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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Form 10-QSB



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Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the Quarterly Period Ended
September 30, 2006



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BANK OF THE JAMES FINANCIAL GROUP, INC.

(Name of Small Business Issuer in Its Charter)



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|                                                               |  |                          |  |                                     
|-------------------------------------------------------------- |  | ------------------------ |  | ------------------------------------
|Virginia                                                       |  | 000-50548                |  | 20-0500300                          
|(State or other jurisdiction of incorporation or organization) |  | (Commission file number) |  | (I.R.S. Employer Identification No.)



|                                         |  |           
|---------------------------------------- |  | ----------
|828 Main Street, Lynchburg, VA           |  | 24504     
|(Address of principal executive offices) |  | (Zip Code)

(434) 846-2000

(Registrants telephone number, including area code)



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Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 shell company (as defined by Rule 12b-2 of the Exchange Act).    Yes ̈No  x

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuers classes of common equity, as of the
latest practicable date: 2,019,978 shares of Common Stock, par value $2.14 per share, were outstanding at November 13, 2006.

Transitional Small Business Disclosure Format (check one)    Yes ̈No  x



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##### Table of Contents

Table of Contents



|                               |  |                                                             |  |   
|------------------------------ |  | ----------------------------------------------------------- |  | --
|PART I  FINANCIAL INFORMATION |  | 3                                                          
|                               |  |                                                            
|Item 1.                        |  | Consolidated Financial Statements                           |  | 3 
|                               |  |                                                            
|Item 2.                        |  | Managements Discussion and Analysis or Plan of Operation.  |  | 11
|                               |  |                                                            
|Item 3.                        |  | Controls and Procedures                                     |  | 24
|                               | 
|PART II  OTHER INFORMATION    |  | 24                                                         
|                               |  |                                                            
|Item 1.                        |  | Legal Proceedings                                           |  | 24
|                               |  |                                                            
|Item 2.                        |  | Unregistered Sales of Equity Securities and Use of Proceeds |  | 24
|                               |  |                                                            
|Item 3.                        |  | Defaults Upon Senior Securities                             |  | 24
|                               |  |                                                            
|Item 4.                        |  | Submission of Matters to a Vote of Security Holders         |  | 24
|                               |  |                                                            
|Item 5.                        |  | Other Information                                           |  | 24
|                               |  |                                                            
|Item 6.                        |  | Exhibits                                                    |  | 24
|                               | 
|SIGNATURES                     |  | 25                                                         



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##### Table of Contents

PART I  FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Balance Sheets

As of September 30, 2006 and December 31, 2005

(dollar amounts in thousands, except per share amounts)



|                                                                                                                                                                          |             |                   |         |           |                  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------- | ----------------- | ------- | --------- | ---------------- | - | ------- | -
|                                                                                                                                                                          |             | September 30,2006 |         |           | December 31,2005 |  
|                                                                                                                                                                          | (unaudited) |                   |         | (audited) |                 
|Assets                                                                                                                                                                    |             |                   |         |           |                  |   |         |  
|Cash and due from banks                                                                                                                                                   |             | $                 | 5,055   |           |                  | $ | 4,993   |  
|Federal funds sold                                                                                                                                                        |             |                   |        |           |                  |   | 4,243   |  
|                                                                                                                                                                          |             |                   |         |           |                  |   |         |  
|Total cash and cash equivalents                                                                                                                                           |             |                   | 5,055   |           |                  |   | 9,236   |  
|                                                                                                                                                                          |             |                   |         |           |                  |   |         |  
|Securities held-to-maturity, at cost                                                                                                                                      |             |                   | 8,495   |           |                  |   | 7,499   |  
|Securities available-for-sale, at fair value                                                                                                                              |             |                   | 17,995  |           |                  |   | 16,420  |  
|Loans, net                                                                                                                                                                |             |                   | 174,020 |           |                  |   | 155,480 |  
|Premises and equipment, net                                                                                                                                               |             |                   | 5,139   |           |                  |   | 4,781   |  
|Software, net                                                                                                                                                             |             |                   | 259     |           |                  |   | 115     |  
|Community Bankers Bank stock                                                                                                                                             |             |                   | 56      |           |                  |   | 56      |  
|Federal Reserve Bank stock                                                                                                                                                |             |                   | 351     |           |                  |   | 351     |  
|Federal Home Loan Bank stock                                                                                                                                              |             |                   | 392     |           |                  |   | 342     |  
|Interest receivable                                                                                                                                                       |             |                   | 1,188   |           |                  |   | 1,076   |  
|Deferred tax asset                                                                                                                                                        |             |                   | 384     |           |                  |   | 219     |  
|Other assets                                                                                                                                                              |             |                   | 1,015   |           |                  |   | 277     |  
|                                                                                                                                                                          |             |                   |         |           |                  |   |         |  
|Total Assets                                                                                                                                                              |             | $                 | 214,349 |           |                  | $ | 195,852 |  
|                                                                                                                                                                          |             |                   |         |           |                  |   |         |  
|Liabilities and stockholders equity                                                                                                                                      |             |                   |         |           |                  |   |         |  
|                                                                                                                                                                          |             |                  
|Deposits                                                                                                                                                                  |             |                   |         |           |                  |   |         |  
|Noninterest bearing demand                                                                                                                                                |             |                   | 29,100  |           |                  |   | 26,186  |  
|NOW, money market and savings                                                                                                                                             |             |                   | 54,960  |           |                  |   | 51,713  |  
|Time                                                                                                                                                                      |             |                   | 104,607 |           |                  |   | 96,057  |  
|                                                                                                                                                                          |             |                   |         |           |                  |   |         |  
|Total deposits                                                                                                                                                            |             |                   | 188,667 |           |                  |   | 173,956 |  
|                                                                                                                                                                          |             |                  
|Federal funds purchased                                                                                                                                                   |             |                   | 668     |           |                  |   |        |  
|                                                                                                                                                                          |             |                  
|Income taxes payable                                                                                                                                                      |             |                   | 14      |           |                  |   | 61      |  
|Interest payable                                                                                                                                                          |             |                   | 224     |           |                  |   | 148     |  
|Repurchase agreements                                                                                                                                                     |             |                   | 8,461   |           |                  |   | 6,957   |  
|Other liabilities                                                                                                                                                         |             |                   | 154     |           |                  |   | 55      |  
|                                                                                                                                                                          |             |                   |         |           |                  |   |         |  
|Total liabilities                                                                                                                                                         |             | $                 | 198,188 |           |                  | $ | 181,177 |  
|                                                                                                                                                                          |             |                   |         |           |                  |   |         |  
|Stockholders equity                                                                                                                                                      |             |                   |         |           |                  |   |         |  
|Common stock $2.14 par value; authorized 10,000,000 shares; issued and outstanding 2,019,978 shares as of September 30, 2006 and
2,001,309 shares as of December 31, 2005 |             |                   | 4,323   |           |                  |   | 4,269   |  
|Additional paid-in-capital                                                                                                                                                |             |                   | 7,732   |           |                  |   | 7,424   |  
|Accumulated other comprehensive (loss)                                                                                                                                    |             |                   | (217    | )         |                  |   | (241    | )
|Retained earnings                                                                                                                                                         |             |                   | 4,323   |           |                  |   | 3,223   |  
|                                                                                                                                                                          |             |                   |         |           |                  |   |         |  
|Total stockholders equity                                                                                                                                                |             | $                 | 16,161  |           |                  | $ | 14,675  |  
|                                                                                                                                                                          |             |                   |         |           |                  |   |         |  
|Total liabilities and stockholders equity                                                                                                                                |             | $                 | 214,349 |           |                  | $ | 195,852 |  
|                                                                                                                                                                          |             |                   |         |           |                  |   |         |  

See accompanying notes to these consolidated financial statements



3



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##### Table of Contents

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statement of Operations

For the Three and Nine Months Ended September 30, 2005 and 2006

(dollar amounts in thousands, except per share
amounts) (unaudited)



