**UNITED
      STATES SECURITITES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-QSB**


**(Mark
      One)**


ý
            **QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURTIES EXCHANGE
                ACT OF
                1934**





For
      the
      quarterly period ended June 30, 2006





o
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE
                ACT**





For
      the
      transition period from _____________________ to
      __________________________





Commission
      File Number: 000-30515





Weststar
      Financial Services Corporation


(Exact
      name of registrant as specified in its charter)





North
                Carolina
            56-2181423(State
                or other jurisdiction of incorporation or organization)
            (IRS
                Employer Identification No.)





79
      Woodfin Place, Asheville NC 28801


(Address
      of principal executive offices)





828.252.1735


(Registrant’s
      telephone number, including area code)







(Former
      name, former address and former fiscal year, if changed since last
      report)





Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act. o





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. Yes ý No o





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12-2
      of the Exchange Act). Yes o No ý





**APPLICABLE
      ONLY TO CORPORATE ISSUERS:**


Indicate
      the number of shares outstanding of each of the issuer’s classes of common
      stock, as of the latest practicable date.





Common
      stock, $1.00 par value - 1,681,290 shares outstanding as of August 8,
      2006.











1





**INDEX**
            
            **Page**Part
                I - FINANCIAL INFORMATIONFinancial
                Statements:Consolidated
                Balance SheetsJune
                30, 2006 and December 31, 2005
            3Consolidated
                Statements of
                OperationsThree
                and Six Months Ended June 30, 2006 and
                2005
            4Consolidated
                Statements of Comprehensive IncomeThree
                and Six Months Ended June 30, 2006 and
                2005
            5Consolidated
                Statements of Changes in Shareholders’
                EquitySix
                Months Ended June 30, 2006 and
                2005
            6Consolidated
                Statements of Cash FlowsSix
                Months Ended June 30, 2006 and
                2005
            7Notes
                to Consolidated Financial Statements
            8Item
                2  -
            Management’s
                Discussion and AnalysisFinancial
                Condition and Results of
                Operations
            11Item
                3  -  Controls and
                Procedures
            22Part
                II  -  OTHER INFORMATIONExhibit
                Index
            23Signatures
            24








2





**Part
      I.****FINANCIAL
      INFORMATION**





**Item
      I.**  **Financial
      Statements**





**Weststar
                  Financial Services Corporation & Subsidiary****Consolidated
                  Balance Sheets**
              
              (unaudited)**June
                  30,**
              
              **December
                  31,****2006**
              
              **2005*****ASSETS:**Cash
                  and cash equivalents:Cash
                  and due from banks
              
              $
              5,467,352
              
              $
              6,243,192Interest-bearing
                  deposits
              
              
              433,081
              
              
              350,770Federal
                  funds sold
              
              
              1,136,000
              
              
              267,000Total
                  cash and cash equivalents
              
              
              7,036,433
              
              
              6,860,962Investment
                  securities -Available
                  for sale, at fair value (amortized cost of$26,651,662
                  and $28,506,899,respectively)
              
              
              25,726,073
              
              
              27,824,748Loans
              
              
              110,747,031
              
              
              100,493,602Allowance
                  for loan losses
              
              
              (1,830,113
              )
              
              (1,760,377
              )Net
                  loans
              
              
              108,916,918
              
              
              98,733,225Premises
                  and equipment, net
              
              
              2,624,156
              
              
              2,584,841Accrued
                  interest receivable
              
              
              825,145
              
              
              707,771Federal
                  Home Loan Bank stock, at cost
              
              
              536,700
              
              
              531,500Deferred
                  income taxes
              
              
              833,215
              
              
              715,310Foreclosed
                  properties
              
              
              142,000
              
              
              127,000Other
                  assets
              
              
              689,488
              
              
              668,178TOTAL
              
              $
              147,330,128
              
              $
              138,753,535**LIABILITIES
                  AND SHAREHOLDERS' EQUITY:**Deposits:Demand
              
              $
              25,299,939
              
              $
              25,164,465NOW
                  accounts
              
              
              14,744,233
              
              
              18,102,736Money
                  market accounts
              
              
              31,143,238
              
              
              29,901,364Savings
              
              
              2,165,268
              
              
              2,382,672Time
                  deposits of $100,000 or more
              
              
              17,683,044
              
              
              13,240,038Other
                  time deposits
              
              
              34,051,113
              
              
              30,321,624Total
                  deposits
              
              
              125,086,835
              
              
              119,112,899Short-term
                  borrowings
              
              
              1,770,000
              
              
              -Accrued
                  interest payable
              
              
              369,255
              
              
              266,835Other
                  liabilities
              
              
              686,254
              
              
              653,258Long-term
                  debt
              
              
              8,124,000
              
              
              8,124,000Total
                  liabilities
              
              
              136,036,344
              
              
              128,156,992**SHAREHOLDERS'
                  EQUITY:**Preferred
                  stock; authorized $1,000,000; issued and outstanding -
                  none
              
              
              -
              
              
              -Common
                  stock, $1 par value, authorized - 9,000,000shares;
                  issued and outstanding - 1,681,290 and 1,401,266,
                  respectively
              
              
              1,681,290
              
              
              1,401,266Additional
                  paid-in capital
              
              
              6,525,307
              
              
              6,805,331Retained
                  earnings
              
              
              3,655,961
              
              
              2,809,122Accumulated
                  other comprehensive loss
              
              
              (568,774
              )
              
              (419,176
              )Total
                  shareholders' equity
              
              
              11,293,784
              
              
              10,596,543TOTAL
              
              $
              147,330,128
              
              $
              138,753,535*Derived
                  from audited consolidated financial statements.
                
                See
                  notes to consolidated financial
                  statements.


*Back
          to Index*
 3





**Weststar
                      Financial Services Corporation & Subsidiary************Consolidated
                      Statements of Operations**(unaudited)**********Three
                      Months**
                    **Ended
                      June 30,**
                  
                  **Six
                      Months**
                    **Ended
                      June 30,****2006**
                  
                  **2005**
                  
                  **2006**
                  
                  **2005****INTEREST
                      INCOME:**Interest
                      and fees on loans
                  
                  $
                  2,362,750
                  
                  $
                  1,536,955
                  
                  $
                  4,447,867
                  
                  $
                  2,973,019Federal
                      funds sold
                  
                  
                  7,069
                  
                  
                  100,200
                  
                  
                  24,061
                  
                  
                  144,316Interest-bearing
                      deposits
                  
                  
                  13,786
                  
                  
                  8,133
                  
                  
                  26,412
                  
                  
                  15,032Investments:Taxable
                      interest income
                  
                  
                  201,966
                  
                  
                  173,167
                  
                  
                  404,263
                  
                  
                  347,420Nontaxable
                      interest income
                  
                  
                  88,551
                  
                  
                  13,472
                  
                  
                  156,188
                  
                  
                  26,901Corporate
                      dividends
                  
                  
                  7,112
                  
                  
                  3,436
                  
                  
                  13,275
                  
                  
                  6,055Total
                      interest income
                  
                  
                  2,681,234
                  
                  
                  1,835,363
                  
                  
                  5,072,066
                  
                  
                  3,512,743**INTEREST
                      EXPENSE:**Time
                      deposits of $100,000 or more
                  
                  
                  194,271
                  
                  
                  75,307
                  
                  
                  339,197
                  
                  
                  131,433Other
                      time and savings deposits
                  
                  
                  623,520
                  
                  
                  430,215
                  
                  
                  1,196,859
                  
                  
                  783,881Short-term
                      borrowings
                  
                  
                  14,165
                  
                  
                  7,878
                  
                  
                  36,602
                  
                  
                  16,016Long-term
                      debt
                  
                  
                  135,259
                  
                  
                  115,155
                  
                  
                  264,214
                  
                  
                  179,524Total
                      interest expense
                  
                  
                  967,215
                  
                  
                  628,555
                  
                  
                  1,836,872
                  
                  
                  1,110,854**NET
                      INTEREST INCOME**
                  
                  
                  1,714,019
                  
                  
                  1,206,808
                  
                  
                  3,235,194
                  
                  
                  2,401,889**PROVISION
                      FOR LOAN LOSSES**
                  
                  
                  61,600
                  
                  
                  112,650
                  
                  
                  152,450
                  
                  
                  353,155**NET
                      INTEREST INCOME AFTER PROVISION****FOR
                      LOAN LOSSES**
                  
                  
                  1,652,419
                  
                  
                  1,094,158
                  
                  
                  3,082,744
                  
                  
                  2,048,734**OTHER
                      INCOME:**Service
                      charges on deposit accounts
                  
