UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549


FORM 10-Q

(Mark One)



X

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended    June 30, 2006





TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934



For the transition period from__________to__________



Commission File Number:        0-18868



PREMIER COMMUNITY BANKSHARES, INC.

(Exact name of registrant as specified in its charter)



|                                                     |                                      | 
|---------------------------------------------------- | ------------------------------------ | 
|Virginia                                             | 54-1560968                          
|_______________________________                      | ___________________________________ 
|(State or other jurisdiction                         | (I.R.S. Employer Identification No.)
|of incorporation or organization)                    |                                     
|
|4095 Valley Pike                                     |                                     
|Winchester, Virginia                                 | 22602                               
|________________________________                     | __________                          
|(Address of principal executive offices)             | (Zip Code)                          
|                                                    
|(540) 869-6600                                      
|(Registrants telephone number, including area code)
|                                                     |                                     

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 X  NO



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.   (Check one):

Large accelerated filer

Accelerated filer  X

Non-accelerated filer



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES   NOX



Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date: 5,660,592 shares of common stock, $1.00 par value, as of August 7, 2006.



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PART I.  FINANCIAL INFORMATION  Item 1. Financial Statements  The following financial statements are provided at the page numbers indicated.  Consolidated Balance Sheets at  June 30, 2006 and December 31, 2005 3  Consolidated Statements of Income for  the Three Months Ended and Six Months Ended  June 30, 2006 and 2005 4  Consolidated Statements of Changes in Shareholders Equity for the Six Months Ended June 30, 2006 and 2005 5  Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2006 and 2005 6  Notes to Consolidated Financial Statements 715   Item 2.  Managements Discussion and Analysis of Financial Condition and Results of Operations 1622  Item 3.  Quantitative and Qualitative Disclosures about Market Risk 2425  Item 4.  Controls and Procedures 25  Part II. OTHER INFORMATION 26-27  Signatures 28               2    PART I.  FINANCIAL INFORMATIONItem 1. FINANCIAL STATEMENTSPREMIER COMMUNITY BANKSHARES, INC.Consolidated Balance Sheets(In Thousands, Except for Share Data)June 30,December 31,20062005Assets:(Unaudited)(Audited)Cash and due from banks$        24,142$        20,459Interest-bearing deposits in other banks4,294633Federal funds sold40,99019,270Securities available for sale, at fair value24,69323,142Securities held to maturity (fair value: June 30, 2006,$6,980; December 31, 2005,  $6,983)7,0967,237Loans, net of allowance for loan losses of $5,758 atJune 30, 2006 and $5,591 at December 31, 2005620,044573,405Bank premises and equipment, net19,12716,802Accrued interest receivable2,6712,467Other real estate-124Other assets13,07410,857Total Assets$       756,131$       674,396Liabilities and Shareholders' Equity:Liabilities:Deposits:Non-interest bearing demand deposits$        97,340$        89,405Savings and interest-bearing demand deposits163,906149,080Time deposits350,839324,395Total deposits612,085562,880Short-term borrowings2164,393Accounts payable and accrued expenses3,9245,014Capital lease payable163169Federal Home Loan Bank advances50,00030,000Trust Preferred Capital Notes36,08421,651Total Liabilities$       702,472$       624,107Shareholders' Equity:Preferred stock, Series A, 5% noncumulative, no parvalue; 1,000,000 shares authorized and unissued$             -$             -Common stock, $1 par value, 20,000,000 shares authorizedJune 30, 2006, 4,971,804 shares issued and outstanding;December 31, 2005, 4,955,648 shares issued and outstanding4,9724,956Capital surplus19,86719,805Retained earnings29,09025,612Accumulated other comprehensive loss(270)(84)Total Shareholders' Equity53,65950,289Total Liabilities and Shareholders' Equity$       756,131$       674,396See Accompanying Notes to Consolidated Financial Statements


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PREMIER COMMUNITY BANKSHARES, INC. Consolidated Statements of Income (In Thousands, Except for Share and Per Share Data)  (Unaudited)(Unaudited)For the Three Months EndedFor the Six Months EndedJune 30,June 30,200620052,0062005Interest and dividend income:Interest and fees on loans$      11,971$    9,236$    22,855$   17,785Interest on investment securities:Nontaxable41438187Taxable6253128120Interest and dividends on securities available for sale:Nontaxable6666135132Taxable152118296216Dividends36457770Interest on deposits in banks522643Interest on federal funds sold145151306232Total interest and dividend income$      12,525$    9,714$   23,942$   18,645Interest expense:Interest on deposits$       4,116$    2,662$    7,700$    4,950Interest on capital lease obligations4377Interest on borrowings9495111,718902Total interest expense$       5,069$    3,176$     ,425$    5,859Net interest income$       7,456$     ,538$   14,517$  12,786Provision for loan losses199100302327Net interest income after prov. for loan losses$       7,257$ 6,438$    14,215$ 12,459Noninterest income:Service charges on deposit accounts$         799$     793$    1,560$   1,509Commissions and fees277233527463Other209109325215Total noninterest income$       1,285$  1,135$    2,412$    2,187Noninterest expense:Salaries and employee benefits$       3,166$   2,596$    6,316$   5,038Net occupancy expense of premises389272727531Furniture and equipment403295789565Other1,9131,7663,5653,389Total noninterest expenses$       5,871$    4,929$   11,397$   9,523Income before income taxes$       2,671$    2,644$    5,230$   5,123Provision for income taxes8988711,7521,689Net income$       1,773$   1,773$    3,478$   3,434Average shares:Basic4,969,7204,935,9464,965,4994,931,201Assuming dilution5,094,4575,073,4325,094,2405,072,286Earnings per common share:Basic$        0.36$    0.36$  0.70$    0.70Assuming dilution0.350.350.680.68See Accompanying Notes to Consolidated Financial Statements