|                                                    |  |                                          |       |   |                                         |   |       |      |  |   |        |   |  |   |       |  
|--------------------------------------------------- |  | ---------------------------------------- | ----- | - | --------------------------------------- | - | ----- | ---- |  | - | ------ | - |  | - | ----- | -
|                                                    |  | For the Three Months Ended September 30, |       |   | For the Nine Months Ended September 30, |  
|                                                    |  | 2006                                     |       |   | 2005                                    |   |       | 2006 |  |   | 2005   |  
|Interest Income                                     |  |                                          |       |   |                                         |   |       |      |  |   |        |   |  |   |       |  
|Loans                                               |  | $                                        | 3,397 |   |                                         | $ | 2,844 |      |  | $ | 9,647  |   |  | $ | 7,914 |  
|Federal Funds Sold                                  |  |                                          | 46    |   |                                         |   | 19    |      |  |   | 91     |   |  |   | 45    |  
|Securities                                          |  |                                          |       |   |                                         |   |       |      |  |   |        |   |  |   |       |  
|US Government and agency obligations                |  |                                          | 311   |   |                                         |   | 253   |      |  |   | 823    |   |  |   | 689   |  
|Other                                               |  |                                          | 32    |   |                                         |   | 31    |      |  |   | 114    |   |  |   | 80    |  
|                                                    |  |                                          |       |   |                                         |   |       |      |  |   |        |   |  |   |       |  
|Total interest income                               |  |                                          | 3,786 |   |                                         |   | 3,147 |      |  |   | 10,675 |   |  |   | 8,728 |  
|                                                    |  |                                          |       |   |                                         |   |       |      |  |   |        |   |  |   |       |  
|Interest Expense                                    |  |                                          |       |   |                                         |   |       |      |  |   |        |   |  |   |       |  
|Federal Funds Purchased                             |  |                                          | 4     |   |                                         |   | 5     |      |  |   | 18     |   |  |   | 15    |  
|Reverse Repurchase Agreements                       |  |                                          | 53    |   |                                         |   | 27    |      |  |   | 129    |   |  |   | 53    |  
|Deposits                                            |  |                                          |       |   |                                         |   |       |      |  |   |        |   |  |   |       |  
|NOW, money market savings                           |  |                                          | 357   |   |                                         |   | 265   |      |  |   | 894    |   |  |   | 830   |  
|Time Deposits                                       |  |                                          | 1,107 |   |                                         |   | 708   |      |  |   | 3,008  |   |  |   | 1,757 |  
|                                                    |  |                                          |       |   |                                         |   |       |      |  |   |        |   |  |   |       |  
|Total interest expense                              |  |                                          | 1,521 |   |                                         |   | 1,005 |      |  |   | 4,049  |   |  |   | 2,655 |  
|                                                    |  |                                          |       |   |                                         |   |       |      |  |   |        |   |  |   |       |  
|Net interest income                                 |  | $                                        | 2,265 |   |                                         | $ | 2,142 |      |  | $ | 6,626  |   |  | $ | 6,073 |  
|                                                    |  |                                          |       |  
|Provision for loan losses                           |  |                                          | 184   |   |                                         |   | 255   |      |  |   | 489    |   |  |   | 629   |  
|                                                    |  |                                          |       |   |                                         |   |       |      |  |   |        |   |  |   |       |  
|Net interest income after provision for loan losses |  | $                                        | 2,081 |   |                                         | $ | 1,887 |      |  | $ | 6,137  |   |  | $ | 5,444 |  
|                                                    |  |                                          |       |   |                                         |   |       |      |  |   |        |   |  |   |       |  
|Other operating income                              |  |                                          |       |   |                                         |   |       |      |  |   |        |   |  |   |       |  
|Service charges, fees, commissions                  |  |                                          | 647   |   |                                         |   | 590   |      |  |   | 1,635  |   |  |   | 1,600 |  
|Gain on sale of securities                          |  |                                          | 2     |   |                                         |   | 4     |      |  |   | 2      |   |  |   | 10    |  
|                                                    |  |                                          |       |   |                                         |   |       |      |  |   |        |   |  |   |       |  
|Total other operating income                        |  | $                                        | 649   |   |                                         | $ | 594   |      |  | $ | 1,637  |   |  | $ | 1,610 |  
|                                                    |  |                                          |       |  
|Other operating expenses                            |  |                                          |       |   |                                         |   |       |      |  |   |        |   |  |   |       |  
|Salaries and employee benefits                      |  |                                          | 1,124 |   |                                         |   | 831   |      |  |   | 3,049  |   |  |   | 2,443 |  
|Occupancy                                           |  |                                          | 155   |   |                                         |   | 133   |      |  |   | 460    |   |  |   | 383   |  
|Equipment                                           |  |                                          | 213   |   |                                         |   | 200   |      |  |   | 620    |   |  |   | 582   |  
|Supplies                                            |  |                                          | 67    |   |                                         |   | 74    |      |  |   | 214    |   |  |   | 212   |  
|Outside expenses                                    |  |                                          | 264   |   |                                         |   | 198   |      |  |   | 778    |   |  |   | 638   |  
|Marketing                                           |  |                                          | 84    |   |                                         |   | 57    |      |  |   | 253    |   |  |   | 203   |  
|Credit expense                                      |  |                                          | 52    |   |                                         |   | 57    |      |  |   | 144    |   |  |   | 163   |  
|Other                                               |  |                                          | 128   |   |                                         |   | 176   |      |  |   | 400    |   |  |   | 438   |  
|Sarbanes-Oxley Compliance                           |  |                                          |      |   |                                         |   | 17    |      |  |   |       |   |  |   | 92    |  
|                                                    |  |                                          |       |   |                                         |   |       |      |  |   |        |   |  |   |       |  
|Total other operating expenses                      |  | $                                        | 2,087 |   |                                         | $ | 1,743 |      |  | $ | 5,918  |   |  | $ | 5,154 |  
|                                                    |  |                                          |       |   |                                         |   |       |      |  |   |        |   |  |   |       |  
|Income before income taxes                          |  |                                          | 643   |   |                                         |   | 738   |      |  |   | 1,856  |   |  |   | 1,900 |  
|Income tax (expense)                                |  |                                          | (227  | ) |                                         |   | (249  | )    |  |   | (656   | ) |  |   | (644  | )
|                                                    |  |                                          |       |   |                                         |   |       |      |  |   |        |   |  |   |       |  
|Net Income                                          |  | $                                        | 416   |   |                                         | $ | 489   |      |  | $ | 1,200  |   |  | $ | 1,256 |  
|                                                    |  |                                          |       |   |                                         |   |       |      |  |   |        |   |  |   |       |  
|Income per common share - basic                     |  | $                                        | 0.21  |   |                                         | $ | 0.24  |      |  | $ | 0.60   |   |  | $ | 0.63  |  
|                                                    |  |                                          |       |   |                                         |   |       |      |  |   |        |   |  |   |       |  
|Income per common share - diluted                   |  | $                                        | 0.19  |   |                                         | $ | 0.23  |      |  | $ | 0.56   |   |  | $ | 0.60  |  
|                                                    |  |                                          |       |   |                                         |   |       |      |  |   |        |   |  |   |       |  

See accompanying notes to these consolidated financial statements



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##### Table of Contents

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2006 and 2005

(dollar amount in thousands, except per share amounts)
(unaudited)



|                                                                                 |  |                    |         |   |                    |   |         |  
|-------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ------------------ | - | ------- | -
|                                                                                 |  | September 30, 2006 |         |   | September 30, 2005 |  
|Cash flows from operating activities                                             |  |                    |         |   |                    |   |         |  
|Net Income                                                                       |  | $                  | 1,200   |   |                    | $ | 1,256   |  
|Adjustments to reconcile net income to net cash provided by operating activities |  |                    |         |   |                    |   |         |  
|                                                                                 |  |                   
|Depreciation                                                                     |  |                    | 471     |   |                    |   | 462     |  
|Net amortization and accretion of premiums and discounts on securities           |  |                    | 51      |   |                    |   | 69      |  
|Gain on sale of available for sale securities                                    |  |                    | (2      | ) |                    |   | (5      | )
|Gain on call of held to maturity securities                                      |  |                    |        |   |                    |   | (5      | )
|Provision for loan losses                                                        |  |                    | 489     |   |                    |   | 629     |  
|(Increase) decrease in interest receivable                                       |  |                    | (112    | ) |                    |   | 36      |  
|(Increase) decrease in other assets                                              |  |                    | (915    | ) |                    |   | 280     |  
|Increase (decrease) in income taxes payable                                      |  |                    | (47     | ) |                    |   | 54      |  
|Increase in interest payable                                                     |  |                    | 76      |   |                    |   | 41      |  
|Increase in other liabilities                                                    |  |                    | 99      |   |                    |   | 50      |  
|                                                                                 |  |                    |         |   |                    |   |         |  
|Net cash provided by operating activities                                        |  | $                  | 1,310   |   |                    | $ | 2,867   |  
|                                                                                 |  |                    |         |   |                    |   |         |  
|Cash flows from investing activities                                             |  |                    |         |   |                    |   |         |  
|Purchases of securities held to maturity                                         |  | $                  | (1,000  | ) |                    | $ | (4,010  | )
|Proceeds from maturities and calls of securities held to maturity                |  |                    |        |   |                    |   | 4,500   |  
|Purchases of securities available for sale                                       |  |                    | (3,985  | ) |                    |   | (15,320 | )
|Proceeds from maturities and calls of securities available for sale              |  |                    | 425     |   |                    |   | 5,865   |  
|Proceeds from sale of securities available for sale                              |  |                    | 1,976   |   |                    |   | 3,296   |  
|Purchases of Federal Home Loan Bank stock                                        |  |                    | (50     | ) |                    |   | (52     | )
|Origination of loans, net of principal collected                                 |  |                    | (19,071 | ) |                    |   | (14,174 | )
|Recoveries on loans charged off                                                  |  |                    | 42      |   |                    |   | 28      |  
|Purchases of premises and equipment                                              |  |                    | (973    | ) |                    |   | (345    | )
|                                                                                 |  |                    |         |   |                    |   |         |  
|Net cash used in investing activities                                            |  | $                  | (22,636 | ) |                    | $ | (20,212 | )
|                                                                                 |  |                    |         |   |                    |   |         |  
|Cash flows from financing activities                                             |  |                    |         |   |                    |   |         |  
|Net increase in deposits                                                         |  | $                  | 14,711  |   |                    | $ | 16,521  |  
|Net increase (decrease) in federal funds purchased                               |  |                    | 668     |   |                    |   | (424    | )
|Net increase in repurchase agreements                                            |  |                    | 1,504   |   |                    |   | 2,492   |  
|Stock compensation expense                                                       |  |                    | 78      |   |                    |   |        |  
|Proceeds from exercise of stock options                                          |  |                    | 184     |   |                    |   | 327     |  
|                                                                                 |  |                    |         |   |                    |   |         |  
|Net cash provided by financing activities                                        |  | $                  | 17,145  |   |                    | $ | 18,916  |  
|                                                                                 |  |                    |         |   |                    |   |         |  
|Increase (decrease) in cash and cash equivalents                                 |  |                    | (4,181  | ) |                    |   | 1,571   |  
|Cash and cash equivalents at beginning of period                                 |  | $                  | 9,236   |   |                    | $ | 3,980   |  
|                                                                                 |  |                    |         |   |                    |   |         |  
|Cash and cash equivalents at end of period                                       |  | $                  | 5,055   |   |                    | $ | 5,551   |  
|                                                                                 |  |                    |         |   |                    |   |         |  
|Non cash transactions                                                            |  |                    |         |   |                    |   |         |  
|Additions to other real estate owned                                             |  | $                  | 579     |   |                    | $ | (85     | )
|                                                                                 |  |                    |         |   |                    |   |         |  
|Cash transactions                                                                |  |                    |         |   |                    |   |         |  
|Cash paid for interest                                                           |  | $                  | 3,973   |   |                    | $ | 2,696   |  
|Cash paid for taxes                                                              |  |                    | 703     |   |                    |   | 596     |  
|                                                                                 |  |                    |         |   |                    |   |         |  

