##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





Form 10-Q





Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities
Exchange Act of 1934

For the Quarterly Period Ended June 30, 2008





BANK OF THE JAMES FINANCIAL GROUP, INC.

(Name of Registrant as Specified in
Its Charter)







|                                                              |  |                          |  |                                    
|------------------------------------------------------------- |  | ------------------------ |  | -----------------------------------
|Virginia                                                      |  | 000-50548                |  | 20-0500300                         
|(State or other jurisdiction ofincorporation or organization) |  | (Commission file number) |  | (I.R.S. EmployerIdentification No.)



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

(434) 846-2000

(Registrants telephone number, including area code)





Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by Section13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.    x  Yes     ̈  No

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



| |  |                            |  |                              |  | 
| |  | -------------------------- |  | ---------------------------- |  | 
| |  | Large accelerated filer   ̈ |  | Accelerated filer   ̈         |  | 
| |  |                            | 
| |  | Non-accelerated filer   ̈   |  | Smaller reporting company  x |  | 

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

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: 2,810,255 shares of Common Stock, par value $2.14 per share, were outstanding at August 13, 2008.









---

##### Table of Contents

Table of Contents



|                               |  |                                                                                       |  |   
|------------------------------ |  | ------------------------------------------------------------------------------------- |  | --
|PART I  FINANCIAL INFORMATION |  | 1                                                                                    
|                               |  |                                                                                      
|Item 1.                        |  | Consolidated Financial Statements                                                     |  | 1 
|                               |  |                                                                                      
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 10
|                               |  |                                                                                      
|Item 3.                        |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 23
|                               |  |                                                                                      
|Item 4.                        |  | Controls and Procedures                                                               |  | 23
|                               | 
|PART II  OTHER INFORMATION    |  | 23                                                                                   
|                               |  |                                                                                      
|Item 1.                        |  | Legal Proceedings                                                                     |  | 23
|                               |  |                                                                                      
|Item 1A.                       |  | Risk Factors                                                                          |  | 23
|                               |  |                                                                                      
|Item 2.                        |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 23
|                               |  |                                                                                      
|Item 3.                        |  | Defaults Upon Senior Securities                                                       |  | 24
|                               |  |                                                                                      
|Item 4.                        |  | Submission of Matters to a Vote of Security Holders                                   |  | 24
|                               |  |                                                                                      
|Item 5.                        |  | Other Information                                                                     |  | 25
|                               |  |                                                                                      
|Item 6.                        |  | Exhibits                                                                              |  | 25
|                               | 
|SIGNATURES                     |  | 26                                                                                   



---

##### Table of Contents

PART I  FINANCIAL INFORMATION



|Item 1. | Consolidated Financial Statements
|------- | ---------------------------------

Bank of the
James Financial Group, Inc. and Subsidiaries

Consolidated Balance Sheets

(dollar amounts in thousands, except per share amounts)



|                                                                                                                                                              |  |                      |         |   |                     |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------- | ------- | - | ------------------- | - | ------- | -
|                                                                                                                                                              |  | (unaudited)6/30/2008 |         |   | (audited)12/31/2007 |  
|Assets                                                                                                                                                        |  |                      |         |   |                     |   |         |  
|                                                                                                                                                              |  |                     
|Cash and due from banks                                                                                                                                       |  | $                    | 10,715  |   |                     | $ | 4,314   |  
|                                                                                                                                                              |  |                     
|Securities held-to-maturity (fair value of $6,028 in 2008 and $6,317 in 2007)                                                                                 |  |                      | 5,994   |   |                     |   | 6,494   |  
|Securities available-for-sale, at fair value                                                                                                                  |  |                      | 32,222  |   |                     |   | 25,733  |  
|Restricted stock, at cost                                                                                                                                     |  |                      | 1,998   |   |                     |   | 986     |  
|Loans, net of allowance for loan losses of $2,275 in 2008 and $2,146 in 2007                                                                                  |  |                      | 245,118 |   |                     |   | 224,022 |  
|Premises and equipment, net                                                                                                                                   |  |                      | 6,363   |   |                     |   | 5,710   |  
|Software, net                                                                                                                                                 |  |                      | 387     |   |                     |   | 292     |  
|Interest receivable                                                                                                                                           |  |                      | 1,612   |   |                     |   | 1,515   |  
|Other real estate owned                                                                                                                                       |  |                      | 404     |   |                     |   |        |  
|Deferred tax asset                                                                                                                                            |  |                      | 800     |   |                     |   | 443     |  
|Other assets                                                                                                                                                  |  |                      | 502     |   |                     |   | 551     |  
|                                                                                                                                                              |  |                      |         |   |                     |   |         |  
|Total Assets                                                                                                                                                  |  | $                    | 306,115 |   |                     | $ | 270,060 |  
|                                                                                                                                                              |  |                      |         |   |                     |   |         |  
|                                                                                                                                                              |  |                     
|Liabilities and Stockholders Equity                                                                                                                          |  |                      |         |   |                     |   |         |  
|                                                                                                                                                              |  |                     
|Deposits                                                                                                                                                      |  |                      |         |   |                     |   |         |  
|Noninterest bearing demand                                                                                                                                    |  | $                    | 34,990  |   |                     | $ | 34,973  |  
|NOW, money market and savings                                                                                                                                 |  |                      | 79,412  |   |                     |   | 56,995  |  
|Time                                                                                                                                                          |  |                      | 124,655 |   |                     |   | 136,755 |  
|                                                                                                                                                              |  |                      |         |   |                     |   |         |  
|Total deposits                                                                                                                                                |  |                      | 239,057 |   |                     |   | 228,723 |  
|                                                                                                                                                              |  |                     
|Federal funds purchased                                                                                                                                       |  |                      | 6,601   |   |                     |   | 5,587   |  
|Repurchase agreements                                                                                                                                         |  |                      | 14,146  |   |                     |   | 10,542  |  
|FHLB borrowings                                                                                                                                               |  |                      | 21,000  |   |                     |   |        |  
|Income taxes payable                                                                                                                                          |  |                      |        |   |                     |   | 3       |  
|Interest payable                                                                                                                                              |  |                      | 405     |   |                     |   | 405     |  
|Other liabilities                                                                                                                                             |  |                      | 103     |   |                     |   | 276     |  
|                                                                                                                                                              |  |                      |         |   |                     |   |         |  
|Total liabilities                                                                                                                                             |  | $                    | 281,312 |   |                     | $ | 245,536 |  
|                                                                                                                                                              |  |                      |         |   |                     |   |         |  
|                                                                                                                                                              |  |                     
|Stockholders equity                                                                                                                                          |  |                      |         |   |                     |   |         |  
|Common stock $2.14 par value; authorized 10,000,000 shares; issued and outstanding 2,807,819 as of June 30, 2008 and 2,812,588 shares as
of December 31, 2007 |  |                      | 6,009   |   |                     |   | 5,472   |  
|Additional paid-in-capital                                                                                                                                    |  |                      | 19,464  |   |                     |   | 15,995  |  
|Accumulated other comprehensive (loss) income                                                                                                                 |  |                      | (699    | ) |                     |   | (7      | )
|Retained earnings                                                                                                                                             |  |                      | 29      |   |                     |   | 3,064   |  
|                                                                                                                                                              |  |                      |         |   |                     |   |         |  
|Total stockholders equity                                                                                                                                    |  | $                    | 24,803  |   |                     | $ | 24,524  |  
|                                                                                                                                                              |  |                      |         |   |                     |   |         |  
|Total liabilities and stockholders equity                                                                                                                    |  | $                    | 306,115 |   |                     | $ | 270,060 |  
|                                                                                                                                                              |  |                      |         |   |                     |   |         |  