                  
                  303,107
                  
                  
                  295,440
                  
                  
                  592,280
                  
                  
                  565,141Other
                      service fees and commissions
                  
                  
                  75,219
                  
                  
                  64,168
                  
                  
                  146,817
                  
                  
                  150,002Securities
                      losses
                  
                  
                  (123,684
                  )
                  
                  -
                  
                  
                  (208,124
                  )
                  
                  -Equity
                      in income (loss) of Bank of Asheville Mortgage Company,
                      LLC
                  
                  
                  (5,402
                  )
                  
                  9,264
                  
                  
                  (16,651
                  )
                  
                  (17,908
                  )Other
                  
                  
                  9,061
                  
                  
                  7,775
                  
                  
                  17,993
                  
                  
                  15,887Total
                      other income
                  
                  
                  258,301
                  
                  
                  376,647
                  
                  
                  532,315
                  
                  
                  713,122**OTHER
                      EXPENSES:**Salaries
                      and wages
                  
                  
                  512,478
                  
                  
                  465,408
                  
                  
                  996,461
                  
                  
                  901,819Employee
                      benefits
                  
                  
                  85,471
                  
                  
                  88,823
                  
                  
                  169,339
                  
                  
                  171,870Occupancy
                      expense, net
                  
                  
                  83,868
                  
                  
                  83,757
                  
                  
                  170,114
                  
                  
                  169,295Equipment
                      rentals, depreciation andmaintenance
                  
                  
                  99,154
                  
                  
                  95,711
                  
                  
                  192,019
                  
                  
                  183,350Supplies
                  
                  
                  61,606
                  
                  
                  60,160
                  
                  
                  122,544
                  
                  
                  122,844Professional
                      fees
                  
                  
                  42,039
                  
                  
                  77,930
                  
                  
                  104,643
                  
                  
                  159,808Data
                      processing fees
                  
                  
                  139,218
                  
                  
                  129,783
                  
                  
                  278,604
                  
                  
                  248,815Marketing
                  
                  
                  81,853
                  
                  
                  60,610
                  
                  
                  128,969
                  
                  
                  107,713(Income)
                      expenses from foreclosed properties
                  
                  
                  (2,009
                  )
                  
                  11,696
                  
                  
                  (917
                  )
                  
                  87,209Other
                  
                  
                  90,213
                  
                  
                  62,532
                  
                  
                  146,615
                  
                  
                  121,148Total
                      other expenses
                  
                  
                  1,193,891
                  
                  
                  1,136,410
                  
                  
                  2,308,391
                  
                  
                  2,273,871**INCOME
                      BEFORE INCOME TAXES**
                  
                  
                  716,829
                  
                  
                  334,395
                  
                  
                  1,306,668
                  
                  
                  487,985**INCOME
                      TAX PROVISION**
                  
                  
                  250,417
                  
                  
                  122,880
                  
                  
                  457,067
                  
                  
                  178,945**NET
                      INCOME**
                  
                  $
                  466,412
                  
                  $
                  211,515
                  
                  $
                  849,601
                  
                  $
                  309,040**EARNINGS
                      PER SHARE:**Basic
                  
                  $
                  0.28
                  
                  $
                  0.13
                  
                  $
                  0.51
                  
                  $
                  0.18Diluted
                  
                  $
                  0.26
                  
                  $
                  0.12
                  
                  $
                  0.47
                  
                  $
                  0.17See
                      notes to consolidated financial statements





*Back
          to Index*
 4


**Weststar
                Financial Services Corporation & Subsidiary****Consolidated
                Statements of Comprehensive Income**(unaudited)**Three****Months**
            
            **Six****Months****Ended
                June30,**
            
            **Ended
                June 30,****2006**
            
            **2005**
            
            **2006**
            
            **2005****NET
                INCOME**
            
            $
            466,412
            
            $
            211,515
            
            $
            849,601
            
            $
            309,040**OTHER
                COMPREHENSIVE INCOME (LOSS)**Unrealized
                holding gains (losses) on securitiesavailable
                for sale
            
            
            (364,752
            )
            
            202,064
            
            
            (451,572
            )
            
            (110,077
            )Tax
                effect
            
            
            140,594
            
            
            (77,896
            )
            
            174,082
            
            
            42,435Unrealized
                holding gains (losses) on securitiesavailable
                for sale, net of tax
            
            
            (224,158
            )
            
            124,168
            
            
            (277,490
            )
            
            (67,642
            )Reclassification
                adjustment for realized losses
            
            
            123,684
            
            
            -
            
            
            208,124
            
            
            -Tax
                effect
            
            
            (47,662
            )
            
            -
            
            
            (80,232
            )
            
            -Reclassification
                adjustment for realized losses,
              net
                of tax
            
            
            76,022
            
            
            -
            
            
            127,892
            
            
            -OTHER
                COMPREHENSIVE INCOME (LOSS), NETOF
                TAX
            
            
            (148,136
            )
            
            124,168
            
            
            (149,598
            )
            
            (67,642
            )COMPREHENSIVE
                INCOME
            
            $
            318,276
            
            $
            335,683
            
            $
            700,003
            
            $
            241,398

















See
      notes
      to consolidated financial statements.


*Back
          to Index*
 5





**Weststar
                Financial Services Corporation & Subsidiary****Consolidated
                Statements of Changes in Shareholders’ Equity**(unaudited)**For
                the Six Months Ended June 30, 2006 and 2005****Accumulated****Additional**
            
            
            
            **Other**
            
            **Total****Common
                Stock**
            
            **Paid-In**
            
            **Retained**
            
            **Comprehensive**
            
            **Shareholders’****Shares**
            
            **Amount**
            
            **Capital**
            
            **Earnings**
            
            **Loss**
            
            **Equity**Balance
                December 31, 2004
            
            
            1,166,208
            
            $
            1,166,208
            
            $
            7,030,589
            
            $
            1,732,872
            
            $
            (119,482
            )
            $
            9,810,18720%
                stock split
            
            
            233,058
            
            
            233,058
            
            
            (233,058
            )Net
                change in unrealizedlosses
                on securities held for sale
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (67,642
            )
            
            (67,642
            )Issuance
                of common stock
            
            
            1,000
            
            
            1,000
            
            
            3,900
            
            
            
            
            
            
            
            
            4,900Cash
                paid in lieu of fractional
              shares
            
            
            
            
            
            
            
            
            
            
            
            (2,387
            )
            
            
            
            
            (2,387
            )Net
                income
            
            
            
            
            
            
            
            
            
            
            
            309,040
            
            
            
            
            
            309,040Balance
                June 30, 2005
            
            
            1,400,266
            
            $
            1,400,266
            
            $
            6,801,431
            
            $
            2,039,525
            
            $
            (187,124
            )
            $
            10,054,098Balance
                December 31, 2005
            
            
            1,401,266
            
            $
            1,401,266
            
            $
            6,805,331
            
            $
            2,809,122
            
            $
            (419,176
            )
            $
            10,596,54320%
                stock split
            
            
            280,024
            
            
            280,024
            
            
            (280,024
            )Net
                change in unrealizedlosses
                on securities held for sale
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (149,598
            )
            
            (149,598
            )Cash
                paid in lieu of fractional
              shares
            
            
            
            
            
            
            
            
            
            
            
            (2,762
            )
            
            
            
            
            (2,762
            )Net
                income
            
            
            
            
            
            
            
            
            
            
            
            849,601
            
            
            
            
            
            849,601Balance
                June 30, 2006
            
            
            1,681,290
            
            $
            1,681,290
            
            $
            6,525,307
            
            $
            3,655,961
            
            $
            (568,774
            )
            $
            11,293,784





See
      notes
      to consolidated financial statements.

