See accompanying notes to these consolidated financial statements



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##### Table of Contents

Bank of the James Financial Group, Inc. and Subsidiaries

September 30, 2006 and 2005

Notes to
Unaudited Consolidated Financial Statements

Note 1  Basis of Presentation

The unaudited consolidated financial statements have been prepared by Bank of the James Financial Group, Inc. (Financial or the Company) pursuant to the rules and regulations of the Securities
and Exchange Commission. In managements opinion the accompanying financial statements, which unless otherwise noted are unaudited, reflect all adjustments, consisting solely of normal recurring accruals, necessary for a fair presentation of
the financial information as of and for the three and nine month periods ended September 30, 2006, in conformity with accounting principles generally accepted in the United States of America. Additional information concerning the organization
and business of Financial, accounting policies followed, and other related information are contained in Financials Annual Report on Form 10-KSB for the year ended December 31, 2005. These financial statements should be read in conjunction
with the audited consolidated financial statements and footnotes for the year ended December 31, 2005 included in Financials Annual Report on Form 10-KSB. Results for the three month period ended September 30, 2006 are not
necessarily indicative of the results that may be expected for the year ending December 31, 2006.

Financials critical accounting policy relates
to the evaluation of the allowance for loan losses which is based on managements opinion of an amount that is adequate to absorb loss in the existing portfolio of Bank of the James (the Bank), Financials wholly-owned
subsidiary. The allowance for loan loss is established through a provision for loan loss based on available information including the composition of the loan portfolio, historical loan loss (to the extent available due to limited history), specific
impaired loans, availability and quality of collateral, age of the various portfolios, changes in local economic conditions, and loan performance and quality of the portfolio. Different assumptions used in evaluating the adequacy of the Banks
allowance for loan loss could result in material changes in Financials financial condition and results of operations. The Banks policies with respect to the methodology for determining the allowance for loan loss involve a higher degree
of complexity and require management to make subjective judgments that often require assumptions or estimates about uncertain matters. These critical policies and their assumptions are periodically reviewed with the Board of Directors.

Note 2  Use of Estimates

The
consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America which require management to make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those estimates.

Note 3  Earnings Per Share

For the quarters ended September 30, 2006 and 2005, basic earnings per share has been computed based upon the weighted average common shares
outstanding of 2,016,986 and 2,000,979, respectively. All earnings per share amounts have been adjusted to reflect the 25% stock dividend paid by Financial in March 2006 as well as all prior stock dividends.

Currently, only the option shares granted to certain officers and other employees of Financial pursuant to the Amended and Restated Stock Option Plan of Financial are
considered dilutive under the provisions of Statement of Financial Accounting Standards No. 128, Earnings Per Share. The following is a summary of the earnings per share calculation for the three and nine months ended
September 30, 2006 and 2005.



6



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##### Table of Contents

Bank of the James Financial Group, Inc. and Subsidiaries

September 30, 2006 and 2005

Notes to
Unaudited Consolidated Financial Statements



|                                      |  |                                 |           |                            |   |           |  |      |           |  |   |          
|------------------------------------- |  | ------------------------------- | --------- | -------------------------- | - | --------- |  | ---- | --------- |  | - | ---------
|                                      |  | Three months endedSeptember 30, |           | Year to date September 30,
|                                      |  | 2006                            |           | 2005                       |   | 2006      |  | 2005
|Net income                            |  | $                               | 416,000   |                            | $ | 489,000   |  | $    | 1,200,000 |  | $ | 1,256,000
|                                      |  |                                 |           |                           
|Weighted average number of shares     |  |                                 | 2,016,986 |                            |   | 2,000,979 |  |      | 2,009,974 |  |   | 1,983,673
|Options affect of incremental shares  |  |                                 | 136,231   |                            |   | 91,889    |  |      | 137,604   |  |   | 98,519   
|                                      |  |                                 |           |                           
|Weighted average diluted shares       |  |                                 | 2,153,218 |                            |   | 2,092,868 |  |      | 2,147,579 |  |   | 2,082,191
|                                      |  |                                 |           |                            |   |           |  |      |           |  |   |          
|Basic EPS (weighted avg shares)       |  | $                               | 0.21      |                            | $ | 0.24      |  | $    | 0.60      |  | $ | 0.63     
|                                      |  |                                 |           |                            |   |           |  |      |           |  |   |          
|Diluted EPS (Including Option Shares) |  | $                               | 0.19      |                            | $ | 0.23      |  | $    | 0.56      |  | $ | 0.60     
|                                      |  |                                 |           |                            |   |           |  |      |           |  |   |          

Note 4 - Stock Based Compensation

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 Company adopted SFAS 123R effective January 1, 2006 using the
modified prospective method and as such, results for prior periods have not been restated. Prior to January 1, 2006, no compensation expense was recognized by the Company for stock option grants as all such grants had an exercise price not less
than fair market value on the date of grant. The Company has not issued any restricted stock.

As a result of adopting SFAS 123R on January 1, 2006,
the amount of stock-based compensation included within the non-interest expense category for the nine months ended September 30, 2006 is $78,000 which impacted basic and diluted earnings per share by $0.05 for the nine months ended
September 30, 2006.

The following illustrates the effect on net income and earnings per share if the Company had applied the fair value method of
Statement of Financial Accounting Standards (SFAS) No, 123, Accounting for Stock-Based Compensation (SFAS 123), prior to January 1, 2006:



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Bank of the James Financial Group, Inc. and Subsidiaries

September 30, 2006 and 2005

Notes to
Unaudited Consolidated Financial Statements



|                                                                                               |  |                                     |      
|---------------------------------------------------------------------------------------------- |  | ----------------------------------- | -----
|                                                                                               |  | Nine months EndedSeptember 30, 2005
|Net Income:                                                                                    |  |                                     |      
|As reported                                                                                    |  | $                                   | 1,256
|                                                                                               | 
|Deduct: total stock-based compensation cost determined under the fair value method, net of tax |  |                                     | 101  
|Pro forma                                                                                      |  | $                                   | 1,155
|                                                                                               |  |                                     |      
|Basic earnings per share:                                                                      |  |                                     |      
|As reported                                                                                    |  | $                                   | 0.63 
|Pro forma                                                                                      |  | $                                   | 0.58 
|Diluted earnings per share:                                                                    |  |                                     |      
|As reported                                                                                    |  | $                                   | 0.60 
|Pro forma                                                                                      |  | $                                   | 0.55 

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions used for the nine month period ended September 30, 2005: dividend yield of 0%, expected volatility of 10%, a risk-free interest rate of 4.08%, and expected lives of 7 years.

During 2006, the Company took into consideration guidance under SFAS 123R and SEC Staff Accounting Bulletin No. 107 (SAB 107) when reviewing and updating
assumptions.

Stock option plan activity for the nine months ended September 30, 2006 is summarized below:



|                                        |  |         |   |  |                              |       |                                                   |      |                                        |   |          
|--------------------------------------- |  | ------- | - |  | ---------------------------- | ----- | ------------------------------------------------- | ---- | -------------------------------------- | - | ---------
|                                        |  | Shares  |   |  | WeightedAverageExercisePrice |       | WeightedAverageRemainingContractualLife (inyears) |      | Value ofUnexercisedIn-The-MoneyOptions
|Options outstanding, January 1, 2006    |  | 325,051 |   |  | $                            | 10.35 |                                                   |      |                                        |   |          
|Granted                                 |  | 2,300   |   |  |                              | 19.83 |                                                   |      |                                        |   |          
|Exercised                               |  | (18,483 | ) |  |                              | 9.97  |                                                   |      |                                        |   |          
|Forfeited                               |  | (1,688  | ) |  |                              | 14.22 |                                                   |      |                                        |   |          
|                                        |  |         |   |  |                              |       |                                                   |      |                                        |   |          
|Options outstanding, September 30, 2006 |  | 307,180 |   |  |                              | 10.41 |                                                   | 6.84 |                                        | $ | 2,641,581
|                                        |  |         |   |  |                              |       |                                                   |      |                                        |   |          
|Options exercisable, September 30, 2006 |  | 280,697 |   |  | $                            | 10.07 |                                                   | 6.70 |                                        | $ | 2,506,851
|                                        |  |         |   |  |                              |       |                                                   |      |                                        |   |          

The total approximate value of in-the-money options exercised during the first nine months ended
September 30, 2006 was $167,000. As of September 30, 2006 there was approximately $62,000 of total unrecognized compensation expense related to non vested option awards which will be recognized over the remaining service period.