See accompanying notes to these consolidated financial statements



1



---

##### Table of Contents

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Operations

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



|                                                         |  |                                    |       |   |      |   |      
|-------------------------------------------------------- |  | ---------------------------------- | ----- | - | ---- | - | -----
|                                                         |  | For the Three MonthsEnded June 30,
|                                                         |  | 2008                               |       |   | 2007
|Interest Income                                          |  |                                    |       |   |      |   |      
|Loans                                                    |  | $                                  | 4,068 |   |      | $ | 3,962
|Securities                                               |  |                                    |       |   |      |   |      
|US Government and agency obligations                     |  |                                    | 200   |   |      |   | 274  
|Mortgage backed securities                               |  |                                    | 210   |   |      |   | 24   
|Municipals                                               |  |                                    | 12    |   |      |   | 8    
|Dividends                                                |  |                                    |      |   |      |   | 17   
|Other (Corporates)                                       |  |                                    | 128   |   |      |   | 1    
|Federal Funds sold                                       |  |                                    | 9     |   |      |   | 12   
|                                                         |  |                                    |       |   |      |   |      
|Total interest income                                    |  | $                                  | 4,627 |   |      | $ | 4,298
|                                                         |  |                                    |       |   |      |   |      
|Interest Expense                                         |  |                                    |       |   |      |   |      
|Deposits                                                 |  |                                    |       |   |      |   |      
|NOW, money market savings                                |  | $                                  | 349   |   |      | $ | 352  
|Time Deposits                                            |  |                                    | 1,433 |   |      |   | 1,463
|Federal Funds purchased                                  |  |                                    | 4     |   |      |   | 12   
|FHLB borrowings                                          |  |                                    | 136   |   |      |   |     
|Reverse repurchase agreements                            |  |                                    | 76    |   |      |   | 72   
|                                                         |  |                                    |       |   |      |   |      
|Total interest expense                                   |  |                                    | 1,998 |   |      |   | 1,899
|                                                         |  |                                    |       |   |      |   |      
|Net interest income                                      |  |                                    | 2,629 |   |      |   | 2,399
|Provision for loan losses                                |  |                                    | 130   |   |      |   | 94   
|                                                         |  |                                    |       |   |      |   |      
|Net interest income after provision for loan losses      |  | $                                  | 2,499 |   |      | $ | 2,305
|                                                         |  |                                    |       |   |      |   |      
|Other operating income                                   |  |                                    |       |   |      |   |      
|Mortgage fee income                                      |  | $                                  | 353   |   |      | $ | 389  
|Service charges, fees, commissions                       |  |                                    | 319   |   |      |   | 168  
|Other                                                    |  |                                    | 117   |   |      |   | 141  
|Gain on sale of securities                               |  |                                    | 12    |   |      |   |     
|                                                         |  |                                    |       |   |      |   |      
|Total other operating income                             |  | $                                  | 801   |   |      | $ | 698  
|                                                         |  |                                    |       |   |      |   |      
|Other operating expenses                                 |  |                                    |       |   |      |   |      
|Salaries and employee benefits                           |  |                                    | 1,288 |   |      |   | 1,204
|Occupancy                                                |  |                                    | 180   |   |      |   | 176  
|Equipment                                                |  |                                    | 242   |   |      |   | 209  
|Supplies                                                 |  |                                    | 95    |   |      |   | 77   
|Professional, data processing, and other outside expense |  |                                    | 335   |   |      |   | 271  
|Marketing                                                |  |                                    | 110   |   |      |   | 87   
|Credit expense                                           |  |                                    | 65    |   |      |   | 62   
|Loss (gain) on sale of assets                            |  |                                    | (2    | ) |      |   |     
|Other                                                    |  |                                    | 199   |   |      |   | 161  
|                                                         |  |                                    |       |   |      |   |      
|Total other operating expenses                           |  | $                                  | 2,512 |   |      | $ | 2,247
|                                                         |  |                                    |       |   |      |   |      
|Income before income taxes                               |  |                                    | 788   |   |      |   | 756  
|Income tax expense                                       |  |                                    | 264   |   |      |   | 258  
|                                                         |  |                                    |       |   |      |   |      
|Net Income                                               |  | $                                  | 524   |   |      | $ | 498  
|                                                         |  |                                    |       |   |      |   |      
|Income per common share  basic                          |  | $                                  | 0.19  |   |      | $ | 0.18 
|                                                         |  |                                    |       |   |      |   |      
|Income per common share  diluted                        |  | $                                  | 0.18  |   |      | $ | 0.17 
|                                                         |  |                                    |       |   |      |   |      