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PREMIER COMMUNITY BANKSHARES, INC.Consolidated Statements of Changes in Shareholders' EquityFor the Six Months Ended June 30, 2006 and 2005(In Thousands, Except for Share Data)(Unaudited)AccumulatedOtherTotalCommonCapitalRetainedComprehensiveComprehensiveShareholders'StockSurplusEarningsIncomeIncomeEquityBalance December 31, 2004$ 4,920$19,502$19,710$       130$ 44,262Comprehensive IncomeNet income3,434$     3,4343,434Other comprehensive loss,Unrealized loss on available forsale securities (net of tax$39)(76)(76)(76)Total comprehensive income$     3,358Issuance of common stock-exercise of stock options(18,250 shares)18106124Balances - June 30, 2005$ 4,938$19,608$23,144$      54$   47,744AccumulatedOtherTotalCommonCapitalRetainedComprehensiveComprehensiveShareholders'StockSurplusEarningsLossIncomeEquityBalance December 31, 2005$4,956$19,805$25,612$     (84)$ 50,289Comprehensive IncomeNet income3,478$    3,4783,478Other comprehensive loss,unrealized loss on available forsale securities (net of tax$94)(186)(186)(186)Total comprehensive income$   3,292Issuance of common stock-exercise of stock options(27,900 shares)28300328exercise of cashless options(11,744 shares)(12)(242)(254)Stock compensation expense44Balances - June 30, 2006$ 4,972$19,867$29,090$    (270)$ 53,659See Accompanying Notes to Consolidated Financial Statements


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PREMIER COMMUNITY BANKSHARES, INC. Consolidated Statements of Cash Flows For the Six Months Ended June 30, 2006 and 2005 (In Thousands) (Unaudited) 20062005CASH FLOWS FROM OPERATING ACTIVITIESNet income$      3,478$      3,434Adjustments to reconcile net incometo net cash provided by operating activities:Depreciation and amortization863577Net amortization on securities1224Provision for loan losses302327Loss on sale of other real estate(12)-Changes in assets and liabilities:(Increase) in other assets(2,099)(3,455)(Increase) in accrued interest receivable(204)(320)Increase (decrease) in accounts payable and accrued expenses75(253)Increase in interest expense payable72162Net cash provided by operating activities$      2,487$        496CASH FLOWS FROM INVESTING ACTIVITIESProceeds from maturities, calls and principal paymentson securities held to maturity$        134$        155Proceeds from maturities, calls and principal paymentson securities available for sale3,4911,777Purchase of securities available for sale(5,326)(2,218)Net increase in loans(46,941)(43,307)Proceeds from sale of other real estate112151Purchase of bank premises and equipment(3,188)(2,732)Net cash used in investing activities$    (51,718)$    (46,174)CASH FLOWS FROM FINANCING ACTIVITIESNet increase in demand deposits and interest bearing deposits$     22,762$        180Net increase in time deposits26,44446,586Net increase (decrease) in borrowings15,823(8,767)Proceeds from trust preferred capital notes14,4338,248Principal payments on capital lease obligation(6)(5)Cash dividends paid(1,239)(1,033)Stock Compensation Expense4-Net proceeds from issuance of common stock78123Net cash provided by financing activities$     78,295$     45,332Increase (decrease) in cash and cash equivalents$     29,064$       (346)Beginning40,36240,649Ending$     69,426$     40,303SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIONCash payments for:Interest$      9,497$      5,697Income taxes$      2,090$      1,705Change in unrealized gain on securities available for sale$       (280)$       (115)See Accompanying Notes to Consolidated Financial Statements


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PREMIER COMMUNITY BANKSHARES, INC.  Notes to Consolidated Financial Statements (Unaudited) For the Six Months Ended June 30, 2006 and 2005  Note 1. Accounting Policies  General  In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position of Premier Community Bankshares, Inc. (Premier or the Corporation) at June 30, 2006 and December 31, 2005, the results of operations and cash flows for the six month periods ended June 30, 2006 and 2005, and the results of operations for the quarters ended June 30, 2006 and 2005.  The statements should be read in conjunction with the Notes to the Consolidated Financial Statements included in Premiers Annual Report on Form 10-K for the year ended December 31, 2005 (the 2005 Form 10-K).  Note 2. Securities  Securities held to maturity at June 30, 2006 are summarized as follows(in thousands):GrossGrossAmortizedUnrealizedUnrealizedFairCostGains(Losses)ValueJune 30, 2006U.S. Government andfederal agencies$497$       -($38)$459Obligations of state andpolitical subdivisions3,88317(46)3,854Other securities2,71649(98)2,667$7,096$66($182)$6,980  Securities available for sale at June 30, 2006 are summarized as follows(in thousands):GrossGrossAmortizedUnrealizedUnrealizedFairCostGains(Losses)ValueJune 30, 2006U.S. Government andfederal agencies$15,480$       -($317)$15,163Obligations of state andpolitical subdivisions5,0733(92)4,984Mortgage-backed securities52-(3)49Other securities4,497--4,497$25,102$3($412)$24,693


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Securities in an unrealized loss position at June 30, 2006 and December 31, 2005, by duration of the unrealized loss, are shown below.  No impairment has been recognized on any of the securities in a loss position because of managements intent and demonstrated ability to hold securities to scheduled maturity or call dates.  There were approximately 52 securities in the consolidated portfolio of the Corporation that had losses as of June 30, 2006, all of which are considered to be temporary. Management has evaluated the investment portfolio by security and determined the declines in fair value were primarily attributable to changes in market interest rates, not in estimated cash flows or credit quality, and therefore no other-than-temporary impairment was recorded at the end of the reporting period.  June 30, 2006Less than 12 monthsMore than 12 monthsTotal(In Thousands)UnrealizedUnrealizedUnrealizedFair Value(Losses)Fair Value(Losses)Fair Value(Losses)U.S. Government and federalagencies$     8,025$     (142)$    6,210$     (213)$   14,235$     (357)Obligations of states and politicalsubdivisions3,893(59)2,008(79)5,901(138)Mortgage-backed securities--49(2)49(2)Other securities--1,728(97)1,728(97)$    11,918$     (201)$    9,995$     (391)$   21,913$     (594)   December 31, 2005Less than 12 monthsMore than 12 monthsTotal(In Thousands)UnrealizedUnrealizedUnrealizedFair Value(Losses)Fair Value(Losses)Fair Value(Losses)U.S. Government and federalagencies$     7,943$     (113)$    3,420$       (65)$   11,363$     (178)Obligations of states and politicalsubdivisions3,048(55)709(11)3,757(66)Mortgage-backed securities76(1)53(1)129(2)Other securities69(180)1,728(108)1,797(288)$    11,136$     (349)$    5,910$     (185)$   17,046$     (534)