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Bank of the James Financial Group, Inc. and Subsidiaries

September 30, 2006 and 2005

Notes to
Unaudited Consolidated Financial Statements



Note 5  Recent Accounting Pronouncements

In February 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 155, Accounting for Certain Hybrid
Financial Instruments  an amendment of FASB Statements No. 133 and 140 (SFAS 155). SFAS 155 permits fair value measurement of any hybrid financial instrument that contains an embedded derivative that otherwise would require
bifurcation. The Statement also clarifies which interest-only strips and principal-only strips are not subject to the requirements of Statement 133. It establishes a requirement to evaluate interests in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation. SFAS 155 also clarifies that concentrations of credit risk in the form of subordination are not embedded
derivatives. Finally, SFAS 155 amends Statement 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial
instrument. SFAS 155 is effective for all financial instruments acquired or issued after the beginning of an entitys first fiscal year that begins after September 15, 2006. The Company does not expect the implementation of SFAS 155 to
have a material impact on its financial statements.

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 Company does not expect the adoption of Statement 156 at the beginning of 2007 to have a material impact.

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes: An Interpretation of FASB Statement No. 109
(FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entitys financial statements in accordance with SFAS 109. The Interpretation prescribes a recognition threshold and measurement principles for the
financial statement recognition and measurement of tax positions taken or expected to be taken on a tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company does not expect FIN 48 to have a material impact
on its financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value
Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 does not require any new
fair value measurements but may change current practice for some entities. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those years. The Company does
not expect the implementation of SFAS 157 to have a material impact on its financial statements.



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Bank of the James Financial Group, Inc. and Subsidiaries

September 30, 2006 and 2005

Notes to
Unaudited Consolidated Financial Statements



In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement Plans  an amendment of FASB Statements No. 87, 88, 106, and 132(R) (SFAS 158). SFAS 158 requires an employer to recognize the overfunded or underfunded status of a
defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. The funded status of a benefit
plan will be measured as the difference between plan assets at fair value and the benefit obligation. For a pension plan, the benefit obligation is the projected benefit obligation. For any other postretirement plan, the benefit obligation is the
accumulated postretirement benefit obligation. SFAS 158 also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position. The Statement also requires additional disclosure in the notes
to financial statements about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition asset or obligation. The Company is
required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. The requirement to measure plan assets and
benefit obligations as of the date of the employers fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. The Company does not expect the adoption of Statement 158 to have a material
impact on its financial statements.

In September 2006, the Securities and Exchange Commission (SEC) released Staff Accounting Bulletin No. 108 (SAB
108). SAB 108 expresses the SEC staffs views regarding the process of quantifying financial statement misstatements. These interpretations were issued to address diversity in practice and the potential under current practice for the build up
of improper amounts on the balance sheet. SAB 108 expresses the SEC staffs view that a registrants materiality evaluation of an identified unadjusted error should quantify the effects of the error on each financial statement and related
financial statement disclosures and that prior year misstatements should be considered in quantifying misstatements in current year financial statements. SAB 108 also states that correcting prior year financial statements for immaterial errors would
not require previously filed reports to be amended. Such correction may be made the next time the registrant files the prior year financial statements. Registrants electing not to restate prior periods should reflect the effects of initially
applying the guidance in SAB 108 in their annual financial statements covering the first fiscal year ending after November 15, 2006. The cumulative effect of the initial application should be reported in the carrying amounts of assets and
liabilities as of the beginning of that fiscal year and the offsetting adjustment should be made to the opening balance of retained earnings for that year. Registrants should disclose the nature and amount of each individual error being corrected in
the cumulative adjustment. The disclosure should also include when and how each error arose and the fact that the errors had previously been considered immaterial. The SEC staff encourages early application of the guidance in SAB 108 for interim
periods of the first fiscal year ending after November 15, 2006. The Company does not expect the adoption of SAB 108 to have a material impact on its financial statements.



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##### Table of Contents

Item 2. Managements Discussion and Analysis or Plan of Operation.

CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS

This report contains statements that constitute forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. The words believe, estimate,
expect, intend, anticipate, plan and similar expressions and variations thereof identify certain of such forward-looking statements which speak only as of the dates on which they were made. Bank of the
James Financial Group, Inc. undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Readers are cautioned that any such forward-looking statements are
not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those indicated in the forward-looking statements as a result of various factors. Factors that could cause actual results to
differ from the results discussed in the forward-looking statements include, but are not limited to: economic conditions (both generally and more specifically in the markets in which we operate); competition for our customers from other providers of
financial services; government legislation and regulation (which changes from time to time and over which we have no control); changes in the value of real estate securing loans made by the Bank; changes in interest rates; and material unforeseen
changes in the liquidity, results of operations, or financial condition of our customers. Other risks, uncertainties and factors could cause our actual results to differ materially from those projected in any forward-looking statements we make.

GENERAL

Critical
Accounting Policies

Bank of the James Financial Group, Inc.s (Financial) financial statements are prepared in
accordance with accounting principles generally accepted in the United States (GAAP). The financial information contained within our statements is, to a significant extent, based on measures of the financial effects of transactions and events that
have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. We use historical loss ratios as one factor in determining
the inherent loss that may be present in our loan portfolio. Actual losses could differ significantly from the historical factors that we use in estimating risk. In addition, GAAP itself may change from one previously acceptable method to another
method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change.

The allowance for loan losses is managements estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting: (i) SFAS No. 5, Accounting for
Contingencies, which requires that losses be accrued when they are probable of occurring and are reasonably estimable and (ii) SFAS No. 114, Accounting by Creditors for Impairment of a Loan, which requires that
losses on impaired loans 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. See Note 1 to the Consolidated Financial
Statements along with Results of Operations  Allowance for Loan Losses and Loan Loss Reserve below for further discussion of the allowance for loan losses.



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Overview

Financial was incorporated on October 3, 2003 under the laws of the Commonwealth of Virginia at the direction of Bank of the James (the Bank) to serve as a bank holding company of the Bank. Effective
January 1, 2004, pursuant to an Agreement and Plan of Share Exchange dated October 9, 2003 (the Agreement) between Financial and the Bank, and approved by the shareholders of the Bank at a special meeting of shareholders held
on December 17, 2003, Financial acquired all of the outstanding stock of the Bank in a statutory share exchange transaction. Under the terms of the Agreement, the shares of the Banks common stock were exchanged for shares of Financial on
a one-for-one basis.

Following completion of the share exchange, Financial became the successor issuer to the Bank pursuant to Rule 12g-3
(promulgated under the Securities Exchange Act of 1934). Prior to the share exchange, the Bank was subject to the information requirements of the Exchange Act and, in accordance with Section 12(i) thereof, was required to file reports and other
financial information with the Board of Governors of the Federal Reserve System (the Federal Reserve). Such reports and other information filed by the Bank with the Federal Reserve may be inspected and copied at the public reference
facilities maintained by the Federal Reserve in Washington, D.C. at the Freedom of Information Office, 1st Floor of the Martin Building, 20th & C Streets, and in Richmond, Virginia at the Research Library of the Federal Reserve Bank of
Richmond, 701 East Byrd Street. The last financial report filed by the Bank with the Federal Reserve was its Form 10-QSB for the quarter ended September 30, 2003, filed on November 13, 2003.

Financial declared a 25% stock dividend on January 17, 2006, which dividend was payable to shareholders of record as of February 10, 2006 and
was paid on March 10, 2006.

Financial had no business until January 1, 2004 when it acquired the common stock of the Bank. As of
the date hereof, the business of Financial consists of the ownership of the capital stock of two wholly-owned subsidiaries, the Bank and of BOTJ Investment Group, Inc. (BOTJIG). Financial conducts its business through the following three
business segments: community banking through the Bank, mortgage origination through the Mortgage Division of the Bank, and securities brokerage services through BOTJIG.

The Bank is a Virginia banking corporation headquartered in Lynchburg, Virginia. The Bank was incorporated under the laws of the Commonwealth of Virginia as a state chartered bank in 1998 and began banking operations
in July 1999. The Bank is a community-oriented financial institution that provides varied banking services to individuals, small and medium-sized businesses, and professional concerns in the Central Virginia, Region 2000 area, which encompasses the
seven jurisdictions of the Town of Altavista, Amherst County, Appomattox County, the City of Bedford, Bedford County, Campbell County, and the City of Lynchburg. The Bank strives to provide its customers with products comparable to statewide
regional banks located in its market area, while maintaining the prompt response time and level of service of a community bank. Management believes this operating strategy has particular appeal in the Banks market area.

BOTJIG was incorporated under the laws of the Commonwealth of Virginia in 2006. Effective April 4, 2006, BOTJIG began providing securities brokerage
services to Bank customers and others. BOTJIG provides the Services through an agreement with Community Bankers Securities, LLC (CB Securities), a registered broker-dealer. Under this agreement, CB Securities will operate service
centers in one or more branches of the Bank. As of the date hereof, BOTJIGs only center is located in the Church Street office. All centers will be staffed by a dual employee of BOTJIG and CB Securities. BOTJIG receives commissions on
transactions generated and in some cases ongoing management fees such as mutual fund 12b-1 fees. As of the date hereof, BOTJIG has been conducting business for



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approximately seven months and its financial impact on the consolidated financials of the Company has been immaterial. Although management cannot predict the
financial impact of BOTJIG with certainty, management anticipates that the impact will be minimal in 2006. In addition, BOTJIG has purchased 4.96% of CBS Holdings, LLC for $10,000. CBS Holdings has an option to purchase CB Securities.

Our operating results depend primarily upon the Banks net interest income, which is determined by the difference between (i) interest and
dividend income on earning assets, which consist primarily of loans, investment securities and other investments, and (ii) interest expense on interest-bearing liabilities, which consist principally of deposits and other borrowings. The
Banks net income also is affected by its provision for loan losses, as well as the level of its non-interest income, including loan fees and service charges, and its non-interest expenses, including salaries and employee benefits, occupancy
expense, data processing expenses, Federal Deposit Insurance Corporation premiums, expense (both direct and indirect) in complying with the Sarbanes-Oxley Act of 2002, miscellaneous other expenses, franchise taxes, and income taxes.