*Back
          to Index*
 6





**Weststar
                Financial Services Corporation & Subsidiary******
              **Consolidated
                Statements of Cash Flows**(unaudited)**For
                the Six Months Ended June 30,**
            
            **2006**
            
            **2005****CASH
                FLOWS FROM OPERATING ACTIVITIES:**Net
                income
            
            $
            849,601
            
            $
            309,040Adjustments
                to reconcile net income to net cash provided by operating
                activities:Depreciation
            
            
            173,469
            
            
            189,750Provision
                for loan losses
            
            
            152,450
            
            
            353,155Premium
                amortization and discount accretion, net
            
            
            22,081
            
            
            41,472Deferred
                income tax benefit
            
            
            (24,055
            )
            
            (89,746
            )Net
                (income) expenses from foreclosed properties
            
            
            (2,010
            )
            
            77,683Loss
                on sales of securities
            
            
            208,124
            
            
            -Loss
                on disposal/sale of premises and equipment
            
            
            550
            
            
            1,584(Increase)
                decrease in accrued interest receivable
            
            
            (117,374
            )
            
            7,118(Increase)
                decrease in other assets
            
            
            (21,310
            )
            
            106,069Increase
                in accrued interest payable
            
            
            102,420
            
            
            72,002Increase
                in other liabilities
            
            
            32,996
            
            
            116,471Net
                cash provided by operating activities
            
            
            1,376,942
            
            
            1,184,598**CASH
                FLOWS FROM INVESTING ACTIVITIES:**Purchases
                of securities available for sale
            
            
            (7,565,132
            )
            
            (1,400,529
            )Maturities
                of securities available for sale
            
            
            1,145,698
            
            
            1,497,680Proceeds
                from sales of securities
            
            
            8,044,456
            
            
            -Net
                increase in loans
            
            
            (10,370,893
            )
            
            (4,181,776
            )Proceeds
                from sales of foreclosed properties
            
            
            21,760
            
            
            170,778Proceeds
                from sales of premises and equipment
            
            
            50
            
            
            1,947FHLB
                stock purchases
            
            
            (261,700
            )
            
            (223,600
            )FHLB
                stock redemptions
            
            
            256,500
            
            
            -Additions
                to premises and equipment
            
            
            (213,384
            )
            
            (144,166
            )Net
                cash used in investing activities
            
            
            (8,942,645
            )
            
            (4,279,666
            )**CASH
                FLOWS FROM FINANCING ACTIVITIES:**Net
                increase in demand deposits, NOW accounts, MMDA and savings
                accounts
            
            
            (2,198,559
            )
            
            (4,748,148
            )Net
                increase in time deposits
            
            
            8,172,495
            
            
            6,980,279Cash
                paid for fractional shares
            
            
            (2,762
            )
            
            (2,387
            )Issuance
                of common stock
            
            
            -
            
            
            4,900Proceeds
                from FHLB advances
            
            
            11,270,000
            
            
            4,000,000Repayment
                of FHLB advances
            
            
            (9,500,000
            )
            
            (2,000,000
            )Net
                cash provided by financing activities
            
            
            7,741,174
            
            
            4,234,644**NET
                INCREASE IN CASH AND CASH EQUIVALENTS**
            
            
            175,471
            
            
            1,139,576**CASH
                AND CASH EQUIVALENTS AT BEGINNING OF PERIOD**
            
            
            6,860,962
            
            
            19,621,267**CASH
                AND CASH EQUIVALENTS AT END OF PERIOD**
            
            $
            7,036,433
            
            $
            20,760,843





See
      notes
      to consolidated financial statements.





*Back
          to Index*
 7


**WESTSTAR
      FINANCIAL SERVICES CORPORTION & SUBSIDIARY**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





1.
            Weststar
                Financial Services Corporation (the “Company”) is a holding company with
                one subsidiary, The Bank of Asheville (the “Bank”). The Bank is a state
                chartered commercial bank which was incorporated in North Carolina
                on
                October 29, 1997. The Bank provides consumer and commercial banking
                services in Buncombe County and surrounding area. Common shares of
                The
                Bank of Asheville were exchanged for common shares of Weststar Financial
                Services Corporation on April 29, 2000. Weststar Financial Services
                Corporation formed Weststar Financial Services Corporation I (the
“Trust”)
                during October 2003 in order to facilitate the issuance of trust
                preferred
                securities. The Trust is a statutory business trust formed under
                the laws
                of the state of Delaware, of which all common securities are owned
                by
                Weststar Financial Services Corporation. Bank of Asheville Mortgage
                Company, LLC (the “Mortgage Company”) is a state chartered mortgage bank
                which was incorporated in North Carolina on October 19, 2004 of which
                Weststar Financial Services Corporation is a 50% owner. The Mortgage
                Company originates conventional mortgage
                loans.





In
      the
      opinion of management, the accompanying consolidated financial statements
      contain all adjustments necessary to present fairly the consolidated financial
      position of the Company as of June 30, 2006 and December 31, 2005, and the
      consolidated results of their operations for the three and six-month periods
      ended June 30, 2006 and 2005 and their cash flows for the six-month periods
      ended June 30 2006 and 2005. Operating results for the three and six-month
      periods ended June 30, 2006 are not necessarily indicative of the results that
      may be expected for the fiscal year ending December 31, 2006.





The
      accounting policies followed are set forth in Note 1 to the 2005 Annual Report
      to Shareholders (Form 10-KSB) on file with the Securities and Exchange
      Commission.








2.
            In
                the normal course of business there are various commitments and contingent
                liabilities such as commitments to extend credit, which are not reflected
                on the financial statements. The unused portions of commitments to
                extend
                credit were $35,824,445 and $25,580,877 at June 30, 2006 and December
                31,
                2005, respectively.








3.
            Basic
                and diluted net income per shave have been computed by dividing net
                income
                for each period by the weighted average number of shares of common
                stock
                outstanding during each period.





Basic
      earnings per common share represents income available to common stockholders
      divided by the weighted average number of common shares outstanding during
      the
      period. Diluted earnings per common share reflect additional common shares
      that
      would have been outstanding if dilutive potential common shares had been issued,
      as well as any adjustments to income that would result from the assumed
      issuance. Potential common shares that may be issued by the Company relate
      solely to outstanding stock options and are determined using the treasury stock
      method. During 2006 and 2005, there were no shares excluded due to
      antidultion.





Basic
      and
      diluted net income per shave have been computed based upon net income as
      presented in the accompanying statements of operations divided by the weighted
      average number of common shares outstanding or assumed to be outstanding, after
      retroactively adjusting for the 6-for-5 stock split effected during May 2006,
      as
      summarized below:


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 8





Three
                Months
            
            Six
                MonthsEnded
                June 30,
            
            Ended
                June 30,2006
            
            2005
            
            2006
            
            2005Weighted
                average number of common shares used in computing
              basic
                net income per share
            
            
            1,681,290
            
            
            1,680,090
            
            
            1,681,290
            
            
            1,679,672Effect
                of dilutive stock options
            
            
            138,278
            
            
            108,274
            
            
            132,765
            
            
            112,875Weighted
                average number of common shares and dilutive potential
              common
                shares used in computing diluted net income per common
                share
            
            
            1,819,568
            
            
            1,788,364
            
            
            1,814,055
            
            
            1,792,547





4.
            Effective
                January 1, 2006, the Company adopted SFAS No. 123 (revised 2004),*Share-Based
                Payments*,
                (“SFAS No. 123R”) which was issued by the FASB in December 2004. SFAS No.
                123R revises SFAS No. 123*Accounting
                for Stock Based Compensation*,
                and supersedes APB No. 25,*Accounting
                for Stock Issued to Employees*,
                (APB No. 25) and its related interpretations. SFAS No. 123R requires
                recognition of the cost of employee services received in exchange
                for an
                award of equity instruments in the financial statements over the
                period
                the employee is required to perform the services in exchange for
                the award
                (presumptively the vesting period). SFAS No. 123R also requires
                measurement of the cost of employee services received in exchange
                for an
                award based on the grant-date fair value of the award. SFAS No. 123R
                also
                amends SFAS No. 95*Statement
                of Cash Flows*,
                to require that excess tax benefits be reported as financing cash
                in
                flows, rather than as a reduction of taxes paid, which is included within
                operating cash flows.