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Note 3. Loans  The consolidated loan portfolio was composed of the following at the dates indicated: June 30,December 31,20062005(In Thousands)Loans secured by real estate:Construction and land development$   161,121$  144,829Secured by farmland14,3965,514Secured by 1-4 family residential149,393141,697Multi-family residential29,96725,560Nonfarm, nonresidential166,144157,587Loans to farmers (except those secured by real estate)1,1001,576Commercial loans (except those secured by real estate)72,00469,869Loans to individuals (except those secured by real estate)25,33326,235All other loans6,3446,129Total loans$   625,802$  578,996Allowance for loan losses5,7585,591Loans, net$   620,044$  573,405   Impaired loans totaled $1.3 million at June 30, 2006 and $2.0 million at December 31, 2005. Non-accrual loans excluded from impaired loans disclosure under the Financial Accounting Standards Board Statement No. 114 amounted to $56 thousand at June 30, 2006 and $74 thousand at December 31, 2005.


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Note 4. Reserve for Loan Losses  The Corporation maintains the allowance for loan losses at a sufficient level to provide for potential losses in the loan portfolio.  Loan losses are charged directly to the allowance when they occur, while recoveries are credited to the allowance.  The adequacy of the provision for loan losses is reviewed periodically by management through consideration of factors including changes in the character and size of the loan portfolio and related loan experience, a review and examination of overall loan quality which includes the assessment of problem loans and an analysis of anticipated economic condition in the market area.  An analysis of the allowance for loan losses, including charge-off activity, is presented below for the six months ended June 30, 2006 and 2005.  Balance, beginning of period$5,591$5,007Less Charge-offs:Commercial335Real estate-mortgage00Real estate-construction00Credit cards155Consumer installment loans164117Total$182$157Plus Recoveries:Commercial74Real estate-mortgage00Real estate-construction015Credit cards41Consumer installment loans3659Total$47$79Additions charged to operating expense302$327Balance, end of period$5,758$5,256   The following is a summary of information pertaining to risk elements and impaired loans at June 30, 2006 and December 31, 2005.  June 30,December 31,20062005(In Thousands)Non-accrual loans$168$614Loans past due 90 days or more and still accruing interest158191$326$805  The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the credit is wellsecured and in process of collection.  Loans are placed on non-accrual at an earlier date or charged off if collection of principal or interest is considered doubtful.


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All interest accrued but not collected for loans that are placed on non-accrual status or charged off is reversed against interest income.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.  Note 5.  Earnings Per Share  Earnings per share were as follows for the six months ended:  For the Six Months Ended:June 30,June 30,20062005SharesAmountSharesAmountBasic earnings per share4,965,499$0.704,931,201$0.70Effect of dilutive securities:Stock options128,741141,085Diluted earnings per share5,094,240$0.685,072,286$0.68   Note 6.  Stock Compensation Plans  The Corporations Long-Term Incentive Plan allows for incentive stock options and nonqualified stock options to be granted to certain key employees and directors with an exercise price to be not less than 100% of the fair market value of the stock on the day the stock option is granted.  440,000 shares of the Corporations common stock plus sufficient shares to cover the options outstanding under the Corporations previous plan have been reserved for the issuance of stock options under the plan.  All options expire ten years from the grant date.  In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment (SFAS 123R). SFAS 123R requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, such as stock options and restricted stock, based on the fair value of those awards at the date of grant and eliminates the choice to account for employee stock options under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25).  The Corporation adopted SFAS 123R effective January 1, 2006 using the modified perspective method and as such, results for prior periods have not been restated.  Prior to January 1, 2006, no compensation expense was recognized for stock option grants as all such grants had an exercise price not less than fair market value on the date of grant.  As a result of the Corporations application of the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based compensation for the six months ended June 30, 2006, the Corporation recognized stock compensation expense of $4,187. This minimal impact is a result of the Corporation having vested all outstanding stock options as of December 31, 2005.


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Stock option compensation expense is the estimated fair value of options granted amortized on a straight-line basis over the requisite service period for each separately vesting portion of the award.  The following table summarizes stock option plan activity for the six months ended June 30, 2006:   WeightedWeightedValue ofNumberAverageAverageUnexercisedofExerciseRemainingIn-The-SharesPriceContractualMoneyLife (in years)OptionsOptions outstanding, January 1314,650$12.01Granted9,00021.0510.00Exercised(27,900)11.59Forfeited- -- -Options outstanding, June 30295,750$ 12.406.55$ 2,418,763Options exercisable, June 30288,750$   11.956.46$ 2,422,053   The total value of in-the-money options exercised during the first six months ended June 30, 2006 was $250,842.