The Bank intends to enhance its profitability by increasing its market share in the Region 2000 area, providing additional services to its customers, and
controlling costs.

The Bank currently serves its customers through the following six full service offices: the main office located at 828
Main Street in Lynchburg (opened October 25, 2004) (the Main Street Office), a branch located at 615 Church Street in Lynchburg (opened July 22, 1999), a branch located at 5204 Fort Avenue in Lynchburg (opened November 13,
2000), a branch located on South Amherst Highway in Amherst County (the Madison Heights Branch) (opened June 4, 2002), a branch located at 17000 Forest Road in Forest (the Forest Branch) (opened February 4, 2005);
and a branch located at 4935 Boonsboro Road, Suites C and D in Lynchburg (the Boonsboro Branch) (opened April 11, 2006). In addition, the Bank, through its mortgage division, originates residential mortgage loans through two
officesone located at the Forest Branch and the other located at 14662 Moneta Rd., Suite A in Moneta (opened July, 2005).

The Bank
continuously evaluates areas located within Region 2000 to identify additional viable branch locations. Based on this ongoing evaluation, the Bank may acquire one or more additional suitable sites.

Subject to regulatory approval, the Bank anticipates opening additional branches during the next two fiscal years. Although numerous factors could
influence the Banks expansion plans, the following discussion provides a general overview of the of the additional branch locations that the Bank currently is considering.



| |  |  | The Town of Amherst, Virginia. On December 21, 2005, the Bank purchased certain improved real property located at 164 South Main St. in the Town of Amherst, Virginia.
The property previously has served as a bank branch for other banking institutions. We began renovations on this property during the third quarter of 2006. During the fourth quarter of 2006, we intend to submit an application for approval to open
this branch during the first quarter of 2007.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | City of Bedford, Virginia. The Bank has an option to purchase certain property located in the City of Bedford, Virginia. The Bank is evaluating the feasibility of this
property as a location on which to open a branch. If the Bank exercises this option, it does not anticipate requesting approval to open a branch at this location prior to 2007.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Timberlake Road Area, Campbell County (Lynchburg), Virginia. The Bank has purchased certain real property located at the intersection of Turnpike and Timberlake Roads,
Campbell County, Virginia. The Bank will evaluate the feasibility of using the current structures on the property as a bank branch. The Bank does not anticipate requesting approval to open a branch at this location prior to 2008.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Bank estimates that the cost of improvements, furniture, fixtures, and equipment necessary to upfit these properties
will be between $900,000 and $1,500,000 per location.

The Bank previously reported that it had entered into a contract to purchase real
estate located at 14694 Moneta Road, Moneta, Virginia. Based on the results of the feasibility study undertaken in accordance with the provisions of the contract, the Bank determined that it did not want to purchase the property and terminated the
contract. The Bank will continue to evaluate other locations in the Smith Mountain Lake area.

Although the Bank cannot predict with
certainty the financial impact of each new branch, management generally anticipates that each new branch will become profitable within 12 to 18 months of operation.

Except as set forth herein, the Bank does not expect to purchase any significant property or equipment in the upcoming 12 months. Future branch openings are subject to regulatory approval.

The following discussion represents managements discussion and analysis of the financial condition and results of operations of Financial as of
September 30, 2006 and December 31, 2005 and for the three months ended September 30, 2006. It should be read in conjunction with the financial statements included elsewhere herein.

OFF-BALANCE SHEET ARRANGEMENTS

The
Bank is a party to various financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of
credit. Such commitments involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amount recognized in the balance sheets and could impact the overall liquidity and capital resources to the extent customers accept
and or use these commitments.

The Banks exposure to credit loss in the event of nonperformance by the other party to the financial
instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for
on-balance sheet instruments. A summary of the Banks commitments is as follows:



|                             |  |                    |           
|---------------------------- |  | ------------------ | ----------
|                             |  | September 30, 2006
|Commitments to extend credit |  | $                  | 33,602,000
|Letters of Credit            |  |                    | 2,686,000 
|                             |  |                    |           
|Total                        |  | $                  | 36,288,000
|                             |  |                    |           

Commitments to extend credit are agreements to lend to a customer as long as there is no violation
of any condition established in the contract. Because many of the commitments are expected to



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expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on the Banks credit evaluation of the customer.

Standby letters of
credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loans to customers. Collateral is required in instances that the Bank deems necessary.

SUMMARY OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The comparison of the financial condition
and operating results between September 30, 2006 and December 31, 2005, as applicable, should be read in the context of the length of time for which the Bank has been operating.

All financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.

Financial Condition Summary

September 30, 2006 as Compared to December 31, 2005

Total assets were $214,349,000 on September 30, 2006
compared with $195,852,000 at December 31, 2005. The increase in total assets is due in part to an increase in deposits resulting from an increase in rates (as a result of the competitive pressures of the market) that the Bank offers on its
deposit products and the Banks reputation for service. In particular, new deposits at the recently opened Boonsboro Branch and the continued growth of our Madison Heights Branch and Main Street Office contributed to this increase in deposits.

Total deposits grew from $173,956,000 for the year ended December 31, 2005 to $188,667,000 September 30, 2006, an increase of
8.46%. In addition, the Banks effort to increase non-FDIC insured sweep accounts (repurchase agreements) resulted in an increased balance in these accounts to $8,461,000 on September 30, 2006 from $6,957,000 on December 31, 2005.

Loans, net of unearned income and allowance, increased to $174,020,000 on September 30, 2006 from $155,480,000 on December 31,
2005. Total loans increased to $176,033,000 on September 30, 2006 from $157,258,000 on December 31, 2005. The following summarizes the composition of the Banks loan portfolio as of the dates indicated by dollar amount and percentages
(dollar amounts in thousands):



|                         |  |                    |         |            |                   |   |        |                    |            |  |        |        |  |            |         |  |        |  
|------------------------ |  | ------------------ | ------- | ---------- | ----------------- | - | ------ | ------------------ | ---------- |  | ------ | ------ |  | ---------- | ------- |  | ------ | -
|                         |  | September 30, 2006 |         |            | December 31, 2005 |   |        | September 30, 2005 |           
|                         |  | Amount             |         | Percentage |                   |   | Amount |                    | Percentage |  |        | Amount |  | Percentage |        
|Commercial               |  | $                  | 34,532  |            | 19.62             | % |        | $                  | 30,853     |  | 19.62  | %      |  | $          | 32,380  |  | 20.83  | %
|Real estate construction |  |                    | 31,513  |            | 17.90             | % |        |                    | 26,648     |  | 16.95  | %      |  |            | 26,361  |  | 16.96  | %
|Real estate mortgage     |  |                    | 87,108  |            | 49.49             | % |        |                    | 78,058     |  | 49.63  | %      |  |            | 74,415  |  | 47.86  | %
|Consumer                 |  |                    | 22,749  |            | 12.92             | % |        |                    | 21,245     |  | 13.51  | %      |  |            | 22,184  |  | 14.27  | %
|Other                    |  |                    | 131     |            | 0.07              | % |        |                    | 454        |  | 0.29   | %      |  |            | 133     |  | 0.08   | %
|                         |  |                    |         |            |                   |   |        |                    |            |  |        |        |  |            |         |  |        |  
|Total loans              |  | $                  | 176,033 |            | 100.00            | % |        | $                  | 157,258    |  | 100.00 | %      |  | $          | 155,473 |  | 100.00 | %
|                         |  |                    |         |            |                   |   |        |                    |            |  |        |        |  |            |         |  |        |  



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Non-accrual loans increased to $668,000 on September 30, 2006 from $261,000 on December 31,
2005. Management has provided for the anticipated losses on these loans in the loan loss reserve and does not anticipate that they will have a material impact on the financial condition of the Bank. The increase in other real estate owned resulted
from the Banks purchase (either at foreclosure or by deed in lieu of foreclosure) of two single family residences following default on the underlying notes. The Bank currently is trying to sell these two properties. The Bank anticipates that
any loss on the sale of these properties will not have a material impact on the Banks financial condition.

Cash and cash equivalents
decreased to $5,055,000 on September 30, 2006 from $9,236,000 on December 31, 2005. Cash and cash equivalents consist of cash due from correspondents, cash in vault, and overnight borrowings (including fed funds sold). The decrease was due
in large part to the Banks liquidation of fed funds sold needed to fund loans. In addition, this decrease is due in part to routine fluctuations in deposits, including fluctuations in transactional accounts and professional settlement
accounts, both of which are subject to fluctuations, and will contribute to variations in cash and cash equivalents.

Securities
held-to-maturity increased to $8,495,000 on September 30, 2006 from $7,499,000 on December 31, 2005. Securities available-for-sale increased to $17,995,000 on September 30, 2006 from $16,420,000 on December 31, 2005. The increase
from December 31, 2005 in securities available-for-sale was primarily due the decision to invest excess cash in securities available-for-sale until such cash is needed to fund loans.