The
      Company adopted SFAS No. 123R using the modified prospective application as
      permitted under SFAS No. 123R. Accordingly, prior period amounts have not been
      restated. Under this application, the Company is required to record compensation
      expense for all awards granted after the date of adoption and for the unvested
      portion of previously granted awards that remain outstanding at the date of
      adoption.





Prior
      to
      adoption of SFAS No. 123R, the Company used the intrinsic value method as
      prescribed by APB No. 25 and thus recognized no compensation expense for options
      granted with exercise prices equal to the fair market value of the Company’s
      common stock on the date of grant.





The
      Company has two share-based compensation plans in effect at June 30, 2006;
      an
      employee based incentive plan and a non-incentive plan for directors. Options
      within both plans had fully vested prior to 2006. As a result, no stock-based
      compensation expense was recognized in the income statement during the period
      ended June 30, 2006.





A
      summary
      of the Company’s option plans as of and for the six months ended June 30, 2006
      is as follows:


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 9





Outstanding
                Options
            
            WeightedShares
            
            
            
            Weighted
            
            AverageAvailable
            
            
            
            Average
            
            RemainingFor
                Future
            
            Number
            
            Exercise
            
            ContractualGrants
            
            Outstanding
            
            Price
            
            TermAt
                December 31, 2005
            
            
            3,145
            
            
            225,223
            
            $
            4.08
            
            
            4.97Exercised
            
            
            -
            
            
            -
            
            
            -
            
            
            -Authorized
            
            
            -
            
            
            -
            
            
            -
            
            
            -Forfeited
            
            
            -
            
            
            -
            
            
            -
            
            
            -Granted
            
            
            -
            
            
            -
            
            
            -
            
            
            -Outstanding
                June 30, 2006
            
            
            3,145
            
            
            225,223
            
            $
            4.08
            
            
            4.97Exercisable
                June 30, 2006
            
            
            -
            
            
            225,223
            
            $
            4.08
            
            
            4.97





The
      aggregate intrinsic values of the outstanding and exercisable shares at June
      30,
      2006, respectively, are $2,234,212 and $2,234,212.





Had
      compensation costs for the Company’s stock option plans been determined using
      the fair value method in 2005, the Company’s pro forma net income would have
      been as follows:





Three
                  Months Ended
              
              Six
                  Months Ended6/30/2005
              
              6/30/2005Net
                  income as reported
              
              $
              211,515
              
              $
              309,040Less:
                  Total stock-based employeecompensation
                  expense determinedunder
                  fair value method for all awards, net of related tax
                  effects
              
              
              22,667
              
              
              47,815Pro
                  forma net income
              
              $
              188,848
              
              $
              261,225Net
                  income per share:As
                  reported:Basic
              
              $
              0.13
              
              $
              0.18Diluted
              
              $
              0.12
              
              $
              0.17Pro
                  forma:Basic
              
              $
              0.11
              
              $
              0.16Diluted
              
              $
              0.11
              
              $
              0.15





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 10


**Item
      2.****Management’s
      Discussion and Analysis**


**Financial
      Condition and Results of Operations**





**Weststar
      Financial Services Corporation & Subsidiaries**


**Management’s
      Discussion and Analysis**





EXECUTIVE
      OVERVIEW





Management’s
      Discussion and Analysis is provided to assist in understanding and evaluating
      the Company’s results of operations and financial condition. The following
      discussion should be read in conjunction with the consolidated financial
      statements and related notes included elsewhere herein. Weststar Financial
      Services Corporation (the “Company”) is a holding company for The Bank of
      Asheville (the “Bank”), a state chartered commercial bank incorporated in North
      Carolina on October 29, 1997. The Bank provides consumer and commercial banking
      services in Buncombe County and surrounding areas. Common shares of the Bank
      were exchanged for common shares of Weststar Financial Services Corporation
      on
      April 29, 2000. Weststar Financial Services Corporation formed Weststar
      Financial Services Corporation I (the “Trust”) during October 2003 in order to
      facilitate the issuance of trust preferred securities. The Trust is a statutory
      business trust formed under the laws of the state of Delaware, of which all
      common securities are owned by Weststar Financial Services Corporation. On
      October 19, 2004, the Company formed Bank of Asheville Mortgage Company, LLC
      (the “Mortgage Company”), a mortgage broker, of which the Company owns a 50%
      interest. Because Weststar Financial Services Corporation has no material
      operations and conducts no business on its own other than owning the Bank,
      the
      discussion contained in Management’s Discussion and Analysis concerns primarily
      the business of the Bank. However, for ease of reading and because the financial
      statements are presented on a consolidated basis, Weststar Financial Services
      Corporation and the Bank are collectively referred to herein as the Company.





During
      2006, the Company continued its focus on improving asset quality, asset growth
      and expansion. Management emphasized prudent underwriting standards, periodic
      reviews of loans of $100,000 or more, and monitoring loan quality. During the
      period asset quality continued to demonstrate improvement. Non-performing assets
      decreased from $1,881,653 at December 31, 2005 to $1,273,397 at June 30, 2006.
      Net charge-offs for the period totaled $82,714 compared to $275,894 for the
      six-month period ended June 30, 2005. Loans outstanding grew by 10% to
      $110,747,031 from December 31, 2005, which reflected improved economic
      conditions and increased business development efforts. Deposits increased 5%
      to
      $125,086,835. The increase was attributable to marketing campaigns, sales calls
      efforts, favorable interest rates and product development.





The
      Company increased its net interest income by 42% during the three-month period
      due to growth in net earning assets and an improved net interest margin. As
      a
      result of charge-offs and loan growth, the Company added $61,600 to the loan
      loss reserve compared to $112,650 during the comparable period in 2005. Service
      charges on deposits and other service fees and commissions increased 5% to
      $378,326. During the quarter, the Company realized $123,684 in losses from
      the
      sales of investment securities compared to none during same period in 2005.
      Bank
      of Asheville Mortgage Company, LLC posted net operating losses of $10,804 during
      the quarter compared to income of $18,528 during 2005, of which $5,402 and
      $9,264 was the Company’s portion during 2006 and 2005, respectively.
      Non-interest expenses increased 5% primarily as a result of growth in loans,
      deposits, marketing, personnel and personnel expenses.





Net
      income totaled $466,412 and $211,515 for the quarters ended June 30, 2006 and
      2005, respectively - an increase of 121%.


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 11





The
      Company increased its net interest income by 35% during the six-month period
      due
      to growth in earning assets and an improved net interest margin. As a result
      of
      charge-offs and loan growth, the Company added $152,450 to the loan loss reserve
      compared to $353,155 during the comparable period in 2005. Service charges
      on
      deposits and other service fees and commissions increased 3% to $739,097. During
      the quarter, the Company realized $208,124 in losses from the sales of
      investment securities compared to none during same period in 2005. Bank of
      Asheville Mortgage Company, LLC posted net operating losses of $33,302 during
      the quarter compared to losses of $35,816 during 2005, of which $16,651 and
      $17,908 was the Company’s portion during 2006 and 2005, respectively.
      Non-interest expenses increased 2% primarily as a result of growth in loans,
      deposits, marketing, personnel and personnel expenses. Management monitors
      expenses closely and reviews each expense relative to the benefit
      provided.





Net
      income totaled $849,601 and $309,040 for the six-month periods ended June 30,
      2006 and 2005, respectively - an increase of 175%.





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 12


CHANGES
      IN FINANCIAL CONDITION


JUNE
      30,
      2006 COMPARED TO DECEMBER 31, 2005





During
      the period from December 31, 2005 to June 30, 2006, total assets increased
      $8,576,593 or 6%. This increase, reflected primarily in the cash and cash
      equivalents and loans, resulted from an increase in deposits and borrowed
      funds.





Securities,
      federal funds sold and interest-bearing balances with other financial
      institutions at June 30, 2006 totaled $27,295,154 compared to $28,442,518 at
      December 31, 2005. Through an investment in the Federal Home Loan Bank, the
      Company gained access to the federal Home Loan Bank system. This access grants
      the Company sources of funds for lending and liquidity. Investments in Federal
      Home Loan Bank stock to date total $536,700.