See accompanying notes to these consolidated financial statements



2



---

##### Table of Contents

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Operations

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



|                                                         |  |                                  |       |      |   |      
|-------------------------------------------------------- |  | -------------------------------- | ----- | ---- | - | -----
|                                                         |  | For the Six MonthsEnded June 30,
|                                                         |  | 2008                             |       | 2007
|Interest Income                                          |  |                                  |       |      |   |      
|Loans                                                    |  | $                                | 8,225 |      | $ | 7,737
|Securities                                               |  |                                  |       |      |   |      
|US Government and agency obligations                     |  |                                  | 417   |      |   | 551  
|Mortgage backed securities                               |  |                                  | 303   |      |   | 48   
|Municipals                                               |  |                                  | 27    |      |   | 17   
|Dividends                                                |  |                                  |      |      |   | 23   
|Other (Corporates)                                       |  |                                  | 187   |      |   | 1    
|Federal Funds sold                                       |  |                                  | 18    |      |   | 14   
|                                                         |  |                                  |       |      |   |      
|Total interest income                                    |  |                                  | 9,177 |      |   | 8,391
|                                                         |  |                                  |       |      |   |      
|Interest Expense                                         |  |                                  |       |      |   |      
|Deposits                                                 |  |                                  |       |      |   |      
|NOW, money market savings                                |  | $                                | 588   |      | $ | 688  
|Time Deposits                                            |  |                                  | 3,012 |      |   | 2,783
|Federal Funds purchased                                  |  |                                  | 49    |      |   | 83   
|FHLB borrowings                                          |  |                                  | 177   |      |   |     
|Reverse repurchase agreements                            |  |                                  | 157   |      |   | 130  
|                                                         |  |                                  |       |      |   |      
|Total interest expense                                   |  |                                  | 3,983 |      |   | 3,684
|                                                         |  |                                  |       |      |   |      
|Net interest income                                      |  |                                  | 5,194 |      |   | 4,707
|Provision for loan losses                                |  |                                  | 255   |      |   | 245  
|                                                         |  |                                  |       |      |   |      
|Net interest income after provision for loan losses      |  | $                                | 4,939 |      | $ | 4,462
|                                                         |  |                                  |       |      |   |      
|Other operating income                                   |  |                                  |       |      |   |      
|Mortgage fee income                                      |  |                                  | 673   |      |   | 708  
|Service charges, fees, commissions                       |  |                                  | 573   |      |   | 459  
|Other                                                    |  |                                  | 202   |      |   | 164  
|Gain on sale of securities                               |  |                                  | 92    |      |   |     
|                                                         |  |                                  |       |      |   |      
|Total other operating income                             |  | $                                | 1,540 |      | $ | 1,331
|                                                         |  |                                  |       |      |   |      
|Other operating expenses                                 |  |                                  |       |      |   |      
|Salaries and employee benefits                           |  |                                  | 2,569 |      |   | 2,391
|Occupancy                                                |  |                                  | 366   |      |   | 348  
|Equipment                                                |  |                                  | 469   |      |   | 413  
|Supplies                                                 |  |                                  | 183   |      |   | 165  
|Professional, data processing, and other outside expense |  |                                  | 666   |      |   | 526  
|Marketing                                                |  |                                  | 194   |      |   | 183  
|Credit expense                                           |  |                                  | 120   |      |   | 117  
|Loss (gain) on sale of assets                            |  |                                  | 7     |      |   |     
|Other                                                    |  |                                  | 377   |      |   | 290  
|                                                         |  |                                  |       |      |   |      
|Total other operating expenses                           |  | $                                | 4,951 |      | $ | 4,433
|                                                         |  |                                  |       |      |   |      
|Income before income taxes                               |  |                                  | 1,528 |      |   | 1,360
|Income tax expense                                       |  |                                  | 500   |      |   | 464  
|                                                         |  |                                  |       |      |   |      
|Net Income                                               |  | $                                | 1,028 |      | $ | 896  
|                                                         |  |                                  |       |      |   |      
|Income per common share  basic                          |  | $                                | 0.37  |      | $ | 0.32 
|                                                         |  |                                  |       |      |   |      
|Income per common share  diluted                        |  | $                                | 0.35  |      | $ | 0.30 
|                                                         |  |                                  |       |      |   |      

See accompanying notes to these consolidated financial statements



3



---

##### Table of Contents

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

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



|                                                                                 |  |                                  |         |   |      |   |         |  
|-------------------------------------------------------------------------------- |  | -------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                 |  | For the Six MonthsEnded June 30, |        
|                                                                                 |  | 2008                             |         |   | 2007 |  
|Cash flows from operating activities                                             |  |                                  |         |   |      |   |         |  
|Net Income                                                                       |  | $                                | 1,028   |   |      | $ | 896     |  
|Adjustments to reconcile net income to net cash provided by operating activities |  |                                  |         |   |      |   |         |  
|Depreciation                                                                     |  |                                  | 361     |   |      |   | 323     |  
|Net amortization and accretion of premiums and discounts on securities           |  |                                  | 3       |   |      |   | 30      |  
|Gain on sale of available for sale securities                                    |  |                                  | (55     | ) |      |   |        |  
|Gain on call of available for sale securities                                    |  |                                  | (37     | ) |      |   |        |  
|Loss on sale of assets                                                           |  |                                  | 7       |   |      |   |         |  
|Provision for loan losses                                                        |  |                                  | 255     |   |      |   | 245     |  
|Stock compensation expense                                                       |  |                                  | 3       |   |      |   | 6       |  
|(Increase) in interest receivable                                                |  |                                  | (97     | ) |      |   | (59     | )
|(Increase) in other assets                                                       |  |                                  | (367    | ) |      |   | (444    | )
|(Decrease) in income taxes payable                                               |  |                                  | (3      | ) |      |   | (129    | )
|Increase in interest payable                                                     |  |                                  |        |   |      |   | 33      |  
|(Decrease) in other liabilities                                                  |  | $                                | (173    | ) |      | $ | (27     | )
|                                                                                 |  |                                  |         |   |      |   |         |  
|Net cash provided by operating activities                                        |  | $                                | 925     |   |      | $ | 874     |  
|                                                                                 |  |                                  |         |   |      |   |         |  
|Cash flows from investing activities                                             |  |                                  |         |   |      |   |         |  
|Proceeds from maturities and calls of securities held to maturity                |  | $                                | 500     |   |      | $ | 1,000   |  
|Purchases of securities available for sale                                       |  |                                  | (19,766 | ) |      |   | (1,937  | )
|Proceeds from maturities and calls of securities available for sale              |  |                                  | 6,331   |   |      |   | 1,199   |  
|Proceeds from sale of securities available for sale                              |  |                                  | 5,985   |   |      |   | 499     |  
|Purchase of Federal Reserve Bank stock                                           |  |                                  | (1      | ) |      |   | (10     | )
|Purchases of Federal Home Loan Bank stock                                        |  |                                  | (1,011  | ) |      |   | (27     | )
|Origination of loans, net of principal collected                                 |  |                                  | (21,351 | ) |      |   | (16,137 | )
|Purchases of premises and equipment                                              |  |                                  | (1,108  | ) |      |   | (745    | )
|Proceeds from sale of other assets                                               |  |                                  | 4       |   |      |   |        |  
|                                                                                 |  |                                  |         |   |      |   |         |  
|Net cash used in investing activities                                            |  | $                                | (30,417 | ) |      | $ | (16,158 | )
|                                                                                 |  |                                  |         |   |      |   |         |  
|Cash flows from financing activities                                             |  |                                  |         |   |      |   |         |  
|Net increase in deposits                                                         |  | $                                | 10,334  |   |      | $ | 11,315  |  
|Net increase in federal funds purchased                                          |  |                                  | 1,014   |   |      |   |        |  
|Net increase in repurchase agreements                                            |  |                                  | 3,604   |   |      |   | 710     |  
|Net increase in FHLB borrowings                                                  |  |                                  | 21,000  |   |      |   |        |  
|Acquisition of common stock                                                      |  |                                  | (59     | ) |      |   |        |  
|Proceeds from exercise of stock options                                          |  |                                  |        |   |      |   | 259     |  
|                                                                                 |  |                                  |         |   |      |   |         |  
|Net cash provided by financing activities                                        |  | $                                | 35,893  |   |      | $ | 12,284  |  
|                                                                                 |  |                                  |         |   |      |   |         |  
|Increase (decrease) in cash and cash equivalents                                 |  |                                  | 6,401   |   |      |   | (3,000  | )
|Cash and cash equivalents at beginning of period                                 |  | $                                | 4,314   |   |      | $ | 9,876   |  
|                                                                                 |  |                                  |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                       |  | $                                | 10,715  |   |      | $ | 6,876   |  
|                                                                                 |  |                                  |         |   |      |   |         |  
|Non cash transactions                                                            |  |                                  |         |   |      |   |         |  
|Transfer of loans to foreclosed assets                                           |  | $                                | 404     |   |      | $ | 426     |  
|Fair value adjustment for securities available for sale                          |  |                                  | (1,050  | ) |      |   | (117    | )
|                                                                                 |  |                                  |         |   |      |   |         |  
|Cash transactions                                                                |  |                                  |         |   |      |   |         |  
|Cash paid for interest                                                           |  | $                                | 3,983   |   |      | $ | 3,651   |  
|Cash paid for taxes                                                              |  |                                  | 553     |   |      |   | 587     |  
|                                                                                 |  |                                  |         |   |      |   |         |  