The following table summarizes the Banks holdings for both securities held-to-maturity and securities available-for-sale as of September 30,
2006 and December 31, 2005 (amounts in 000s):



|                             |  |                |        |                                     |        |    |            |   |      |   |  |   |       
|---------------------------- |  | -------------- | ------ | ----------------------------------- | ------ | -- | ---------- | - | ---- | - |  | - | ------
|                             |  | AmortizedCosts |        | September 30, 2006 Gross Unrealized |        |    | Fair Value
|                             |  |                | Gains  |                                     | Losses |    |           
|Held to Maturity             |  |                |        |                                     |        |    |            |   |      |   |  |   |       
|U.S. agency obligations      |  | $              | 8,495  |                                     | $      | 3  |            | $ | (166 | ) |  | $ | 8,332 
|                             |  |                |        |                                     |        |    |            |   |      |   |  |   |       
|Available-for-sales          |  |                |        |                                     |        |    |            |   |      |   |  |   |       
|U.S. agency obligations      |  | $              | 16,015 |                                     | $      | 14 |            | $ | (279 | ) |  | $ | 15,750
|Mortgage - backed securities |  |                | 2,309  |                                     |        |   |            |   | (64  | ) |  |   | 2,245 
|                             |  |                |        |                                     |        |    |            |   |      |   |  |   |       
|                             |  | $              | 18,324 |                                     | $      | 14 |            | $ | (343 | ) |  | $ | 17,995
|                             |  |                |        |                                     |        |    |            |   |      |   |  |   |       
|                             |  |                |       
|                             |  | AmortizedCosts |        | December 31 ,2005 Gross Unrealized  |        |    | Fair Value
|                             |  |                | Gains  |                                     | Losses |    |           
|Held to Maturity             |  |                |        |                                     |        |    |            |   |      |   |  |   |       
|U.S. agency obligations      |  | $              | 7,499  |                                     | $      | 9  |            | $ | (141 | ) |  | $ | 7,367 
|                             |  |                |        |                                     |        |    |            |   |      |   |  |   |       
|Available-for-sales          |  |                |        |                                     |        |    |            |   |      |   |  |   |       
|U.S. agency obligations      |  | $              | 14,039 |                                     | $      |   |            | $ | (303 | ) |  | $ | 13,736
|Mortgage - backed securities |  |                | 2,746  |                                     |        | 2  |            |   | (64  | ) |  |   | 2,684 
|                             |  |                |        |                                     |        |    |            |   |      |   |  |   |       
|                             |  | $              | 16,785 |                                     | $      | 2  |            | $ | (367 | ) |  | $ | 16,420
|                             |  |                |        |                                     |        |    |            |   |      |   |  |   |       



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The following table shows the gross unrealized losses and fair value of the Banks investments,
aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at the date indicated:



|                                      |  |                     |        |                  |                     |      |           |       |                  |        |  |           |      |                  |  |   |        |  |   |      |  
|------------------------------------- |  | ------------------- | ------ | ---------------- | ------------------- | ---- | --------- | ----- | ---------------- | ------ |  | --------- | ---- | ---------------- |  | - | ------ |  | - | ---- | -
|                                      |  | Less than 12 months |        |                  | More than 12 months |      |           | Total |                 
|September 30, 2006                    |  | FairValue           |        | UnrealizedLosses |                     |      | FairValue |       | UnrealizedLosses |        |  | FairValue |      | UnrealizedLosses | 
|Description of securities             |  |                     |        |                  |                     |      |           |       |                  |        |  |           |      |                  |  |   |        |  |   |      |  
|U.S. agency obligations               |  | $                   | 2,512  |                  | $                   |     |           |       | $                | 21,570 |  | $         | (445 | )                |  | $ | 24,082 |  | $ | (445 | )
|Mortgage-backed securities            |  |                     | 259    |                  |                     | (1   | )         |       |                  | 1,986  |  |           | (63  | )                |  |   | 2,245  |  | $ | (64  | )
|                                      |  |                     |        |                  |                     |      |           |       |                  |        |  |           |      |                  |  |   |        |  |   |      |  
|Total temporarily impaired securities |  | $                   | 2,771  |                  | $                   | (1   | )         |       | $                | 23,556 |  | $         | (508 | )                |  | $ | 26,327 |  | $ | (509 | )
|                                      |  |                     |        |                  |                     |      |           |       |                  |        |  |           |      |                  |  |   |        |  |   |      |  
|                                      |  |                     |       
|                                      |  | Less than 12 months |        |                  | More than 12 months |      |           | Total |                 
|December 31, 2005                     |  | FairValue           |        | UnrealizedLosses |                     |      | FairValue |       | UnrealizedLosses |        |  | FairValue |      | UnrealizedLosses | 
|Description of securities             |  |                     |        |                  |                     |      |           |       |                  |        |  |           |      |                  |  |   |        |  |   |      |  
|U.S. agency obligations               |  | $                   | 16,123 |                  | $                   | (337 | )         |       | $                | 3,971  |  | $         | (108 | )                |  | $ | 20,094 |  | $ | (445 | )
|Mortgage-backed securities            |  |                     | 1,724  |                  |                     | (32  | )         |       |                  | 647    |  |           | (31  | )                |  |   | 2,371  |  |   | (63  | )
|                                      |  |                     |        |                  |                     |      |           |       |                  |        |  |           |      |                  |  |   |        |  |   |      |  
|Total temporarily impaired securities |  | $                   | 17,847 |                  | $                   | (369 | )         |       | $                | 4,618  |  | $         | (139 | )                |  | $ | 22,465 |  | $ | (508 | )
|                                      |  |                     |        |                  |                     |      |           |       |                  |        |  |           |      |                  |  |   |        |  |   |      |  

At September 30, 2006, Financial had liquid assets of approximately $23,050,000 in the form
of cash and available-for-sale investments. Management believes that liquid assets were adequate at September 30, 2006. Management anticipates that additional liquidity will be provided by the growth in deposit accounts and loan repayments at
the Bank and the anticipated proceeds from stock offering currently in progress. In addition, the Bank has the ability to purchase federal funds on the open market and borrow from the Federal Reserve Banks discount window, if necessary.

Management is not aware of any trends, events or uncertainties that are reasonably likely to have a material negative impact on
Financials short-term or long-term liquidity.

At September 30, 2006, the Bank had a leverage ratio of 7.73%, a Tier 1
risk-based capital ratio of 9.29% and a total risk-based capital ratio of 10.44%. As of September 30, 2006 and December 31, 2005 the Banks regulatory capital levels exceeded those established for well-capitalized institutions. The
following table sets forth the minimum capital requirements and the Banks capital position as of September 30, 2006 and December 31, 2005:



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|                               |  |               |         |              |   |        
|------------------------------ |  | ------------- | ------- | ------------ | - | -------
|Analysis of Capital (in 000s) |  | Sept. 30,2006 |         | Dec. 31,2005
|Tier 1 Capital:                |  |               |         |              |   |        
|Common stock                   |  | $             | 4,323   |              | $ | 4,269  
|Surplus                        |  |               | 7,632   |              |   | 7,424  
|Retained earnings              |  |               | 4,323   |              |   | 3,223  
|                               |  |               |         |              |   |        
|Total Tier 1 capital           |  | $             | 16,307  |              | $ | 14,916 
|                               |  |               |         |              |   |        
|Tier 2 Capital:                |  |               |         |              |   |        
|Allowance for loan losses      |  | $             | 2,013   |              | $ | 1,777  
|                               |  |              
|Total Tier 2 Capital:          |  | $             | 2,013   |              | $ | 1,777  
|                               |  |               |         |              |   |        
|Total risk-based capital       |  | $             | 18,320  |              | $ | 16,693 
|                               |  |               |         |              |   |        
|Risk weighted assets           |  | $             | 175,498 |              | $ | 156,436
|Average total assets           |  | $             | 211,013 |              | $ | 192,498



|                                       |  |               |                             |  |                       |                             |  |      |   |  |       |  
|-------------------------------------- |  | ------------- | --------------------------- |  | --------------------- | --------------------------- |  | ---- | - |  | ----- | -
|                                       |  | Actual        |                             |  | Regulatory Benchmarks |                            
|                                       |  |               | For CapitalAdequacyPurposes |  |                       | For WellCapitalizedPurposes | 
|                                       |  | Sept. 30,2006 |                             |  | Dec. 31,2005          |                             |  |     
|Capital Ratios:                        |  |               |                             |  |                       |                             |  |      |   |  |       |  
|Tier 1 risk-based capital ratio        |  | 9.29          | %                           |  | 9.53                  | %                           |  | 4.00 | % |  | 6.00  | %
|Total risk-based capital ratio         |  | 10.44         | %                           |  | 10.67                 | %                           |  | 8.00 | % |  | 10.00 | %
|Tier 1 capital to average total assets |  | 7.73          | %                           |  | 7.75                  | %                           |  | 4.00 | % |  | 5.00  | %

Results of Operations

Comparison of the Three and Nine months Ended September 30, 2006 and 2005

Earnings Summary

Net income for the three and nine months ended September 30, 2006 was $416,000 and $1,200,000
respectively, compared to a net income of $489,000 and $1,256,000 for the same periods in 2005. Basic earnings per common share for the three and nine months ended September 30, 2006 were $0.21 and $0.60, respectively, compared with $0.24 and
$0.63 for the same periods in 2005. Fully diluted earnings per common share for the three months and nine months ended September 30, 2006 were $0.19 and $0.56 compared with $0.23 and $0.60 for the same periods in 2005. All earnings per share
amounts have been adjusted to reflect the 25% stock dividend paid by Financial in March 2006 as well as all prior stock dividends. Net income remained constant in large part due to personnel costs associated with Financials expansion as well
as additional costs associated with opening the Boonsboro Branch and the opening of BOTJ Investment Group, Inc.

These operating results
represent an annualized return on shareholders equity of 10.55% and 10.51% for the three and nine months ended September 30, 2006 compared with 13.67% and 12.35% for



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the same period in 2005. The annualized return on average assets for the three and months ended September 30, 2006 was 0.78% and 0.79% compared with
1.03% and 0.93% for the same periods in 2005.