At
      June
      30, 2006, the loan portfolio constituted 75% of the Company’s total assets.
      Loans increased $10,253,429 from December 31, 2005 to June 30, 2006. Improved
      economic conditions and business development efforts resulted in the 10%
      increase in loan growth. Management places a strong emphasis on loan quality.
      At
      June 30, 2006, management was not aware of any loan that (i) represented or
      resulted from trends or uncertainties which management reasonably expects to
      materially impact future operating results, liquidity, or capital resources,
      or
      (ii) represented a material credit about which management was aware of any
      information which caused management to have serious doubts as to the ability
      of
      such borrower to comply with the loan repayment terms.





The
      recorded investment in loans that are considered to be impaired in accordance
      with criteria set forth in Statement of Financial Accounting Standards No.
      114
      of the Financial Accounting Standards Board was $1,131,396, $1,019,222, and
      $1,792,486 at June 30, 2006 and 2005, and December 31, 2005, respectively.
      The
      average recorded balance of impaired loans for the six months ended June 30,
      2006 and 2005 totaled $1,654,169 and $1,728,665, respectively and $1,576,007
      for
      the year end December 31, 2005.. The related allowance for loan losses
      determined in accordance with SFAS No. 114 for impaired loans was $34,434 and
      $113,391 and $210,044 at June 30, 2006 and 2005, and December 31, 2005
      respectively.  For
      the
      six-month periods ended June 30, 2006 and 2005, Weststar recognized interest
      income from impaired loans of approximately $920 and $18,039.  See
      “Asset Quality” for discussion for an analysis of loan loss
      reserves.





Deposits
      increased $5,973,936 during the six months ended June 30, 2006. The increase
      in
      deposits is primarily reflected in money market and time accounts, which have
      continued to pay increasingly higher rates due to the higher interest rate
      environment and competition. Demand deposits remained relatively flat during
      the
      period and totaled $25,299,939. NOW accounts decreased by $3,358,503 partially
      attributable to rate sensitive customers shifting funds to higher yielding
      time
      deposits. Time deposits increased $8,172,495, while money market accounts
      increased $1,241,874.





Short-term
      borrowings consisted of two advances from the FHLB, which totaled $1,770,000.
      The $1,000,000 advance bears a fixed rate of 5.56% and matures on August 29,
      2006. The $770,000 daily rate credit advance bears a variable rate of interest
      and matures on June 27, 2007; however, it can be repaid at any time without
      penalty.





Long-term
      borrowings consisted of one advance from the FHLB, which totaled $4,000,000
      and
      junior subordinated debentures of $4,124,000. The interest rate on this advance
      was 5.01% and matures on March 23, 2010. Advances from the FHLB are secured
      by a
      blanket lien on 1-4 family real estate loans and certain commercial real estate
      loans. The junior subordinated debentures bear a rate of LIBOR plus 315 basis
      points and pay dividends quarterly. The rate is subject to quarterly resets.
      The
      junior subordinated debentures mature October 7, 2033, and


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 13


are
      callable on or after October 7, 2008. Approximately $4 million was eligible
      for
      inclusion as Tier I capital.





The
      Company’s capital at June 30, 2006 to risk weighted assets totaled 14.71%.
      Current regulations require a minimum ratio of total capital to risk weighted
      assets of 8%, with at least 4% being in the form of Tier 1 capital, as defined
      in the regulation. As of June 30, 2006, the Company’s capital exceeded the
      current regulatory capital requirements.





RESULTS
      OF OPERATIONS


FOR
      THE
      THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2006 AND 2005





Net
      interest income, the principal source of the Company’s earnings, is the amount
      of income generated by earning assets (primarily loans and investment
      securities) less the total interest cost of the funds obtained to carry them
      (primarily deposits and other borrowings). The volume, rate and mix of both
      earning assets and related funding sources determine net interest
      income.





COMPARATIVE
      THREE MONTHS





Net
      interest income for the quarter ended June 30, 2006 totaled $1,714,019 compared
      to $1,206,808 in 2005 primarily due to higher yields on and volumes of loans,
      partially offset by higher rates paid on interest-bearing deposits. Because
      a
      significant portion of the Company’s loans are variable rate commercial loans,
      they reprice more rapidly than rate sensitive interest-bearing deposits, thus
      an
      increase in net interest margin during a rising rate environment as was
      experienced during the three month period. The Company’s net interest margins
      were approximately 5.0% and 3.7% for the quarters ended June 30, 2006 and 2005,
      respectively.





Weststar
      recorded a provision for loan losses of $61,600 and $112,650 for the quarters
      ended June 30, 2006 and 2005, respectively. The provision for loan losses is
      charged to operations to bring the allowance to a level deemed appropriate
      by
      management based on the factors discussed under “Asset Quality.”





Other
      non-interest income for the June 30, 2006 and 2005 quarters totaled $258,301
      and
      $376,647, respectively. The decrease in other income primarily reflects realized
      losses of $123,684 from the sales of securities during the period compared
      to
      none during the same period in 2005. Lower yielding securities were sold with
      funds being reinvested into higher yielding securities. Service charges, fees
      and commissions increased from $359,608 to $378,326 or 5%. The increase resulted
      from increased volume in services charge related services such as overdraft
      charges, brokerage fee and commissions, and credit card commissions. The
      Mortgage Company posted net operating losses of $10,804 and net revenue of
      $18,528 during the 2006 and 2005 periods, respectively, of which $5,402 and
      $9,264 was the Company’s portion during 2006 and 2005, respectively. Other
      income increased 17% to $9,061.





Other
      non-interest expense totaled $1,193,891 compared to $1,136,410 in 2005. This
      increase was primarily attributable to overall company growth to support loans
      and deposits. Professional fees decreased from $77,930 during 2005 to $42,039.
      The decrease parallels overall increase in asset quality and a reduction in
      accounting services related to documenting and testing the Company’s internal
      controls. Other expenses increased $27,681 primarily attributable to sustaining
      a loss on a fraudulent check deposited with the Bank. Income before income
      tax
      provision totaled $716,829 and $334,395 for the quarters ended June 30, 2006
      and
      2005, respectively. Income tax provision totaled $250,417 and $122,880 for
      the
      quarters ended June 30, 2006 and 2005, respectively, which equated to an
      effective tax rate of 34.93% and 36.75%. The decrease in the effective tax
      rate
      resulted from increased tax exempt income generated from purchases of tax exempt
      municipal bonds. Net income totaled $466,412 and $211,515 for the quarters
      ended
      June 30, 2006 and 2005, respectively.


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 14








Other
      comprehensive income (loss) totaled $(148,136) and $124,168 in 2006 and 2005,
      respectively. Comprehensive income, which is the change in shareholders’ equity
      excluding transactions with shareholders, totaled $318,276 and $335,683 for
      the
      quarters ended June 30, 2006 and 2005, respectively.





COMPARATIVE
      SIX MONTHS





Net
      interest income for the six-month period June 30, 2006 totaled $3,235,194
      compared to $2,401,889 in 2005 primarily due to higher yields on and volumes
      of
      loans, partially offset by higher rates paid on interest-bearing deposits.
      Because a significant portion of the company’s loans are variable rate
      commercial loans, they reprice more rapidly than rate sensitive interest-bearing
      deposits, thus an increase in net interest margin during a rising rate
      environment as was experienced during the six-month period. The Company’s net
      interest margins were approximately 4.8% and 3.8% for the periods ended June
      30,
      2006 and 2005, respectively.





Weststar
      recorded a provision for loan losses of $152,450 and $353,155 for the six months
      ended June 30, 2006 and 2005, respectively. The provision for loan losses is
      charged to operations to bring the allowance to a level deemed appropriate
      by
      management based on the factors discussed under “Asset Quality.”