See accompanying notes to these consolidated financial statements



4



---

##### Table of Contents

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 six month periods ended June 30, 2008 and 2007, 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-K for the year ended December 31, 2007. These financial statements should be read in conjunction with the
audited consolidated financial statements and footnotes for the year ended December 31, 2007 included in Financials Annual Report on Form 10-K. Results for the three and six month periods ended June 30, 2008 are not necessarily
indicative of the results that may be expected for the year ending December 31, 2008.

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 losses 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 losses 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 losses 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 June 30, 2008 and 2007 basic earnings per share has been computed based upon the weighted average common shares outstanding of 2,807,905 and 2,806,666, respectively. For the six months
ended June 30, 2008 and 2007 basic earnings per share has been computed based upon the weighted average common shares outstanding of 2,808,878 and 2,802,467, respectively. All earnings per share amounts have been adjusted to reflect the 10%
stock dividend paid by Financial in July 2008 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 six months ended June 30, 2008 and 2007.



5



---

##### Table of Contents

|                                      |  |                            |           |                          |   |           |  |      |           |  |   |          
|------------------------------------- |  | -------------------------- | --------- | ------------------------ | - | --------- |  | ---- | --------- |  | - | ---------
|                                      |  | Three months endedJune 30, |           | Six months endedJune 30,
|                                      |  | 2008                       |           | 2007                     |   | 2008      |  | 2007
|Net income                            |  | $                          | 524,000   |                          | $ | 498,000   |  | $    | 1,028,000 |  | $ | 896,000  
|                                      |  |                            |           |                         
|Weighted average number of shares     |  |                            | 2,807,905 |                          |   | 2,808,666 |  |      | 2,808,878 |  |   | 2,802,467
|Options affect of incremental shares  |  |                            | 116,116   |                          |   | 155,824   |  |      | 106,723   |  |   | 158,612  
|                                      |  |                            |           |                          |   |           |  |      |           |  |   |          
|Weighted average diluted shares       |  |                            | 2,924,021 |                          |   | 2,964,490 |  |      | 2,915,601 |  |   | 2,961,079
|                                      |  |                            |           |                          |   |           |  |      |           |  |   |          
|Basic EPS (weighted average shares)   |  | $                          | 0.19      |                          | $ | 0.18      |  | $    | 0.37      |  | $ | 0.32     
|                                      |  |                            |           |                          |   |           |  |      |           |  |   |          
|Diluted EPS (Including option shares) |  | $                          | 0.18      |                          | $ | 0.17      |  | $    | 0.35      |  | $ | 0.30     
|                                      |  |                            |           |                          |   |           |  |      |           |  |   |          

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 three and six months ended June 30, 2008 is $0 and $3,000, respectively which had no impact on basic and diluted earnings per share for the same period.



6



---

##### Table of Contents

Stock option plan activity for the six months ended June 30, 2008 is summarized below:



|                                     |  |         |   |  |                              |       |                                                    |      |                        |   |          
|------------------------------------ |  | ------- | - |  | ---------------------------- | ----- | -------------------------------------------------- | ---- | ---------------------- | - | ---------
|                                     |  | Shares  |   |  | WeightedAverageExercisePrice |       | WeightedAverageRemainingContractualLife (in years) |      | AverageIntrinsic Value
|Options outstanding, January 1, 2008 |  | 327,991 |   |  | $                            | 8.58  |                                                    |      |                        |   |          
|Granted                              |  |        |   |  |                              | n/a   |                                                    |      |                        |   |          
|Exercised                            |  |        |   |  |                              | n/a   |                                                    |      |                        |   |          
|Forfeited                            |  | (9,076  | ) |  | $                            | 11.02 |                                                    |      |                        |   |          
|                                     |  |         |   |  |                              |       |                                                    |      |                        |   |          
|Options outstanding, June 30, 2008   |  | 318,915 |   |  | $                            | 8.55  |                                                    | 5.10 |                        | $ | 2,061,391
|Options exercisable, June 30, 2008   |  | 318,915 |   |  | $                            | 8.55  |                                                    | 5.10 |                        | $ | 2,061,391

There were no options exercised during the six months ended June 30, 2008. As of June 30, 2008 there was
no unrecognized compensation expense related to non-vested option awards, as all expense associated with all current outstanding awards has been realized.