Interest Income; Interest Expense; and Net Interest Income

Interest income increased to $3,786,000 and $10,675,000 for the three and nine months ended September 30, 2006 from $3,147,000 and $8,728,000 for the
same periods in 2005. This increase was due to an increase in interest earning assets, including loans and investment securities, as well as an increase in rates received by the Bank on its interest earning assets. In particular, a significant
portion of the Banks loan portfolio is invested in variable rate loans, the rates on which have continued to increase in the current rising interest rate environment.

Interest expense increased to $1,521,000 and $4,049,000 for the three and nine months ended September 30, 2006 from $1,005,000 and $2,655,000 for
the same periods in 2005. This increase in interest expense was primarily due to both an increase in the aggregate balance in interest bearing deposit accounts and, in response to the interest rate increases by Federal Open Market Committee
(FOMC) and an increase in the interest rates paid by the Bank on deposit accounts. In addition, interest expense increased in part because the Bank has increased the interest rates that it offers on certificates of deposit in response
both to competition and the FOMC rate increases. As existing certificates of deposit mature, many customers reinvest the proceeds at the current higher market rate.

The fundamental source of the Banks revenue is net interest income, which is determined by the difference between (i) interest and dividend income on interest earning assets, which consist primarily of
loans, investment securities and other investments, and (ii) interest expense on interest-bearing liabilities, which consist principally of deposits and other borrowings. Net interest income for the three and nine months ended
September 30, 2006 was $2,265,000 and $6,626,000 compared with $2,142,000 and $6,073,000 the same periods in 2005. The net interest margin decreased to 4.51% and 4.62% for the three and nine months ended September 30, 2006 from 4.75% and
4.73% in the same periods a year ago. The growth in net interest income for the three months ended September 30, 2006 as compared with the comparable three months in 2005 was due to the increase in average interest-earning assets, which was the
result of growth in the loan portfolio funded by the growth in deposits. The Bank increased the rates that it pays on deposit accounts in response to competition and this resulted in a slight decrease in the net interest margin.

Financials net interest margin analysis and average balance sheets are shown in Schedule I on page 25.

Non-Interest Income

Non-interest
income, which is comprised primarily of fees and charges on transactional deposit accounts, mortgage loan origination fees, commissions on sales of investments (since April, 2006), and the Banks ownership interest in a title insurance agency,
increased to $647,000 and $1,635,000 (exclusive of $2,000 in income from gains on sales of securities) for the three and nine month periods ended September 30, 2006, from $590,000 and $1,600,000 (exclusive of $4,000 and $10,000, respectively,
in income from gains on sales of securities) for the comparable periods in 2005.

The Bank, through Bank of the James Mortgage, a Division
of Bank of the James (the Mortgage Division) originates both conforming and non conforming consumer residential mortgage loans in the Region 2000 area. As part of the Banks overall risk management strategy, all of the loans
originated and closed by the Mortgage Division are presold to major national mortgage banking or financial institutions.



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The Mortgage Division assumes no credit or interest rate risk on these mortgages. In July, 2005, the Mortgage Division opened its second mortgage origination
office. This office is located in Moneta and was opened to serve the Smith Mountain Lake market. The Bank anticipates that this office will contribute additional non-interest income during 2006.

As noted above, we opened BOTJIG April, 2006. Although the impact on our financial condition to date has not been material to date, we anticipated that
BOTJIG will contribute additional non-interest income in the remainder of 2006.

Non-Interest Expense

Non-interest expense for the three and nine months ended September 30, 2006 increased to $2,087,000 and $5,918,000 from $1,743,000 and $5,154,000 for
the comparable periods in 2005. The increase in non-interest expense can be attributed to increased occupancy expenses, along with an increase in compensation expense related to an increase in the number of employees necessary to accommodate the
Banks growth and expansion.

Total personnel expense increased to $1,124,000 and $3,049,000 for the three and nine month periods
ended September 30, 2006, from $831,000 and $2,443,000 for the comparable period in 2005. In addition part of this increase was related to the Companys adoption as of January 1, 2006 of SFAS 123R requiring the recognition of options
expense equal to the fair market value as calculated at the time of the grant. Additional information concerning SFAS 123R is set forth in Note 4 to the Financial Statements. Compensation for some employees of the Mortgage Division and BOTJIG is
commission-based and therefore subject to fluctuation. The Bank also had increases in depreciation expense, data processing fees, other operating expenses, all of which are related to the growth of the Bank.

The Securities and Exchange Commission has delayed the date by which Financial must comply with the internal control requirements of Section 404 of
the Sarbanes-Oxley Act until July, 2007. Management expects that this delay will enable the Bank to use more of its internal resources in complying with this Act.

Allowance for Loan Losses

The provision for loan losses is charged to earnings to bring the total
allowance to a level deemed appropriate by management and is based upon many factors, including calculations of specific impairment of certain loans, general economic conditions, actual and expected credit losses, loan performance measures,
historical trends and specific conditions of the individual borrower. Based on the application of the loan loss calculation, the Bank provided $184,000 and $489,000 to the allowance for loan loss for the three and nine months ended
September 30, 2006, respectively, compared to a provision of $255,000 and $629,000 for the comparable periods in 2005. Management believes that the current allowance for loan loss of $2,013,000 (or 1.14% of total loans) at September 30,
2006 is adequate.



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##### Table of Contents

The following sets forth the reconciliation of the allowance for loan loss:



|                                |  |                    |       |   |                    |   |       |  
|------------------------------- |  | ------------------ | ----- | - | ------------------ | - | ----- | -
|                                |  | Nine months ended  |      
|                                |  | September 30, 2006 |       |   | September 30, 2005 |  
|Balance, beginning of period    |  | $                  | 1,777 |   |                    | $ | 1,419 |  
|Provision for loan loses        |  |                    | 489   |   |                    |   | 629   |  
|Loans charged off               |  |                    | (295  | ) |                    |   | (392  | )
|Recoveries of loans charged off |  |                    | 42    |   |                    |   | 28    |  
|                                |  |                    |       |   |                    |   |       |  
|Balance, end of period          |  | $                  | 2,013 |   |                    | $ | 1,684 |  
|                                |  |                    |       |   |                    |   |       |  

Income Taxes

For the three and nine ended months September 30, 2006, Financial had an income tax expense of $227,000 and $656,000, respectively. Based on its 2005 income tax liability, Financial made an estimated income tax
payment of $328,000 during the quarter ended September 30, 2006.



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Schedule I

Net Interest Margin Analysis

Average Balance Sheets

For the Three Months Ended September 30, 2006 and 2005



|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|----------------------------------------- |  | ------------------- | ------- | - | ---------------------- | - | ----------------------- |  | ---- | ------------------- |  | - | ---------------------- | - | ----------------------- | - | ----- |  | ---- | -
|                                          |  | 2006                |         |   | 2005                   |  
|                                          |  | AverageBalanceSheet |         |   | InterestIncome/Expense |   | AverageRatesEarned/Paid |  |      | AverageBalanceSheet |  |   | InterestIncome/Expense |   | AverageRatesEarned/Paid |  
|ASSETS                                    |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|                                          |  |                     |         |   |                        |  
|Loans, including fees                     |  | $                   | 168,171 |   |                        | $ | 3,397                   |  | 8.01 | %                   |  | $ | 151,469                |   |                         | $ | 2,844 |  | 7.45 | %
|Federal funds sold                        |  |                     | 3,431   |   |                        |   | 46                      |  | 5.32 | %                   |  |   | 2,166                  |   |                         |   | 19    |  | 3.48 | %
|Securities                                |  |                     | 27,473  |   |                        |   | 337                     |  | 4.87 | %                   |  |   | 24,564                 |   |                         |   | 281   |  | 4.54 | %
|Federal agency equities                   |  |                     | 743     |   |                        |   | 6                       |  | 3.20 | %                   |  |   | 623                    |   |                         |   | 4     |  | 2.55 | %
|CBB equity                                |  |                     | 56      |   |                        |   |                        |  |     |                     |  |   | 56                     |   |                         |   |      |  |     |  
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Total earning assets                      |  |                     | 199,874 |   |                        |   | 3,786                   |  | 7.52 | %                   |  |   | 178,878                |   |                         |   | 3,148 |  | 6.98 | %
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Allowance for loan losses                 |  |                     | (2,027  | ) |                        |   |                         |  |      |                     |  |   | (1,581                 | ) |                         |   |       |  |      |  
|Non-earning assets                        |  |                     | 13,166  |   |                        |   |                         |  |      |                     |  |   | 10,644                 |   |                         |   |       |  |      |  
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Total assets                              |  | $                   | 211,013 |   |                        |   |                         |  |      |                     |  | $ | 187,941                |   |                         |   |       |  |      |  
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|LIABILITIES AND STOCKHOLDERS EQUITY      |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|                                          |  |                     |         |   |                        |  
|Deposits                                  |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Demand interest bearing                   |  | $                   | 37,878  |   |                        | $ | 268                     |  | 2.81 | %                   |  | $ | 18,312                 |   |                         | $ | 59    |  | 1.28 | %
|Savings                                   |  |                     | 18,973  |   |                        |   | 90                      |  | 1.88 | %                   |  |   | 41,598                 |   |                         |   | 206   |  | 1.96 | %
|Time deposits                             |  |                     | 102,770 |   |                        |   | 1,107                   |  | 4.27 | %                   |  |   | 82,290                 |   |                         |   | 709   |  | 3.42 | %
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Total interest bearing deposits           |  |                     | 159,621 |   |                        |   | 1,465                   |  | 3.64 | %                   |  |   | 142,200                |   |                         |   | 974   |  | 2.72 | %
|                                          |  |                     |         |   |                        |  
|Other borrowed funds                      |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Fed funds purchased                       |  |                     | 290     |   |                        |   | 4                       |  | 5.47 | %                   |  |   | 519                    |   |                         |   | 5     |  | 3.82 | %
|Repurchase agreements                     |  |                     | 8,433   |   |                        |   | 53                      |  | 2.49 | %                   |  |   | 5,527                  |   |                         |   | 26    |  | 1.87 | %
|                                          |  |                     |         |   |                        |  
|Total interest-bearing liabilities        |  |                     | 168,344 |   |                        |   | 1,521                   |  | 3.59 | %                   |  |   | 148,246                |   |                         |   | 1,005 |  | 2.69 | %
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Non-interest bearing deposits             |  |                     | 26,610  |   |                        |   |                         |  |      |                     |  |   | 25,244                 |   |                         |   |       |  |      |  
|Other liabilities                         |  |                     | 417     |   |                        |   |                         |  |      |                     |  |   | 100                    |   |                         |   |       |  |      |  
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Total liabilities                         |  |                     | 195,370 |   |                        |   |                         |  |      |                     |  |   | 173,748                |   |                         |   |       |  |      |  
|                                          |  |                     |         |   |                        |  
|Stockholders equity                      |  |                     | 15,643  |   |                        |   |                         |  |      |                     |  |   | 14,193                 |   |                         |   |       |  |      |  
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Total liabilities and Stockholders equity |  | $                   | 211,013 |   |                        |   |                         |  |      |                     |  | $ | 187,941                |   |                         |   |       |  |      |  
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Net interest earnings                     |  |                     |         |   |                        | $ | 2,265                   |  |      |                     |  |   |                        |   |                         | $ | 2,143 |  |      |  
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Net interest margin                       |  |                     |         |   |                        |   |                         |  | 4.49 | %                   |  |   |                        |   |                         |   |       |  | 4.75 | %
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Interest spread                           |  |                     |         |   |                        |   |                         |  | 3.93 | %                   |  |   |                        |   |                         |   |       |  | 4.28 | %
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  