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Note 7.  Deferred Compensation Plans  During 2004, a deferred compensation plan and split dollar life insurance plan were adopted for selected officers of the Corporation.  Under these plans, the benefit is equal to 25% of the individual employees final compensation at time of retirement.  Benefits are to be paid in monthly installments commencing at retirement for a period of 180 months.  The agreement provides that if employment is terminated for reasons other than retirement or disability, the benefit is reduced based upon a vesting schedule.  If death occurs prior to termination of service, no retirement benefits are paid but a life insurance benefit of up to three times compensation is paid to the employees beneficiary.  During 2005, a second deferred compensation plan and split dollar life insurance plan were adopted for additional selected officers of the Corporation. Under these new plans, the benefit is equal to 25% of the sum of the individual employee's final base compensation at time of retirement plus the average of bonuses paid during the final five years of service. Benefits are to be paid in annual installments commencing at retirement for a period of 15 years. The agreement provides that if employment is terminated for reasons other than retirement or disability, the benefit is reduced based upon a vesting schedule. If death occurs prior to termination of service, only the accrued benefit and a life insurance benefit of $50,000 is paid to the employees' beneficiary.  The deferred compensation charged to expense as of June 30, 2006 and 2005, based on the present value of the retirement benefits, was $204,175 and $266,391, respectively.
The plans are unfunded; however, life insurance has been acquired on the life of company employees in amounts sufficient to offset the expense of the obligations.  Note 8.  Other Expenses  The Corporation and its subsidiaries had the following other expenses for the six months ended June 30, 2006 and 2005.  20062005(In Thousands)Advertising$     375$     378ATM Expense249199Directors' Fees310247Other Outside Service20964Postage Expense148139Stationery and Supplies199229Telephone Expense227200Other (no item >1% of revenue)1,8481,933$   3,565$   3,389


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Note 9. Trust Preferred Capital Notes  On June 20, 2006, the Corporation entered into an agreement with Wilmington Trust Company to issue an additional $14.4 million in Trust Preferred Capital Notes.  The Corporation received the proceeds from this issue of subordinated debt on June 20, 2006.  The issue has a floating interest rate of 1.55% plus the prevailing 3-month LIBOR rate. The issue has a maturity date of June 20, 2036.  The Corporation has created Premier Statutory Trust IV to administer this new Trust Preferred obligation.  The proceeds have been used to fund the acquisition of Albemarle First Bank.  This acquisition is further discussed in Note 10 below.  Note 10. Subsequent Event  On July 1, 2006, the Corporation completed the acquisition of Albemarle First Bank (Albemarle) headquartered in Charlottesville, Virginia.  Under the terms of the acquisition agreement, Albemarle merged with and into Rockingham Heritage Bank (Rockingham), a subsidiary of the Corporation, and currently operates as a division of Rockingham.  The total consideration paid to Albemarle shareholders in connection with the acquisition was approximately $29 million, which consisted of approximately $14.5 million in cash and the issuance of 688,788 shares of the Corporations common stock.  The operations of Albemarle, as part of Rockingham, will be included in the Corporations financial statements beginning July 1, 2006.  As of June 30, 2006, Albemarle had total assets of $122.1 million.  In connection with the acquisition of Albemarle, the Corporation formed Premier Statutory Trust IV (as discussed above in note 9) to facilitate the cash payment of $14.5 million as required in the terms of the acquisition agreement.


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Note 11. Recent Accounting Pronouncements  In March 2006, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 156, "Accounting for
 Servicing of Financial Assets an amendment of FASB Statement 140" (Statement 156).  Statement 156 amends Statement 140 with respect to separately recognized servicing assets and liabilities.  Statement 156 requires an entity to recognize a servicing asset or liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract and requires all servicing assets and liabilities to be initially measured at fair value, if practicable.  Statement 156 also permits entities to subsequently measure servicing assets and liabilities using an amortization method or fair value measurement method.  Under the amortization method, servicing assets and liabilities are
amortized in proportion to and over the estimated period of servicing.  Under the fair value measurement method, servicing assets are measured at fair value at each reporting
 date and changes in fair value are reported in net income for the period the change occurs.  Adoption of Statement 156 is required as of the beginning of fiscal years beginning subsequent to September 15, 2006.  Earlier adoption is permitted as of the beginning of an entity's fiscal year, provided the entity has not yet issued financial statements, including interim financial statements.  The Corporation does not expect the adoption of Statement 156 at the beginning of 2007 to have a material impact.


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Item 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  The following discussion and analysis of the financial condition and results of operations for the six months and three months ended June 30, 2006 should be read in conjunction with the Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements included in this quarterly report and in the Annual Report on Form 10-K for the year ended December 31, 2005.  Caution About Forward Looking Statements  We make forward-looking statements in this quarterly report that are subject to risks and uncertainties.  These forward-looking statements include statements regarding our profitability, liquidity, allowance for loan losses, interest rate sensitivity, market risk, growth strategy, and financial and other goals.  The words believes, expects, may, will, should, projects, contemplates, anticipates, forecasts, intends, or other similar words or terms are intended to identify forward-looking statements.  These forward-looking statements are subject to significant uncertainties because they are based upon or are affected by factors including, but not limited to:   the ability to successfully manage our growth or implement our growth strategies if we are unable to identify attractive markets, locations or opportunities to expand in the future;  maintaining capital levels adequate to support our growth;  maintaining cost controls and asset qualities as we open or acquire new branches;  the risks associated with entering a new market area related to the merger with Albemarle First Bank;  reliance on our management team, including our ability to attract and retain key personnel;  the successful management of interest rate risk;  the risks of a cool down or slow down in the real estate market that might affect the real estate portion of our loan portfolio;  changes in general economic and business conditions in our market area;  changes in interest rates and interest rate policies;  risks inherent in making loans such as repayment risks and fluctuating collateral values;  competition with other banks and financial institutions, and companies outside of the banking industry, including those companies that have substantially greater access to capital and other resources;  demand, development and acceptance of new products and services;  problems with technology utilized by us;  changing trends in customer profiles and behavior; and  changes in banking and other laws and regulations applicable to us.  Because of these uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.  In addition, our past results of operations do not necessarily indicate our future results.