Note 5  Stock Dividend

On May 15, 2007, the Board of Directors of the Company declared a 10% stock dividend. The stock dividend was
paid on July 24, 2007 to shareholders of record June 19, 2007. Following the stock dividend, the number of outstanding shares increased by 229,790. The dividend required a reclassification of retained earnings effective May 15, 2007
in the amount of $4,009,000. Of this amount, $497,000 was reclassified as common stock and $3,512,000 was reclassified as additional paid-in-capital. The reclassification did not change total stockholders equity. All per share amounts have
been retroactively adjusted to reflect this dividend.

On May 20, 2008, the Board of Directors of the Company declared a 10% stock dividend. The stock
dividend was paid on July 22, 2008 to shareholders of record June 17, 2008. Following the stock dividend, the number of outstanding shares increased by approximately 256,000 (final number subject to rounding). The dividend required a
reclassification of retained earnings effective May 20, 2008 in the amount of $4,064,000. Of this amount, $546,000 was reclassified as common stock and $3,518,000 was reclassified as additional paid-in-capital. The reclassification did not
change total stockholders equity. All per share amounts have been retroactively adjusted to reflect this dividend.

Note 6  Recent Accounting
Pronouncements

In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141(R),
Business Combinations (SFAS 141(R)). The Standard will significantly change the financial accounting and reporting of business combination transactions. SFAS 141(R) establishes the criteria for how an acquiring entity in a business
combination recognizes the assets acquired and liabilities assumed in the transaction; establishes the acquisition date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to
investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. Acquisition related costs including finders fees, advisory, legal, accounting valuation and
other professional and consulting fees are required to be expensed as incurred. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008 and early implementation is not permitted. The Company does not expect the
implementation to have a material impact on its consolidated financial statements.



7



---

##### Table of Contents

In December 2007, the FASB issued Statement of Financial Accounting Standards No.160, Noncontrolling Interests in
Consolidated Financial Statements (SFAS 160). SFAS 160 requires the Company to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This Statement is
effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company does not expect the implementation of SFAS 160 to have a material impact on its
consolidated financial statements.

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative
Instruments and Hedging Activities  an amendment of FASB Statement No. 133 (SFAS 161). SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments
and related hedged items affect an entitys financial position, financial performance and cash flows. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008, with early application permitted. The
Company does not expect the implementation of SFAS 161 to have a material impact on its consolidated financial statements.

Note 7 - Fair Value
Measurements

SFAS No. 157, Fair Value Measurements, defines fair value, establishes a framework for measuring fair value, establishes
a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability
as of the measurement date. The three levels are defined as follow:



| |  |  | Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset
or liability, either directly or indirectly, for substantially the full term of the financial instrument.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.
| | - |  | -----------------------------------------------------------------------------------------------------------

Following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such
instruments pursuant to the valuation hierarchy:

Securities

Where quoted prices are available in an active market, securities are classified within level 1of the valuation hierarchy. Level 1 securities would
include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or
discounted cash flow. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there
is limited activity or less transparency around inputs to the valuation, securities are classified within level 3 of the valuation hierarchy. Currently, all of the Companys securities are considered to be Level 2 securities.



8



---

##### Table of Contents

Loans held for sale

Loans held for sale are required to be measured in a lower of cost or fair value. Under SFAS No. 157, market value is to represent fair value. Management obtains quotes or bids on all or part of these loans
directly from the purchasing financial institutions. Premiums received or to be received on the quotes or bids are indicative of the fact that cost is lower than fair value. At June 30, 2008, the Company had no loans available for sale.

Impaired loans

SFAS
No. 157 applies to loans measured for impairment using the practical expedients permitted by SFAS No. 114, Accounting by Creditors for Impairment of a Loan, including impaired loans measured at an observable market price (if available), or
at the fair value of the loans collateral (if the loan is collateral dependent). Fair value of the loans collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation which is then adjusted
for the cost related to liquidation of the collateral.

Other Real Estate Owned

Certain assets such as other real estate owned (OREO) are measured at fair value less cost to sell. We believe that the fair value component in its
valuation follows the provisions of SFAS No. 157.



9



---

##### Table of Contents

|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

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 Management Discussion and Analysis Results of Operations  Allowance for Loan Losses and Loan Loss Reserve below for further discussion of the allowance for loan losses.

Overview

Financial is a bank
holding company with its headquarters in Lynchburg, Virginia. Financial was incorporated at the direction of Bank of the James (the Bank) on October 3, 2003 to serve as a bank holding company of the Bank. Financial had no business
until January 1, 2004 when it acquired the common stock of the Bank through a statutory share exchange on a one-for-one basis. In



10



---

##### Table of Contents

addition to the Bank, Financial wholly-owns BOTJ Investment Group, Inc. (Investment Group) through which we offer brokerage, fixed and variable
annuity products, and related services to the public through a third party broker-dealer. These two businesses are our only subsidiaries and primary assets. 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 Investment Group.

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 was organized to engage in general retail and commercial banking business. 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.

The Bank was organized in part as a response to the loss of many of the
Central Virginia, Region 2000 areas local financial institutions through mergers with larger, non-local banks and bank holding companies. The organizers perceived that local customers who once relied on experienced personal attention were
being forced to use 800 numbers, computerized menus, and persons in other localities who were not familiar with their needs.

The Bank
opened for business on July 22, 1999 to fill this void left in the Region 2000 market. The Banks organizers recognized that an opportunity existed to create a banking institution designed exclusively for a market that expected
personalized service. The idea was to build a financial institution staffed with experienced professionals who would place a high value on knowing their customers and serving their distinctive banking needs.

The Bank was capitalized by more than 2,400 shareholders that wanted a new local bank. These investors provided the initial customer base and are
integral to the success of the Bank. Management believes that the key to the Banks success lies in providing Bank customers with personalized service while providing products and services that meet their banking needs.

The Banks principal office is located at 828 Main Street, Lynchburg, Virginia 24504 and its telephone number is (434) 846-2000. The Bank also
maintains a website at www.bankofthejames.com.

Financial declared a 10% stock dividend on May 15, 2007 which was paid on
July 24, 2007. Financial declared a 10% stock dividend on May 20, 2008 which was paid on July 22, 2008 to shareholders of record on June 17, 2008.