Other
      non-interest income for the June 30, 2006 and 2005 periods totaled $532,315
      and
      $713,122, respectively. The decrease in other income primarily reflects realized
      losses of $208,124 from the sales of securities during the period compared
      to
      none during the same period in 2005. Lower yielding securities were sold with
      funds being reinvested into higher yielding securities. Service charges, fees
      and commissions increased from $715,143 to $739,097 or 3%. The increase resulted
      from increased volume in services charge related services such as overdraft
      charges, brokerage fee and commissions, and credit card commissions. The
      Mortgage Company posted net operating losses of $33,302 and $35,816 during
      the
      2006 and 2005 periods, respectively, of which $16,651 and $17,908 was the
      Company’s portion during 2006 and 2005, respectively. Other income increased 13%
      to $17,993.





Other
      non-interest expense totaled $2,308,391 compared to $2,273,871 in 2005. This
      increase was primarily attributable to overall company growth to support loans
      and deposits. Professional fees decreased from $159,808 during 2005 to $104,643.
      The decrease parallels overall improvement in asset quality and a reduction
      in
      accounting services related to documenting and testing the Company’s internal
      controls. Net expenses from foreclosed properties totaled $87,209 during 2005
      compared to net revenue of $917 during 2006. This change parallels a reduction
      in foreclosed properties and overall improved asset quality. Other expenses
      increased $25,467 primarily attributable to sustaining a loss on a fraudulent
      check deposit with the Bank. Income before income tax provision totaled
      $1,306,668 and $487,985 for the quarters ended June 30, 2006 and 2005,
      respectively. Income tax provision totaled $457,067 and $178,945 for the
      quarters ended June 30, 2006 and 2005, respectively, which equated to an
      effective tax rate of 34.98% and 36.67%. The decrease in the effective tax
      rate
      resulted from increased tax exempt income generated from purchases of tax exempt
      municipal bonds. Net income totaled $849,601 and $309,040 for the periods ended
      June 30, 2006 and 2005, respectively.





Other
      comprehensive loss totaled $149,598 and $67,642 in 2006 and 2005, respectively.
      Comprehensive income, which is the change in shareholders’ equity excluding
      transactions with shareholders, totaled $700,003 and $241,398 for the periods
      ended June 30, 2006 and 2005, respectively.


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 15





**ASSET/LIABILITY
      MANAGEMENT**





The
      Company’s asset/liability management, or interest rate risk management, program
      is focused primarily on evaluating and managing the composition of its assets
      and liabilities in view of various interest rate scenarios. Factors beyond
      the
      Company’s control, such as market interest rates and competition, may also have
      an impact on the Company’s interest income and interest expense.





In
      the
      absence of other factors, the yield or return associated with the Company’s
      earning assets generally will increase from existing levels when interest rates
      rise over an extended period of time and, conversely, interest income will
      decrease when interest rates decline. In general, interest expense will increase
      when interest rates rise over an extended period of time and, conversely,
      interest expense will decrease when interest rates decline.





**Interest
      Rate Gap Analysis.** As
      a part
      of its interest rate risk management policy, the Company calculates an interest
      rate “gap.” Interest rate “gap” analysis is a common, though imperfect, measure
      of interest rate risk, which measures the relative dollar amounts of
      interest-earning assets and interest-bearing liabilities which reprice within
      a
      specific time period, either through maturity or rate adjustment. The “gap” is
      the difference between the amounts of such assets and liabilities that are
      subject to repricing. A “positive” gap for a given period means that the amount
      of interest-earning assets maturing or otherwise repricing within that period
      exceeds the amount of interest-bearing liabilities maturing or otherwise
      repricing within the same period. Accordingly, in a declining interest rate
      environment, an institution with a positive gap would generally be expected,
      absent the effects of other factors, to experience a decrease in the yield
      on
      its assets greater than the decrease in the cost of its liabilities and its
      income should be negatively affected. Conversely, the cost of funds for an
      institution with a positive gap would generally be expected to increase more
      slowly than the yield on its assets in a rising interest rate environment,
      and
      such institution’s net interest income generally would be expected to be
      positively affected by rising interest rates. Changes in interest rates
      generally have the opposite effect on an institution with a “negative
      gap.”





The
      majority of the Company’s deposits are rate-sensitive instruments with rates
      that tend to fluctuate with market rates. These deposits, coupled with the
      Company’s short-term certificates of deposit, have increased the opportunities
      for deposit repricing. The Company places great significance on monitoring
      and
      managing the Company’s asset/liability position. The Company’s policy of
      managing its interest margin (or net yield on interest-earning assets) is to
      maximize net interest income while maintaining a stable deposit base. The
      Company’s deposit base is not generally subject to the level of volatility
      experienced in national financial markets in recent years; however, the Company
      does realize the importance of minimizing such volatility while at the same
      time
      maintaining and improving earnings. Therefore, management prepares on a regular
      basis earnings projections based on a range of interest rate scenarios of
      rising, flat and declining rates in order to more accurately measure interest
      rate risk.





Interest-bearing
      liabilities and variable rate loans are generally repriced to current market
      rates. Based on its analysis, the Company believes that its balance sheet is
      slightly asset-sensitive, meaning that in a given period there will be more
      assets than liabilities subject to immediate repricing as the market rates
      change. Because a significant portion of the Company’s loans are variable rate
      commercial loans, they reprice more rapidly than rate sensitive interest-bearing
      deposits. During periods of rising rates, this results in increased net interest
      income, assuming similar growth rates and stable product mixes in loans and
      deposits. The opposite occurs during periods of declining rates.





The
      Company uses interest sensitivity analysis to measure the sensitivity of
      projected earnings to changes in interest rates. The sensitivity analysis takes
      into account the current contractual agreements that the Company has on
      deposits, borrowings, loans, investments and any commitments to enter into
      those
      transactions. The Company monitors interest sensitivity by


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 16


means
      of
      computer models that incorporate the current volumes, average rates, scheduled
      maturities and payments and repricing opportunities of asset and liability
      portfolios. Using this information, the model estimates earnings based on
      projected portfolio balances under multiple interest rate scenarios. In an
      effort to estimate the effects of pure interest-rate risk, the Company assumes
      no growth in its balance sheet, because to do so could have the effect of
      distorting the balance sheet’s sensitivity to changing interest rates. The
      Company simulates the effects of interest rate changes on its earnings by
      assuming no change in interest rates as its base case scenario and either (1)
      gradually increasing or decreasing interest rates by over a twelve-month period
      or (2) immediately increasing or decreasing interest rates by 25%, .50%, 1%
      and 2%. Although these methods are subject to the accuracy of the assumptions
      that underlie the process and do not take into account the pricing strategies
      that management would undertake in response to sudden interest rate changes,
      the
      Company believes that these methods provide a better indication of the
      sensitivity of earnings to changes in interest rates than other analyses.





Income
      simulation through modeling is one tool that the Company uses in the
      asset/liability management process. The Company also considers a number of
      other
      factors in determining its asset/liability and interest rate sensitivity
      management strategies. Management strives to determine the most likely outlook
      for the economy and interest rates by analyzing external factors, including
      published economic projections and data, the effects of likely monetary and
      fiscal policies as well as any enacted or prospective regulatory changes. The
      Company’s current and prospective liquidity position, current balance sheet
      volumes and projected growth, accessibility of funds for short-term needs and
      capital maintenance are also considered. This data is combined with various
      interest rate scenarios to provide management with information necessary to
      analyze interest sensitivity and to aid in the development of strategies to
      manage the Company’s balance sheet.





The
      following table sets forth the amounts of interest-earning assets and
      interest-bearing liabilities outstanding at June 30, 2006, which are projected
      to reprice or mature in each of the future time periods shown. Except as stated
      below, the amounts of assets and liabilities shown which reprice or mature
      within a particular period were determined in accordance with the contractual
      terms of the assets or liabilities. Loans with adjustable rates are shown as
      being due at the end of the next upcoming adjustment period. The interest rate
      sensitivity of the Company’s assets and liabilities illustrated in the following
      table would vary substantially if different assumptions were used or if actual
      experience differs from that indicated by such assumptions.