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General  Premier Community Bankshares, Inc. (Premier or the Corporation) is a Virginia multi-bank holding company headquartered in Winchester, Virginia.  The Corporation owns The Marathon Bank, Rockingham Heritage Bank and its subsidiary, RHB Services, Inc., all of which are located in Virginia, and Premier Bank, Inc., which is headquartered in Martinsburg, West Virginia and began operating as a de novo bank on July 18, 2005.  On July 1, 2006, the Corporation acquired Albemarle First Bank in Charlottesville, Virginia.  Albemarle merged with and into Rockingham Heritage Bank and will operate as a division thereof.  For more information on this merger, see Note 10 of the Notes to Consolidated Financial Statements.  The Corporation and its subsidiaries are engaged in the business of offering financial services to the general public. Premier offers checking accounts, savings and time deposits, and commercial, real estate, personal, home improvement, automobile and other installment and term loans.  The Corporation also offers financial services, travelers checks, safe deposit boxes, collection, notary public and other customary bank services (with the exception of trust services) to its customers.  Net interest income is our primary source of revenue.  We define revenue as interest
 income plus non-interest income.  As discussed further in the quantitative and qualitative disclosures about market risk section, we manage our balance sheet and interest rate risk to both maximize and stabilize net interest income.  We do this by monitoring the spread between the interest rates we earn on interest earning assets such as loans and the interest rates we pay on interest bearing liabilities such as deposit accounts.  We attempt to minimize our exposure to interest rate risk, but are unable to eliminate it.  In addition to management of interest rate risk, we analyze our loan portfolio for credit risk.  Risk of loan defaults and foreclosures are unavoidable in the banking industry, and we try to limit our exposure to this risk by carefully underwriting and monitoring our
 extension of credit.  In addition to net interest income, non-interest income is an increasingly important source of income
for the Corporation.  Non-interest income is derived chiefly from service charges on deposit accounts (such as charges for non-sufficient funds and ATM fees) as well as commissions and fees from bank services (such as mortgage originations and debit and credit card processing).  Premier Bank, Inc. has signed a $1.65 million contract for the construction of its permanent headquarters, which will be located in Martinsburg, West Virginia.  The bank is currently operating out of a temporary facility.  In addition, Premier Bank has executed a lease for a branch facility to be located in Charles Town, West Virginia.  That facility is expected to open during the later part of the fourth quarter of 2006.  On June 23, 2006, Marathon Bank sold its credit card portfolio to a third party.  Credit cards in Marathons name will still be offered, but will be serviced and owned by the third party vendor.  This transaction resulted in the recognition of a one-time gain on sale of assets in the amount of $109,961.  Financial Overview  At June 30, 2006, the Corporation had total assets of $756.1 million, net loans of $620.0 million, deposits of $612.1 million and shareholders equity of $53.7 million.  The increase in assets was 21.1% over the amount at June 30, 2005, while net loans and deposits increased 17.0% and 15.3%, respectively, for the same period.


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Our
earnings per share, on a fully diluted basis, for the quarter ended June 30, 2006 was $0.35, unchanged from the same period in 2005. Management is encouraged by the fact that, although new operations increased operating expenses significantly, the Corporation was able to absorb these costs through continued growth in earning assets to increase net income year over year.  The Corporation has experienced a net operating loss from the operation of the de novo bank in West Virginia in the amount of $510 thousand through the first six months of 2006.  An operating loss is customary and expected as a de novo bank begins to ramp up its operations and expand its trade area.  The Corporation also added three additional branch offices during the first six months of 2006.  The costs related to opening and
staffing these new facilities have also had a negative impact on the Corporations net income.  Management feels that these investments in
 expanded operations are necessary and will have a positive impact on earnings in the future. However, these results cannot be guaranteed and are subject to the
 factors that are disclosed in Caution About Forward Looking Statements above, which may cause results which are materially different than our expectations.  Our return on average equity was 13.48% for the six months ended June 30, 2006.  We have been able to achieve this level without relying on a disproportionate share of income from mortgage banking operations.  Due to the higher operating costs noted above, our efficiency ratio also increased during this period, rising from 63.1% for the six months ended June 30, 2005 to 66.9% for the period ended June 30, 2006.  For more information on the efficiency ratio and its calculation, see the non interest expense section below.  Critical Accounting Policies  General  The financial condition and results of operations presented in the consolidated financial statements, the accompanying notes to the consolidated financial statements and this section are, to a large degree, dependent upon our accounting policies.  The selection and application of these accounting policies involve judgments, estimates, and uncertainties that are susceptible to change.  We discuss below those accounting policies that we believe are the most important to the portrayal and understanding of our financial condition and results of operations.  These critical accounting policies require our most difficult, subjective and complex judgments about matters that are inherently uncertain.  In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of materially different financial condition or results of operations is a reasonable likelihood.  Allowance for Loan Losses  The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio.  The allowance is based on two basic principles of accounting:   SFAS 5, Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimatable and  SFAS 114, Accounting by Creditors for Impairment of a Loan, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance.


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Our allowance
for loan losses is determined by evaluating our loan portfolio on at least a quarterly basis.  Particular
attention is paid to individual loan performance, collateral values, borrower financial condition and overall economic
conditions.  The evaluation includes a close review of the internal watch list and other non-performing loans.  Management
uses three steps in calculating the balance of the allowance.  The first step is the specific classification, which examines problem loans and applies a weight factor to each category.  The weight factor is based upon historical data, and the loans within each category are reviewed on a monthly basis to determine changes in their status.  The second step applies a predetermined rate against total loans with unspecified reserves.  Again, this rate is based upon experience and can change over time.  The
third step is an unallocated allowance, which is determined by economic events and conditions that may have a real,
 but as yet undetermined, impact upon the portfolio.  Each of these steps is based on data that can
be subjective and the actual losses may be greater or less than the amount of the allowance.  However, management feels that the allowance represents a reasonable assessment of the risk embedded in the portfolio.  Net Income  Net income for the quarter ended June 30, 2006 was $1.8 million, unchanged from the same period in 2005. The provision for income tax expense increased $27 thousand from $871 thousand for the 2005 period to $898 thousand for the 2006 period. The annualized return on assets was 0.97% for the second quarter of 2006 as compared to 1.15% for the same period of 2005.  Annualized return on equity was 13.38% and 15.18% for the second quarters of 2006 and 2005, respectively. This decline is primarily attributable to the losses and expenses incurred from investing in the de novo bank and new branch facilities, discussed previously.  Net income for the six months ended June 30, 2006 was $3.5 million compared to $3.4 million for the same period in 2005. This is an increase of $44 thousand or 1.3% over the same period in 2005. The provision for income tax expense increased $63 thousand from $1.7 million for the 2005 period to $1.8 million for the 2006 period. The annualized return on assets was 0.97% for the first six months of 2006 as compared to 1.15% for the same period of 2005.  For the first half of 2006 the annualized return on equity was 13.48%, compared to 15.06% for the same period in 2005.  Total Assets  Total assets increased $81.7 million or 12.1% to $756.1 million at June 30, 2006
compared to $674.4 million at December 31, 2005.  Total loans at June 30, 2006
were $625.8 million, of which $521.0 million were loans secured by real estate.  The
remaining loans consisted of $73.1 million in commercial loans, $25.3 million in consumer
loans and $6.4 million in all other loans.  Net loans at June 30, 2006 were $620.0 million,
 an increase of $46.6 million or 8.1% from the December 31, 2005 amount of$573.4 million.  The
 loan to deposit ratio was 102.2% at June 30, 2006 and 102.9% at December 31, 2005.  Steady loan
demand in an expanding market generated the loan growth experienced for the first six months of 2006. In
response to the national and local cooling in the real estate market, management is closely monitoring all
loans secured by real estate and the Corporations exposure to or concentration in these types of loans.  We
 expect the strong and diversified economies and low unemployment rates
 in our market areas to help to offset the expected compression in the net interest margin.