Investment Group was incorporated under the laws of the Commonwealth of Virginia in 2006. Effective April 4, 2006, Investment Group began providing securities brokerage services to Bank customers and others.
Investment Group 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, Investment Groups only center is located in the Church Street office. All centers will be staffed by a dual employee of Investment Group and CB Securities. Investment Group receives commissions on
transactions generated and in some cases ongoing management fees such as mutual fund 12b-1 fees. As of the date hereof, Investment Group has been conducting business for approximately two years and its financial impact on the consolidated financials
of the Company has been immaterial. In addition, Investment Group has purchased 4.96% of CBS Holdings, LLC for $10,000. CBS Holdings is owned by 11 financial institutions and currently has an option to purchase up to 10% of CB Securities.



11



---

##### Table of Contents

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 seven full
service offices: the main office located at 828 Main Street in Lynchburg (opened October 2004) (the Main Street Office), a branch located at 615 Church Street in Lynchburg (opened July 1999), a branch located at 5204 Fort Avenue in
Lynchburg (opened November 2000), a branch located on South Amherst Highway in Amherst County (the Madison Heights Branch) (opened June 2002), a branch located at 17000 Forest Road in Forest (the Forest Branch) (opened
February 2005); a branch located at 4935 Boonsboro Road, Suites C and D in Lynchburg (the Boonsboro Branch) (opened April 2006), a branch located at 164 South Main Street, Amherst, Virginia (the Amherst Branch) (opened
January 2007). 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 additional branch locations that the Bank currently is
considering.



| |  |  | City of Bedford, Virginia.The Bank has purchased certain property located in the City of Bedford, Virginia, located off of Independence Boulevard. The Bank
began constructing the improvements necessary to operate a bank branch location in March 2008. We anticipate completing construction and upfit in the early fourth quarter of 2008. Management has received approval from the Virginia Bureau of
Financial Institutions to open this branch and anticipates opening the branch in the fourth quarter of 2008.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Town of Altavista, Virginia. The Bank has purchased certain real property and improvements thereto located in the Town of Altavista, Virginia. Subject to
regulatory approval, the Bank anticipates that it will begin improving this property for use as a permanent bank branch in the fourth quarter of 2008 with a goal of opening the branch by the end of the first quarter of 2009. The Bank is determining
whether to renovate or replace the existing structure. The Bank is also evaluating whether to open a temporary location in Altavista, subject to regulatory approval. The Bank anticipates filing an application for approval with the Bureau of
Financial Institutions during the third or fourth quarter of 2008.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



12



---

##### Table of Contents

| |  |  | 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 has determined that the existing structures are insufficient for use as a bank branch. The Bank does not anticipate requesting approval to open a branch at this location prior to late 2009.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Bank estimates that the cost of improvements, furniture, fixtures, and equipment necessary to upfit these properties
will be between $1,300,000 and $1,700,000 per location. Subject to terms acceptable to the Bank, the Bank may consider entering into one or more sale-leaseback arrangements for these and other branches.

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.

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:



|                             |  |                             |       
|---------------------------- |  | --------------------------- | ------
|                             |  | June 30, 2008(in thousands)
|Commitments to extend credit |  | $                           | 45,498
|Letters of Credit            |  |                             | 2,931 
|                             |  |                             |       
|Total                        |  | $                           | 48,429
|                             |  |                             |       

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 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.



13



---

##### Table of Contents

SUMMARY OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion represents managements discussion and analysis of the financial condition and results of operations of Financial as of
June 30, 2008 and December 31, 2007 and for the three and six months ended June 30, 2008 and 2007. It should be read in conjunction with the financial statements included elsewhere herein and 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

June 30, 2008 as Compared to December 31, 2007

Total assets were $306,115,000 on June 30, 2008 compared with $270,060,000 at December 31, 2007. 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 Amherst Branch as well as the
continued growth of our Madison Heights Branch and Main Street Office contributed to this increase in deposits.

Total deposits grew from
$228,723,000 for the year ended December 31, 2007 to $239,057,000 on June 30, 2008, an increase of 4.52%. In addition, the Banks effort to increase non-FDIC insured sweep accounts (repurchase agreements) resulted in an increased
balance in these accounts to $14,146,000 on June 30, 2008 from $10,542,000 on December 31, 2007.

To complement deposits in
funding asset growth and due to the attractive rates on these funds, the Bank funded $21,000,000 of earning asset growth with short to medium term advances from the Federal Home Loan Bank of Atlanta (FHLBA).

Loans, net of unearned income and allowance, increased to $245,118,000 on June 30, 2008 from $224,022,000 on December 31, 2007, an increase of
9.42%. Total loans increased to $247,393,000 on June 30, 2008 from $226,168,000 on December 31, 2007. The following summarizes the position of the Banks loan portfolio as of the dates indicated by dollar amount and percentages
(dollar amounts in thousands):



|                         |  |               |         |            |                   |   |        |   |            |  |        |  
|------------------------ |  | ------------- | ------- | ---------- | ----------------- | - | ------ | - | ---------- |  | ------ | -
|                         |  | June 30, 2008 |         |            | December 31, 2007 |  
|                         |  | Amount        |         | Percentage |                   |   | Amount |   | Percentage | 
|Commercial               |  | $             | 47,038  |            | 19.01             | % |        | $ | 43,877     |  | 19.40  | %
|Real estate-construction |  |               | 42,188  |            | 17.05             | % |        |   | 36,296     |  | 16.05  | %
|Real estate-residential  |  |               | 121,138 |            | 48.97             | % |        |   | 114,278    |  | 50.53  | %
|Consumer                 |  |               | 35,793  |            | 14.47             | % |        |   | 31,717     |  | 14.02  | %
|Other                    |  |               | 1,236   |            | 0.50              | % |        |   |           |  |       |  
|                         |  |               |         |            |                   |   |        |   |            |  |        |  
|Total loans              |  | $             | 247,393 |            | 100.00            | % |        | $ | 226,168    |  | 100.00 | %
|                         |  |               |         |            |                   |   |        |   |            |  |        |  

Non-accrual loans increased to $2,316,000 on June 30, 2008 from $1,246,000 on
December 31, 2007. 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. We also classify other real
estate owned (OREO) as a non-performing asset. OREO represents real property owned by the Bank either through purchase at foreclosure or received from the borrower through a deed in lieu of foreclosure. On December 31, 2007, the Bank had no
OREO property. As of June 30, 2008, the Bank was carrying four OREO properties on its books at a value of $404,000. Since the end of the second quarter, the Bank has sold one of these properties for $146,000 with no loss to the Bank. The Bank
currently is trying to sell the remaining three OREO properties. The Bank anticipates that the gain or loss on the sale of these properties, if any, will not have a material impact on the Banks financial condition.