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Net Interest Margin Analysis

Average Balance Sheets

For the Nine Months Ended September 30, 2006 and 2005



|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|----------------------------------------- |  | ------------------- | ------- | - | ---------------------- | - | ----------------------- |  | ---- | ------------------- |  | - | ---------------------- | - | ----------------------- | - | ----- |  | ---- | -
|                                          |  | 2006                |         |   | 2005                   |  
|                                          |  | AverageBalanceSheet |         |   | InterestIncome/Expense |   | AverageRatesEarned/Paid |  |      | AverageBalanceSheet |  |   | InterestIncome/Expense |   | AverageRatesEarned/Paid |  
|ASSETS                                    |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|                                          |  |                     |         |   |                        |  
|Loans, including fees                     |  | $                   | 163,515 |   |                        | $ | 9,647                   |  | 7.89 | %                   |  | $ | 146,719                |   |                         | $ | 7,914 |  | 7.21 | %
|Federal funds sold                        |  |                     | 2,416   |   |                        |   | 91                      |  | 5.04 | %                   |  |   | 2,061                  |   |                         |   | 45    |  | 2.92 | %
|Securities                                |  |                     | 25,428  |   |                        |   | 907                     |  | 4.77 | %                   |  |   | 22,071                 |   |                         |   | 751   |  | 4.55 | %
|Federal agency equities                   |  |                     | 727     |   |                        |   | 30                      |  | 5.52 | %                   |  |   | 606                    |   |                         |   | 18    |  | 3.97 | %
|CBB equity                                |  |                     | 56      |   |                        |   |                        |  |     |                     |  |   | 56                     |   |                         |   |      |  |     |  
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Total earning assets                      |  |                     | 192,142 |   |                        |   | 10,675                  |  | 7.43 | %                   |  |   | 171,513                |   |                         |   | 8,728 |  | 6.80 | %
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Allowance for loan losses                 |  |                     | (1,970  | ) |                        |   |                         |  |      |                     |  |   | (1,522                 | ) |                         |   |       |  |      |  
|Non-earning assets                        |  |                     | 12,582  |   |                        |   |                         |  |      |                     |  |   | 10,838                 |   |                         |   |       |  |      |  
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Total assets                              |  | $                   | 202,754 |   |                        |   |                         |  |      |                     |  | $ | 180,829                |   |                         |   |       |  |      |  
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|                                          |  |                     |         |   |                        |  
|LIABILITIES AND STOCKHOLDERS EQUITY      |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Deposits                                  |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Demand interest bearing                   |  | $                   | 29,291  |   |                        | $ | 541                     |  | 2.47 | %                   |  | $ | 19,024                 |   |                         | $ | 146   |  | 1.03 | %
|Savings                                   |  |                     | 24,451  |   |                        |   | 353                     |  | 1.93 | %                   |  |   | 47,580                 |   |                         |   | 684   |  | 1.92 | %
|Time deposits                             |  |                     | 99,628  |   |                        |   | 3,008                   |  | 4.04 | %                   |  |   | 72,395                 |   |                         |   | 1,758 |  | 3.25 | %
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Total interest bearing deposits           |  |                     | 153,370 |   |                        |   | 3,902                   |  | 3.40 | %                   |  |   | 138,999                |   |                         |   | 2,588 |  | 2.49 | %
|                                          |  |                     |         |   |                        |  
|Other borrowed funds                      |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Fed funds purchased                       |  |                     | 475     |   |                        |   | 18                      |  | 5.07 | %                   |  |   | 586                    |   |                         |   | 14    |  | 3.19 | %
|Repurchase agreements                     |  |                     | 7,408   |   |                        |   | 129                     |  | 2.33 | %                   |  |   | 4,116                  |   |                         |   | 53    |  | 1.72 | %
|                                          |  |                     |         |   |                        |  
|Total interest-bearing liabilities        |  |                     | 161,253 |   |                        |   | 4,049                   |  | 3.36 | %                   |  |   | 143,701                |   |                         |   | 2,655 |  | 2.47 | %
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Non-interest bearing deposits             |  |                     | 25,823  |   |                        |   |                         |  |      |                     |  |   | 23,377                 |   |                         |   |       |  |      |  
|Other liabilities                         |  |                     | 417     |   |                        |   |                         |  |      |                     |  |   | 100                    |   |                         |   |       |  |      |  
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Total liabilities                         |  |                     | 187,493 |   |                        |   |                         |  |      |                     |  |   | 167,178                |   |                         |   |       |  |      |  
|                                          |  |                     |         |   |                        |  
|Stockholders equity                      |  |                     | 15,261  |   |                        |   |                         |  |      |                     |  |   | 13,597                 |   |                         |   |       |  |      |  
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Total liabilities and Stockholders equity |  | $                   | 202,754 |   |                        |   |                         |  |      |                     |  | $ | 180,829                |   |                         |   |       |  |      |  
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Net interest earnings                     |  |                     |         |   |                        | $ | 6,626                   |  |      |                     |  |   |                        |   |                         | $ | 6,073 |  |      |  
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Net interest margin                       |  |                     |         |   |                        |   |                         |  | 4.61 | %                   |  |   |                        |   |                         |   |       |  | 4.73 | %
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Interest spread                           |  |                     |         |   |                        |   |                         |  | 4.07 | %                   |  |   |                        |   |                         |   |       |  | 4.33 | %
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  



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##### Table of Contents

Item 3. Controls and Procedures

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-QSB, Financials principal executive officer and
principal financial officer have concluded that the Banks disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)) are effective as of the end of
the period covered by this quarterly report to ensure that information required to be disclosed by the Bank in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms. There were no changes in Financials internal controls over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or is reasonably likely to
materially affect, Financials internal controls over financial reporting.

PART II  OTHER INFORMATION

Item 1. Legal Proceedings

The Bank is not involved in any pending legal proceedings at this time, other
than routine litigation incidental to its business.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not Applicable

Item 3. Defaults Upon Senior Securities

Not Applicable

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

Not applicable

Item 5. Other Information

Not applicable

Item 6. Exhibits

The following are filed as Exhibits to this Form 10-QSB:



|            |  |                                                                                                                                                
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibit                                                                                                                         
|            | 
|31.1        |  | Certification of Robert R. Chapman III Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 13, 2006                      
|            | 
|31.2        |  | Certification of J. Todd Scruggs Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 13 2006                             
|            | 
|32          |  | Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002, dated November 13, 2006



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##### Table of Contents

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.



|                        |  |                                         |  |                                                                                                        
|----------------------- |  | --------------------------------------- |  | -------------------------------------------------------------------------------------------------------
|                        |  | BANK OF THE JAMES FINANCIAL GROUP, INC.
|                        |  |                                        
|Date: November 13, 2006 |  | By                                      |  | /S/ Robert R. Chapman III                                                                              
|                        |  |                                         |  | Robert R. Chapman III, President                                                                       
|                        |  |                                         |  | (Principal Executive Officer)                                                                          
|                        |  |                                        
|Date: November 13, 2006 |  | By                                      |  | /S/ J. Todd Scruggs                                                                                    
|                        |  |                                         |  | J. Todd Scruggs, Secretary and Treasurer (Principal
Financial Officer and Principal Accounting Officer)



25



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##### Table of Contents

Index of Exhibits



|            |  |                                                                                                                                                
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibit                                                                                                                         
|            | 
|31.1        |  | Certification of Robert R. Chapman III Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 13, 2006                      
|            | 
|31.2        |  | Certification of J. Todd Scruggs Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 13, 2006                            
|            | 
|32          |  | Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002, dated November 13, 2006



26