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The investment portfolio increased 4.6% to $31.8 million at June 30, 2006 compared to $30.4 million at December 31, 2005.  Federal funds sold increased $21.7 million to $41.0 million at June 30, 2006 compared to $19.3 million at December 31, 2005.  Total interest earning assets increased $73.6 million or 11.7% from December 31, 2005 to June 30, 2006.  This increase was the result of the increase in outstanding loan balances and the increase in fed funds sold, due to the timing of additional FHLB advances and the receipt of proceeds from the new Trust Preferred issue, which is discussed in greater detail in Note 9 of this quarterly report.  Allowance for Loan Losses  We maintain the allowance for loan losses at a sufficient level
 to provide for potential losses in the loan portfolio.  Loan losses are charged directly to the allowance when they
occur, while recoveries are credited to the allowance.  Specific reserves by loan type are established based on overall historical losses, anticipated losses, and inherent risk.  Additionally, specific reserves for individual loans are established depending on the severity of the potential loss.  Loans are individually reserved once classified as a watch item by management.  Higher percentages of loans are reserved for individual loans with a more severe classification.  The adequacy of the provision for loan losses is reviewed regularly by management through consideration of several factors including changes in character and size of the loan portfolio and related loan loss experience, a review and examination of overall loan quality, which
 includes the identification and assessment of problem loans, and an analysis of anticipated economic conditions in the market area.  The allowance for loan losses at June 30, 2006, was $5.8 million. This is an increase of $167 thousand or 3.0% from December 31, 2005.  This gives the Corporation a 0.92% allowance for loan losses to total loans.  Management has completed an analysis on the reserve and believes the reserve is adequate.  Liabilities  Total deposits increased to $612.1 million at June 30, 2006 from $562.9 million at
December 31, 2005, which is an increase of $49.2 million or 8.7%.  Non-interest bearing deposits were $97.3 million at June 30, 2006, an increase of $7.9 million or 8.8% from the amount at December 31, 2005.  During this period, interest bearing checking and savings accounts increased $14.8 million or 9.9% to $163.9 million.  The amount of time deposits was $350.8 million at the end of the second quarter, reflecting an increase of $26.4 million or 8.1% over the amount at the end of the year.  At June 30, 2006 non-interest bearing deposits represented 15.9% of total deposits as compared to 15.9% at year-end 2005.  Low cost interest-bearing deposits including savings and interest bearing checking were 26.8% of total deposits.   Time deposits represented 57.3% of total deposits at June
30, 2006, down slightly from 57.6% at year-end 2005.  The increase in time deposits is the result of Premiers ability to
offer competitive rates in its market area; however, if this trend continues, it may further compress the net interest margin.  The Corporation has been experiencing a changing trend in its deposit mix from lower cost savings and money market accounts to higher cost time deposits.  This is consistent with national and local trends in our industry, and the Corporation continues to create new deposit products and explore other avenues of achieving higher profits.


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Shareholders' Equity  Total equity increased by $3.4 million or 6.8% from December 31, 2005 to June 30, 2006.  The increase was due to a $3.5 million net profit for the first six months of 2006 plus exercised stock options of $77 thousand and an increase of $270 thousand in accumulated other comprehensive loss.  The primary capital to assets ratio was 7.1% at June 30, 2006.  Interest Income  Interest income totaled $23.9 million for the six months ended June 30, 2006, $5.3 million or 28.4% higher than the amount for the six months ended June 30, 2005.  Interest and fees on loans of $22.9 million comprise the majority of interest income. Interest income from investment securities was $639 thousand for the first six months of 2006, an increase of $85 thousand or 15.3% from the same period in 2005.  Interest income on federal funds, the third major component of the Corporations interest income, increased $74 thousand or 31.8%.  The increase in interest income on federal funds balances was the result of higher fed funds balances earlier in the six-month period.  Interest Expense  Total interest expense for the six months ended June 30, 2006 was $9.4 million, $3.6 million or 60.9% higher than the amount for the six months ended June 30, 2005.  Interest on deposits for the six-month period increased by $2.8 million or 55.6% over the same period in 2005, due to higher deposit balances and increased short term interest rates.  Interest on borrowings increased by $816 thousand or 90.4% over the same period last year.  Net Interest Income  Net interest income for the six months ended June 30, 2006 was $14.5 million, $1.7 million or 13.5% higher than the amount for the six months ended June 30, 2005. This increase is the result of the growth in earning assets of $120.3 million from June 30, 2005 to June 30, 2006, offset by an increase in certificate of deposit rates.  Despite the increase in rates, the Corporation was able to maintain a high net interest margin.  The net interest margin for the six months ended June 30, 2006 was 4.50%, down slightly from 4.63% for the same period of 2005.  Premier is liability sensitive for interest bearing balances repricing or maturing within one year.  Non-interest Income  Total non-interest income for the six months ended June 30, 2006 was $2.4 million, an increase of $225 thousand or 10.3% from the 2005 amount of $2.2 million. Commissions and fees income increased $63 thousand or 13.7% as a result of increased secondary market mortgage commissions.  The Corporation also had a one-time gain of $110 thousand as a result of the sale of Marathon Banks credit card portfolio.  Fee income is traditionally the major component of non-interest income.  Non-interest Expense  Total non-interest expense for the six months ended June 30, 2006 was $11.4 million, $1.9 million or 19.7% higher than the amount for the six months ended June 30, 2005.  Salary expense increased $1.3 million or 25.4%, and occupancy expense increased by $196 thousand from the same period in 2005.  The net increase in these expenses was in part a result of additional staffing to handle the growth of the Corporation, the expenses associated with opening additional branches, and the costs involved in processing an increasing number of accounts and transactions.