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 17





TERMS
                TO REPRICING AT JUNE 30, 20061-90
                Days
            
            91-180
                Days
            
            181-365
                Days
            
            Total
                One
              Year
            
            Non-
              Sensitive
            
            TotalInterest-earning
                assets:Interest
                bearing deposits
            
            $
            433,081
            
            
            
            
            
            
            
            $
            433,081
            
            
            
            
            $
            433,081Federal
                funds sold
            
            
            1,136,000
            
            
            
            
            
            
            
            
            1,136,000
            
            
            
            
            
            1,136,000Investment
                securities
            
            
            3,683,520
            
            $
            683,520
            
            $
            1,367,040
            
            
            5,734,080
            
            $
            20,917,582
            
            
            26,651,662Federal
                Home Loan Bank stock
            
            
            536,700
            
            
            -
            
            
            -
            
            
            536,700
            
            
            -
            
            
            536,700Loans
                (1)
            
            
            85,548,560
            
            
            1,080,281
            
            
            6,335,310
            
            
            92,964,151
            
            
            16,651,483
            
            
            109,615,634Total
                interest-earning assets
            
            
            91,337,861
            
            
            1,763,801
            
            
            7,702,350
            
            
            100,804,012
            
            
            37,569,065
            
            
            138,373,077Interest-bearing
                liabilities:Time
                deposits
            
            
            17,073,165
            
            
            11,942,894
            
            
            21,185,380
            
            
            50,201,439
            
            
            1,532,718
            
            
            51,734,157All
                other deposits
            
            
            48,052,739
            
            
            -
            
            
            -
            
            
            48,052,739
            
            
            -
            
            
            48,052,739Short-term
                debt
            
            
            1,770,000
            
            
            -
            
            
            -
            
            
            1,770,000
            
            
            -
            
            
            1,770,000Long-term
                debt
            
            
            4,124,000
            
            
            -
            
            
            -
            
            
            4,124,000
            
            
            4,000,000
            
            
            8,124,000Total
                interest-bearing liabilities
            
            
            71,019,904
            
            
            11,942,894
            
            
            21,185,380
            
            
            104,148,178
            
            
            5,532,718
            
            
            109,680,896Interest
                sensitivity gap
            
            $
            20,317,957
            
            $
            (10,179,093
            )
            $
            (13,483,030
            )
            $
            (3,344,166
            )
            $
            32,036,347Cumulative
                interest sensitivityGap
            
            $
            20,317,957
            
            $
            10,138,864
            
            $
            (3,344,166
            )Cumulative
                ratio of interest -earning
                assets as a percentof
                interest sensitive liabilities
            
            
            128.6
            %
            
            14.8
            %
            
            36.4
            %
            
            96.8
            %





(1)
      Non-accrual loans have been excluded.


Weststar
      has established an acceptable range of 80% to 120% for interest-earning assets
      as a percent of interest sensitive liabilities.





**ASSET
      QUALITY**





Management
      considers Weststar’s asset quality to be of primary importance. We maintain an
      allowance for loan losses to absorb probable losses inherent in the loan
      portfolio. The loan portfolio is analyzed monthly in an effort to identify
      potential problems before they actually occur. The allowance for loan losses
      is
      established as losses are estimated to have occurred through a provision for
      loan losses charged to earnings. The provision for loan losses is based upon
      management’s best estimate of the amount needed to maintain the allowance for
      loan losses at an adequate level. Loan losses are charged against the allowance
      when management believes the uncollectibility of a loan balance is confirmed.
      Subsequent recoveries, if any, are credited to the allowance.





The
      allowance for loan losses is evaluated on a regular basis by management and
      is
      based upon management’s periodic review of the collectibility of the loans in
      light of the current status of the portfolio, historical experience, the nature
      and volume of the loan portfolio, adverse situations that may affect the
      borrower’s ability to repay, estimated value of any underlying collateral, and
      prevailing economic conditions. Management segments the loan portfolio by loan
      type in considering each of the aforementioned factors and their impact upon
      the
      level of the allowance for loan losses.





This
      evaluation is inherently subjective, as it requires estimates that are
      susceptible to significant revision as more information becomes available.
      Therefore, while management uses the best information available to make
      evaluations, future adjustments to the allowance may be necessary if conditions
      differ substantially from the assumptions used in making the evaluations. In
      addition, regulatory examiners may require the Company to recognize changes
      to
      the


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 18


allowance
      for loan losses based on their judgments about information available to them
      at
      the time of their examination.





A
      loan is
      considered impaired when, based on current information and events, it is
      probable that the Company will be unable to collect the scheduled payments
      of
      principal or interest when due according to the contractual terms of the loan
      agreement. Factors considered by management in determining impairment include
      payment status, collateral value, and the probability of collecting scheduled
      principal and interest payments when due. Loans that experience insignificant
      payment delays and payment shortfalls generally are not classified as impaired.
      Management determines the significance of payment delays and payment shortfalls
      on a case-by-case basis, taking into consideration all of the circumstances
      surrounding the loan and the borrower, including the length of the delay, the
      reasons for the delay, the borrower’s prior payment record, and the amount of
      the shortfall in relation to the principal and interest owed. Impairment is
      measured on a loan by loan basis for commercial and construction loans by either
      the present value of expected future cash flows discounted at the loan’s
      effective interest rate, the loan’s obtainable market price, or the fair value
      of the collateral if the loan is collateral dependent. Large groups of smaller
      balance homogeneous loans are collectively evaluated for impairment.
      Accordingly, the Company does not separately identify individual consumer and
      residential loans for impairment disclosures.





The
      provision for loan losses represents a charge against income in an amount
      necessary to maintain the allowance at an appropriate level. The monthly
      provision for loan losses may fluctuate based on the results of this analysis.
      The allowance for loan losses at June 30, 2006 and 2005, and December 31, 2005
      was $1,830,113, $1,685,627 and $1,760,377 or 1.65%, 1.90% and 1.75%,
      respectively, of gross loans outstanding. The ratio of net charge-offs to
      average loans outstanding was .16%, .63% and .35% during the periods ended
      June
      30, 2006 and 2005, and December 31, 2005, respectively. During the period,
      loan
      quality demonstrated significant improvement over March 31, 2006, June 30,
      2005
      and December 31, 2005. During June the Company experienced its largest
      improvement in asset quality with nonperforming loans dropping to 1.02% of
      gross
      loans outstanding compared to 1.76% at March 31, 2006, 2.59% at June 30, 2005
      and 1.75% at December 31, 2005. In light of the significant improvement in
      asset
      quality of June 30, 2006 over March 31, 2006, the loan loss reserve was reduced
      from 1.75% of gross loans outstanding at March 31, 2006 to 1.65% of gross loans
      outstanding at June 30, 2006.





The
      following table contains an analysis for the allowance for loan losses,
      including the amount of charge-offs and recoveries by loan type, for the six
      months ended June 30, 2006 and 2005, and for the year ended December 31,
      2005.





**Summary
      of Allowance for Loan Losses**





For
                the six months
            
            For
                the year endedended
                June 30,
            
            December
                31,2006
            
            2005
            
            2005Balance,
                beginning of period
            
            $
            1,760,377
            
            $
            1,608,366
            
            $
            1,608,366Charge-offs:Commercial,
                financial and agricultural
            
            
            (85,665
            )
            
            (186,228
            )
            
            (207,106
            )Real
                estate:Construction
            
            
            -
            
            
            -
            
            
            -Mortgage
            
            
            (14,161
            )
            
            (96,000
            )
            
            (129,401
            )Consumer
            
            
            (17,260
            )
            
            (17,325
            )
            
            (33,339
            )Total
                charge-offs
            
            
            (117,086
            )
            
            (299,553
            )
            
            (369,846
            )RecoveriesCommercial,
                financial and agricultural
            
            
            9,758
            
            
            7,048
            
            
            28,488Real
                estate:Construction
            
            
            -
            
            
            -
            
            
            -Mortgage
            
            
            6,483
            
            
            -
            
            
            -Consumer
            
            
            18,131
            
            
            16,611
            
            
            27,099Total
                recoveries
            
            
            34,372
            
            
            23,659
            
            
            55,587Net
                (charge-offs) recoveries
            
            
            (82,714
            )
            
            (275,894
            )
            
            (314,259
            )Provision
                charged to operations
            
            
            152,450
            
            
            353,155
            
            
            466,270Balance,
                end of period
            
            $
            1,830,113
            
            $
            1,685,627
            
            $
            1,760,377Percentage
                of net charge-offs toaverage
                loans
            
            
            .16
            %
            
            .63
            %
            
            .35
            %Percentage
                of allowance toperiod-end
                loans
            
            
            1.65
            %
            
            1.90
            %
            
            1.75
            %





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 19





During
      2006, there were no changes in estimation methods or assumptions that affected
      our methodology for assessing the appropriateness of the formula and specific
      allowance for credit losses. Changes in estimates and assumptions regarding
      the
      effect of economic and business conditions on borrowers affect the assessment
      of
      the allowance. The Company does not have any significant loan
      concentrations.