14



---

##### Table of Contents

The following tables set forth information regarding impaired and non-accrual loans as of June 30,
2008 and December 31, 2007:



|                                                             |  |                                                                        |        |                   |   |       
|------------------------------------------------------------ |  | ---------------------------------------------------------------------- | ------ | ----------------- | - | ------
|                                                             |  | Impaired & Non-Accrual Loans(dollars in thousands)                    
|                                                             |  | June 30, 2008                                                          |        | December 31, 2007
|Impaired loans without a valuation allowance                 |  | $                                                                      | 7,022  |                   | $ | 10,355
|Impaired loans with a valuation allowance                    |  |                                                                        | 7,750  |                   |   | 4,503 
|                                                             |  |                                                                        |        |                   |   |       
|Total impaired loans                                         |  | $                                                                      | 14,772 |                   | $ | 14,858
|                                                             |  |                                                                        |        |                   |   |       
|Valuation allowance related to impaired loans                |  | $                                                                      | 1,500  |                   | $ | 1,389 
|Total non-accrual loans                                      |  | $                                                                      | 2,316  |                   | $ | 1,246 
|Total loans past due ninety days or more and still accruing  |  | $                                                                      |       |                   | $ |      
|                                                             | 
|                                                             |  | Average Investment in Impaired Loans(dollars in
thousands)Period Ended
|                                                             |  | June 30, 2008                                                          |        | December 31, 2007
|Average investment in impaired loans                         |  | $                                                                      | 14,815 |                   | $ | 13,891
|                                                             |  |                                                                        |        |                   |   |       
|Interest income recognized on impaired loans                 |  | $                                                                      | 429    |                   | $ | 988   
|                                                             |  |                                                                        |        |                   |   |       
|Interest income recognized on a cash basis on impaired loans |  | $                                                                      | 429    |                   | $ | 988   
|                                                             |  |                                                                        |        |                   |   |       

No non-accrual loans were excluded from impaired loan disclosure under SFAS No. 114 at
June 30, 2008 and December 31, 2007. If interest on these loans had been accrued, such income would have approximated $122,000 and $88,000, on June 30, 2008 and December 31, 2007, respectively. Loan payments received on
non-accrual loans are applied to principal. When a loan is placed on non-accrual status there are several negative implications. First, all interest accrued but unpaid at the time of the classification is deducted from the interest income totals for
the Bank. Second, accruals of interest are discontinued until it becomes certain that both principal and interest can be repaid. Third, there may be actual losses that necessitate additional provisions for credit losses charged against earnings.
These loans were included in the non-performing loan totals listed above.

Cash and cash equivalents increased to $10,715,000 on
June 30, 2008 from $4,314,000 on December 31, 2007. Cash and cash equivalents consist of cash due from correspondents, cash in vault, and overnight investments (including federal funds sold). This increase 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 and the Bank does not consider
this change to be material.

Securities held-to-maturity decreased to $5,994,000 on June 30, 2008 from $6,494,000 on December 31,
2007, which resulted from the call of securities prior to maturity. Securities available-for-sale increased to $32,222,000 on June 30, 2008 from $25,733,000 on December 31, 2007. The increase from December 31, 2007 in securities
available-for-sale was primarily due to the investment of surplus funds in longer term, higher yielding securities.



15



---

##### Table of Contents

The following table summarizes the Banks holdings for both securities held-to-maturity and
securities available-for-sale as of June 30, 2008 and December 31, 2007 (amounts in thousands):



|                              |  |                |        |                   |          |     |           |   |        |   |  |   |       
|----------------------------- |  | -------------- | ------ | ----------------- | -------- | --- | --------- | - | ------ | - |  | - | ------
|                              |  |                |        | June 30, 2008     |          |     |          
|                              |  | AmortizedCosts |        | Gross Unrealized  |          |     | FairValue
|                              |  |                | Gains  |                   | (Losses) |     |          
|Held to Maturity              |  |                |        |                   |          |     |           |   |        |   |  |   |       
|US Govt & Agency obligations |  | $              | 5,994  |                   | $        | 41  |           | $ | (7     | ) |  | $ | 6,028 
|                              |  |                |        |                   |          |     |           |   |        |   |  |   |       
|Available for Sale            |  |                |        |                   |          |     |           |   |        |   |  |   |       
|US Govt & Agency obligations |  |                | 8,995  |                   |          | 26  |           |   | (69    | ) |  |   | 8,952 
|Mortgage-backed securities    |  |                | 18,988 |                   |          | 10  |           |   | (592   | ) |  |   | 18,406
|Municipals                    |  |                | 1,057  |                   |          |    |           |   | (27    | ) |  |   | 1,030 
|Corporates                    |  |                | 4,242  |                   |          |    |           |   | (408   | ) |  |   | 3,834 
|                              |  |                |        |                   |          |     |           |   |        |   |  |   |       
|                              |  | $              | 33,282 |                   | $        | 36  |           | $ | (1,096 | ) |  | $ | 32,222
|                              |  |                |        |                   |          |     |           |   |        |   |  |   |       
|                              |  |                |       
|                              |  |                |        | December 31, 2007 |          |     |          
|                              |  | AmortizedCosts |        | Gross Unrealized  |          |     | FairValue
|                              |  |                | Gains  |                   | (Losses) |     |          
|Held to Maturity              |  |                |        |                   |          |     |           |   |        |   |  |   |       
|US Govt & Agency obligations |  | $              | 6,494  |                   | $        | 32  |           | $ | (3     | ) |  | $ | 6,523 
|                              |  |                |        |                   |          |     |           |   |        |   |  |   |       
|Available for Sale            |  |                |        |                   |          |     |           |   |        |   |  |   |       
|US Govt & Agency obligations |  | $              | 14,954 |                   | $        |    |           | $ |       |   |  | $ | 15,083
|Mortgage-backed securities    |  |                | 4,764  |                   |          | 19  |           |   | (49    | ) |  |   | 4,734 
|Municipals                    |  |                | 2,547  |                   |          | 1   |           |   | (25    | ) |  |   | 2,523 
|Corporates                    |  |                | 3,478  |                   |          |    |           |   | (85    | ) |  |   | 3,393 
|                              |  |                |        |                   |          |     |           |   |        |   |  |   |       
|                              |  | $              | 25,743 |                   | $        | 149 |           | $ | (159   | ) |  | $ | 25,733
|                              |  |                |        |                   |          |     |           |   |        |   |  |   |       