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The Corporation's efficiency ratio was 66.9% for the six months ended June 30, 2006 compared to 63.1% for the same period in 2005.  The efficiency ratio is a non-GAAP financial measure, which we believe provides investors with important information regarding our operational efficiency.  We compute our efficiency ratio by dividing non-interest expense by the sum of the net interest income on a tax-equivalent basis and non-interest income, net of securities gains or losses.  The following table reflects the calculation for the efficiency ratio for the six months ended June 30, 2006 and 2005:  June  30,20062005Total Non-interest Expense$  11,397$ 9,523$  11,397$ 9,523Net interest Income$  14,517$ 12,786Fully Taxable Equivalent adjustment111113Non-interest Income2,4122,187$ 17,040$15,086Efficiency Ratio66.9%63.1%   Two important factors may impact non-interest expense for 2006 and going
forward.  First, the Board of Directors approved a plan by management to begin assessing the feasibility of streamlining and consolidating back-office operations of the Corporation.  Currently, the subsidiary banks primarily operate these functions autonomously.  In light of the continued compression on the net interest margin and in an effort to restructure the overall operations of the Corporation to become more efficient and potentially lower the operating costs of the Corporation, management has begun a study of areas to consolidate at the holding company level.  The Corporation believes the consolidation of these operations will provide cost and operating efficiencies; however, these results cannot be guaranteed and are subject to
the factors that are disclosed in Caution About Forward Looking Statements above, which may cause
results which are materially different than our expectations. As such, the Corporation cannot accurately quantify or estimate the potential cost savings related to the consolidation, as this study has just recently commenced.  The Corporation has re-evaluated an expansion plan for the main office of Marathon Bank, as the overall plans will now differ materially from the Corporations original intent.  This resulted in a one-time charge recorded in the amount of $129 thousand to write-off capitalized expenses related to this project.  Second, after a detailed review of the useful life of certain software products, the Corporation determined the useful life of these products was longer than the amortization period being applied.  Consistent with Accounting Principles Bulletin (APB) 20 Accounting Changes, the Corporation applied the changes in accounting estimate to these products beginning with the third quarter of 2006. As required by APB 20, the


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Corporation will begin accounting for this change in accounting estimate in the period of change and in future periods prospectively.  There will not be a restatement regarding amounts previously reported in the Corporations financial statements.  Currently, these products are amortized over a three year period and, beginning in the third quarter of 2006, a five year life will be applied to all affected assets and any new purchases subsequent to this date.  The Corporation estimates this change in accounting estimate will reduce amortization expense for the applicable assets currently recorded by approximately $102 thousand for the remainder of 2006 and $149 thousand for 2007.  Liquidity  Premiers liquidity requirements are measured by the need to meet deposit withdrawals, fund loans, meet reserve requirements and maintain cash levels necessary for daily operations. To meet liquidity requirements, Premier maintains cash reserves and has an adequate flow of funds from maturing loans, securities, and short-term investments. In addition, Premiers subsidiary banks have the ability to borrow additional funds from various sources.  Short-term borrowings are available from federal funds facilities at correspondent banks and from the discount window of the Federal Reserve Bank.  Borrowings are also available from the Federal Home Loan Bank. The Corporation considers its sources of liquidity to be sufficient to meet its estimated needs.  Capital Resources  The Corporations risk-based capital position at June 30, 2006 was $71.9
million, or 11.50% of risk-weighted assets for Tier 1 capital, and $96.4 million, or 15.42% for total risk based capital. Tier 1
capital consists primarily of common shareholders' equity and qualifying Trust Preferred Capital Notes. Tier 2 capital includes the allowance for loan losses and the portion of Trust Preferred Capital Notes that does not qualify for inclusion in Tier 1 capital.  Total risk-based capital is the sum of Tier 1 and Tier 2 capital. Risk-weighted assets are determined by assigning various levels of risk to different categories of assets and off-balance sheet items. Under current risk-based capital standards, all banks are required to have Tier 1 capital of at least 4% and a total capital ratio of 8%.  The Corporations issuance of $7.2 million in Trust Preferred Capital Notes in the fourth quarter of 2001, $6.2 million in notes in the third quarter
of 2003, $8.2 million in notes in the second quarter of 2005 and, as described below, $14.4 million
in notes during the second quarter of 2006 are included in risk-based capital, and will serve as a long-term source of funding.  On June 20, 2006, the Corporation entered into an agreement with Wilmington Trust Company to issue an additional $14.4 million in Trust Preferred Capital Notes.  The Corporation received the proceeds from this issue of subordinated debt on June 20, 2006.  The issue has a floating interest rate of 1.55% plus the prevailing 3-month LIBOR rate. The issue has a maturity date of June 20, 2036.  The Corporation has created Premier Statutory Trust IV to administer this new Trust Preferred obligation.  The proceeds have been used to fund the acquisition of Albemarle First Bank.  The Corporation is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit and standby letters of credit and commercial lines of credit.  Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance


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sheets.  There have been no material changes in these instruments from the amounts disclosed in the 2005 Form 10-K.   Item 3. Quantitative and Qualitative Disclosures About Market Risk  Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates and equity prices.  The Corporations market risk is composed primarily of interest rate risk.  The Corporations Asset and Liability Management Committee (ALCO) is responsible for reviewing the interest rate sensitivity position and establishing policies to monitor and limit exposure to this risk.  The Board of Directors reviews the guidelines established by ALCO.  Interest rate risk is monitored through the use of three
 complementary modeling tools: static gap analysis, earnings simulation modeling and economic value simulation (net present value estimation).  Each of these models measures changes in a variety of interest rate scenarios.  While each of the interest rate risk measures has limitations, taken together they represent a reasonably comprehensive view of the magnitude of interest rate risk in the Corporation, the distribution of risk along the yield curve, the level of risk through time, and the amount of exposure to changes in certain interest rate relationships.  Static gap, which measures aggregate repricing values, is less utilized since it does not effectively measure the earnings impact on the Corporation and is not addressed here. The earnings simulation and economic value models, however, which more effectively reflect the earnings impact, are utilized by management on a regular basis
and are explained below.  Earnings Simulation Analysis  Management uses simulation analysis to measure the sensitivity of net income to changes in interest rates.  The model calculates an earnings estimate based on current and projected balances and rates.  This method is subject to the accuracy of the assumptions that underlie the process, but it provides a better analysis of the sensitivity of earnings to changes in interest rates than other analysis such as the static gap analysis.  Assumptions used in the model, including loan and deposit growth rates, are derived from seasonal trends and managements outlook, as are the assumptions used to project the yields and rates for new loans and deposits.  All maturities, calls and prepayments in the securities portfolio are assumed to be reinvested in like instruments.  Mortgage loans and mortgage backed securities prepayment assumptions are based on industry estimates of prepayment speeds for portfolios with similar coupon ranges and seasoning.  Different interest rate scenarios and yield curves are used to measure the sensitivity of earnings to changing interest rates.  Interest rates on different asset and liability accounts move differently when the prime rate changes and are accounted for in the different rate scenarios.


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The following table represents the interest rate sensitivity on net interest income for the Corporation using different rate scenarios at June 30, 2006.  % Change inChange in Prime RateNet Income+300 basis points+7.8%+200 basis points+7.4%+100 basis points+5.5%Most Likely0-100 basis points-2.0%-200 basis points-4.8%-300 basis points-8.4%   Economic Value Simulation  Economic value simulation is used to calculate the estimated fair value of assets and liabilities over different interest rate environments.  Economic
 values are calculated based on discounted cash flow analysis.  The economic value of equity is the economic value of all assets minus the economic value of all liabilities.  The change in economic value of equity over different rate environments is an indication of the longer term repricing risk in the balance sheet.  The same assumptions are used in the economic value simulation as in the earnings simulation.  The following chart reflects the change in net market value by using June 30, 2006 data over different rate environments with a one-year horizon.  Change in Economic Value of EquityChange in Prime Rate(dollars in thousands)+300 basis points(5,643)+200 basis points(5,487)+100 basis points(5,611)Most Likely(6,213)-100 basis points(5,312)-200 basis points(6,551)-300 basis points(10,173)    Item 4. Controls and Procedures  The Corporation maintains disclosure controls and procedures that are designed to provide assurance that information required to be disclosed by the Corporation in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods required by the Securities and Exchange Commission.  As of June 30, 2006, an evaluation of the effectiveness of the design and operation of the Corporations disclosure controls and procedures was carried out under the supervision and with the participation of management, including the Corporations Chief Executive Officer and Chief Financial Officer.  Based on and as of the date of such evaluation, the aforementioned officers concluded that the Corporations disclosure controls and procedures were effective.  The Corporations management is also responsible for establishing and maintaining adequate internal control over financial reporting.  There were no changes in the Corporations internal control over financial reporting identified in connection with the evaluation of it that occurred during the


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Corporations last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting.    PART II. OTHER INFORMATION  Item 1.  Legal Proceedings  None  Item 1A. Risk Factors  As of the date of this report, there are no material changes to the risk factors previously disclosed in Part I, Item 1A (Risk Factors) of the 2005 Form 10-K.  Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds  None  Item 3.  Defaults upon Senior Securities  None  Item 4.  Submission of Matters to a Vote of Security Holders   (a) Premier Community Bankshares, Inc. held its Annual Meeting of Shareholders on Tuesday, May 2, 2006 in Strasburg, Virginia. (b) Not Applicable (c) At the Annual Meeting, the shareholders approved the election of five of the directors of the Company and the appointment of the firm Yount, Hyde & Barbour, P.C. as the independent auditors for the fiscal year ending December 31, 2006.  The votes cast for or withheld in the election of the directors were as follows:  NAMEFORWITHHELDStephen T. Heitz4,027,994222,464John K. Stephens4,047,552202,906Donald L. Unger4,048,548201,910James C. Youngblood4,049,148201,310D. Frank Hill, III4,232,29818,160   The votes cast for, against or abstain to approve the ratification of Yount, Hyde & Barbour, P.C. as independent auditors for the fiscal year ending December 31, 2006 were as follows:  NAMEFORAGAINSTABSTAINIndependent Auditors - Yount,
Hyde & Barbour, P.C.4,220,74125,3394,378  (d)  Not Applicable


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Item 5.  Other Information  None  Item 6.  Exhibits  31.1 Rule 13(a)-14(a) Certification of Chief Executive Officer 31.2 Rule 13(a)-14(a) Certification of Chief Financial Officer 32.1 Statement of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350


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SIGNATURES  Pursuant to 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.   PREMIER COMMUNITY BANKSHARES, INC.      DATE:   8/8/06 /s/ Donald L. Unger DONALD L. UNGER PRESIDENT AND CEO     DATE:   8/8/06 /s/ Frederick A. Board FREDERICK A. BOARD CHIEF FINANCIAL OFFICER


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EXHIBIT INDEX   Exhibit No. Description  31.1 Rule 13(a)-14(a) Certification of Chief Executive Officer.  31.2 Rule 13(a)-14(a) Certification of Chief Financial Officer.  32.1 Statement of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.


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