**CAPITAL
      RESOURCES**





Banks
      and
      bank holding companies, as regulated institutions, must meet required levels
      of
      capital. The Federal Deposit Insurance Corporation (“FDIC”) and the Federal
      Reserve, the primary regulators of The Bank of Asheville and Weststar,
      respectively, have adopted minimum capital regulations or guidelines that
      categorize components and the level of risk associated with various types of
      assets. Financial institutions are expected to maintain a level of capital
      commensurate with the risk profile assigned to its assets in accordance with
      these guidelines. As shown in the following table, Weststar and The Bank of
      Asheville both maintained capital levels exceeding the minimum levels for "well
      capitalized" banks and bank holding companies.










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 20


**REGULATORY
      CAPITAL**





**To
                Be Well****Capitalized
                Under****For
                Capital**
            
            **Prompt
                Corrective****Actual**
            
            **Adequacy
                Purposes**
            
            **Action
                Provisions****Amount**
            
            **Ratio**
            
            **Amount**
            
            **Ratio**
            
            **Amount**
            
            **Ratio**(Dollars
                in Thousands)As
                of June 30, 2006Total
                Capital (to Risk Weighted Assets)Consolidated
            
            $
            17,340
            
            
            14.71
            %
            $
            9,430
            
            
            8.00
            %
            $
            11,787
            
            
            10.00
            %Bank
            
            $
            16,525
            
            
            14.05
            %
            $
            9,406
            
            
            8.00
            %
            $
            11,757
            
            
            10.00
            %Tier
                1 Capital (to Risk Weighted Assets)Consolidated
            
            $
            15,816
            
            
            13.42
            %
            $
            4,715
            
            
            4.00
            %
            $
            7,072
            
            
            6.00
            %Bank
            
            $
            15,051
            
            
            12.80
            %
            $
            4,703
            
            
            4.00
            %
            $
            7,054
            
            
            6.00
            %Tier
                1 Capital (to Average Assets)Consolidated
            
            $
            15,816
            
            
            11.10
            %
            $
            5,700
            
            
            4.00
            %
            $
            7,126
            
            
            5.00
            %Bank
            
            $
            15,051
            
            
            10.58
            %
            $
            5,688
            
            
            4.00
            %
            $
            7,111
            
            
            5.00
            %








**LIQUIDITY**





Maintaining
      adequate liquidity while managing interest rate risk is the primary goal of
      Weststar’s asset and liability management strategy. Liquidity is the ability to
      fund the needs of the Company’s borrowers and depositors, pay operating
      expenses, and meet regulatory liquidity requirements. Loan repayments, deposit
      growth, federal funds purchased and borrowings from the Federal Home Loan Bank
      are presently the main sources of the Company’s liquidity. The Company’s primary
      uses of liquidity are to fund loans and to make investments.





As
      of
      June 30, 2006 liquid assets (cash due from banks, interest-earning bank deposits
      and federal funds sold) were approximately $7.0 million, which represents 4.8%
      of total assets and 5.6% of total deposits. Supplementing this liquidity,
      Weststar has available lines of credit from correspondent banks of approximately
      $11.9 million. At June 30, 2006, outstanding commitments to extend credit and
      available lines of credit were  $35.8
      million . Management
      believes that the combined aggregate liquidity position of the Company is
      sufficient to meet the funding
      requirements of loan demand and deposit maturities and withdrawals in the near
      term.





Certificates
      of deposit represented approximately 41.4% of Weststar’s total deposits at June
      30, 2006. The Company’s growth strategy includes efforts focused on increasing
      the relative volume of transaction deposit accounts, as the branch network
      is
      expanded, making it more convenient for our banking customers. Certificates
      of
      deposit of $100,000 or more represented 14.1% of the Company’s total deposits at
      June 30, 2006. These deposits are generally considered rate sensitive, but
      management believes most of them are relationship-oriented. While the Company
      will need to pay competitive rates to retain these deposits at maturity, there
      are other subjective factors that will determine the Company’s continued
      retention of these deposits.











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 21





**IMPACT
      OF INFLATION AND CHANGING PRICES**





A
      financial institution has assets and liabilities that are distinctly different
      from those of a company with substantial investments in plant and inventory
      because the major portion of its assets is monetary in nature. As a result,
      a
      bank’s performance may be significantly influenced by changes in interest rates.
      Although the banking industry is more affected by changes in interest rates
      than
      by inflation in the prices of goods and services, inflation is a factor, which
      may influence interest rates. However, the frequency and magnitude of interest
      rate fluctuations do not necessarily coincide with changes in the general
      inflation rate. Inflation does affect operating expenses in that personnel
      expenses, cost of supplies and outside services tend to increase more during
      periods of high inflation .





**Item
      3.****Controls
      and Procedures**





The
      Company carried out an evaluation as of the end of the period covered by this
      report under the supervision and with the participation of the company’s
      management, including the Company’s Chief Executive Officer and Chief Financial
      Officer, of the effectiveness of the design and operation of the Company’s
      disclosure controls and procedures pursuant to Securities and Exchange Act
      Rule
      13a-14. Based upon that evaluation, the Chief Executive Officer and Chief
      Financial Officer concluded that the Company’s disclosure controls and
      procedures are effective in timely alerting them to material information
      relating to the Company required to be included in the Company’s periodic SEC
      Filings. There were no significant changes in the Company’s internal controls or
      in other factors that could significantly affect the controls during the most
      recent quarter.


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 22


**Part
      II.****OTHER
      INFORMATION**





**Item
      4.****Submission
      of Matters to a Vote of Security Holders**


The
      Annual Meeting of Stockholders was held on April 18, 2006. Of 1,401,266 shares
      entitled to vote at the meeting, 1,146,047 or 81.8% voted. The following matters
      were voted on at the meeting:





Proposal
      1:  To
      elect
      three board members to three-year terms. Votes for each nominee were as
      follows:




3-year
                terms
            
            Votes
                For
            
            Votes
                WithheldM.
                David Cogburn
            
            1,141,126
            
            4,921Steven
                D. Cogburn
            
            1,079,311
            
            66,736Stephen
                L. Pignatiello
            
            1,143,441
            
            2,606Laura
              A. Webb
            
            1,145,183
            
            864


Proposal
      2:  To
      ratify
      the appointment of Dixon Hughes PLLC as independent accountants for the year
      ending December 31, 2006. Votes were as follows:





Votes
                For
            
            Abstain1,145,857
            
            190




**Item
      6.****Exhibits**





(a) Exhibits.





31.1
      -
      Certification of the Chief Executive Officer pursuant to Rule
      13a-14(a) under
      the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002





31.2
      -
      Certification of the Chief Financial Officer pursuant to Rule
      13a-14(a) under
      the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002





32.1
      -
      Certification by the Chief Executive Officer pursuant to 18 U.S.C. 1350 as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002





32.2
      -
      Certification by the Chief Financial Officer pursuant to 18 U.S.C. 1350 as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002








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 23





**SIGNATURES**








Under
      the
      requirements of the Securities Exchange Act of 1934, the registrant has duly
      caused this report to be signed on its behalf by the undersigned thereunto
      duly
      authorized.








**WESTSTAR
                FINANCIAL SERVICES CORPORATION**Date:
                August 8, 2006
            By:
            /s/
                G. Gordon GreenwoodG.
                Gordon GreenwoodPresident
                and Chief Executive OfficerDate:
                August 8, 2006
            By:
            /s/
                Randall C. HallRandall
                C. HallExecutive
                Vice President and Chief Financialand
                Principal Accounting Officer





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24