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 (amounts in thousands):



|                                      |  |                     |        |                    |                     |      |           |       |                    |       |  |           |      |                    |  |   |        |  |   |        |  
|------------------------------------- |  | ------------------- | ------ | ------------------ | ------------------- | ---- | --------- | ----- | ------------------ | ----- |  | --------- | ---- | ------------------ |  | - | ------ |  | - | ------ | -
|                                      |  | Less than 12 months |        |                    | More than 12 months |      |           | Total |                   
|June 30, 2008                         |  | FairValue           |        | Unrealized(Losses) |                     |      | FairValue |       | Unrealized(Losses) |       |  | FairValue |      | Unrealized(Losses) | 
|Description of securities             |  |                     |        |                    |                     |      |           |       |                    |       |  |           |      |                    |  |   |        |  |   |        |  
|U.S. agency obligations               |  | $                   | 4,992  |                    | $                   | (76  | )         |       | $                  |      |  | $         |     |                    |  | $ | 4,992  |  | $ | (76    | )
|Mortgage-backed securities            |  |                     | 16,163 |                    |                     | (564 | )         |       |                    | 864   |  |           | (28  | )                  |  |   | 17,027 |  |   | (592   | )
|Municipals                            |  |                     | 717    |                    |                     | (22  | )         |       |                    | 340   |  |           | (5   | )                  |  |   | 1,057  |  |   | (27    | )
|Other                                 |  |                     | 487    |                    |                     | (108 | )         |       |                    | 3,755 |  |           | (300 | )                  |  |   | 4,242  |  |   | (408   | )
|                                      |  |                     |        |                    |                     |      |           |       |                    |       |  |           |      |                    |  |   |        |  |   |        |  
|Total temporarily impaired securities |  | $                   | 22,359 |                    | $                   | (770 | )         |       | $                  | 4,959 |  | $         | (333 | )                  |  | $ | 27,318 |  | $ | (1,103 | )
|                                      |  |                     |        |                    |                     |      |           |       |                    |       |  |           |      |                    |  |   |        |  |   |        |  



16



---

##### Table of Contents

|                                      |  |                     |       |                    |                     |      |           |       |                    |       |  |           |     |                    |  |   |        |  |   |      |  
|------------------------------------- |  | ------------------- | ----- | ------------------ | ------------------- | ---- | --------- | ----- | ------------------ | ----- |  | --------- | --- | ------------------ |  | - | ------ |  | - | ---- | -
|                                      |  | Less than 12 months |       |                    | More than 12 months |      |           | Total |                   
|December 31, 2007                     |  | FairValue           |       | Unrealized(Losses) |                     |      | FairValue |       | Unrealized(Losses) |       |  | FairValue |     | Unrealized(Losses) | 
|Description of securities             |  |                     |       |                    |                     |      |           |       |                    |       |  |           |     |                    |  |   |        |  |   |      |  
|U.S. agency obligations               |  | $                   |      |                    | $                   |     |           |       | $                  | 1,992 |  | $         | (3  | )                  |  | $ | 1,992  |  | $ | (3   | )
|Mortgage-backed securities            |  |                     | 1,001 |                    |                     | (18  | )         |       |                    | 1,569 |  |           | (31 | )                  |  |   | 2,570  |  |   | (49  | )
|Municipals                            |  |                     | 1,684 |                    |                     | (24  | )         |       |                    | 497   |  |           | (1  | )                  |  |   | 2,181  |  |   | (25  | )
|Other                                 |  |                     | 3,393 |                    |                     | (85  | )         |       |                    |      |  |           |    |                    |  |   | 3,393  |  |   | (85  | )
|                                      |  |                     |       |                    |                     |      |           |       |                    |       |  |           |     |                    |  |   |        |  |   |      |  
|Total temporarily impaired securities |  | $                   | 6,078 |                    | $                   | (127 | )         |       | $                  | 4,058 |  | $         | (35 | )                  |  | $ | 10,136 |  | $ | (162 | )
|                                      |  |                     |       |                    |                     |      |           |       |                    |       |  |           |     |                    |  |   |        |  |   |      |  

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis,
and may do so more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and
near-term prospects of the issuer, and (3) the intent and ability of Financial to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

At June 30, 2008, the Company does not consider the unrealized losses as other-than-temporary losses due to the nature of the securities involved.
The Bank currently owns 22 securities that are being evaluated for other than temporary impairment. Thirteen of these securities are S&P rated AAA, four are S&P rated AA, and five are S&P rated A. Of these securities fifteen are
obligations of government sponsored entities, three are municipal bank-qualified issues, and four are issued by publicly traded United States corporations. For these reasons, management believes the default risk to be minimal. As management has the
ability to hold securities until maturity, or for the foreseeable future if classified as available-for-sale, no declines are deemed to be other than temporary.

At June 30, 2008, Financial had liquid assets of approximately $42,937,000 in the form of cash and available-for-sale investments. Management believes that liquid assets were adequate at June 30, 2008.
Management anticipates that additional liquidity will be provided by the growth in deposit accounts and loan repayments at the Bank. 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 June 30, 2008, the Bank had a
leverage ratio of 8.49%, a Tier 1 risk-based capital ratio of 10.21% and a total risk-based capital ratio of 11.14%. As of June 30, 2008 and December 31, 2007 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 June 30, 2008 and December 31, 2007:



17



---

##### Table of Contents

|                               |  |               |         |                   |   |        
|------------------------------ |  | ------------- | ------- | ----------------- | - | -------
|Analysis of Capital (in 000s) |  | June 30, 2008 |         | December 31, 2007
|Tier 1 Capital:                |  |               |         |                   |   |        
|Common stock                   |  | $             | 3,743   |                   | $ | 3,743  
|Surplus                        |  |               | 13,313  |                   |   | 13,311 
|Retained earnings              |  |               | 7,935   |                   |   | 6,981  
|                               |  |               |         |                   |   |        
|Total Tier 1 capital           |  | $             | 24,991  |                   | $ | 24,035 
|                               |  |               |         |                   |   |        
|Tier 2 Capital:                |  |               |         |                   |   |        
|Allowance for loan losses      |  |               | 2,275   |                   |   | 2,145  
|                               |  |              
|Total Tier 2 Capital:          |  |               | 2,275   |                   |   | 2,145  
|                               |  |               |         |                   |   |        
|Total risk-based capital       |  | $             | 27,266  |                   | $ | 26,180 
|                               |  |               |         |                   |   |        
|Risk weighted assets           |  | $             | 244,802 |                   | $ | 219,180
|                               |  |              
|Average total assets           |  | $             | 294,938 |                   | $ | 268,187



|                                                              |  |               |   |  |                       |   |  |                             |   |  |                             |  
|------------------------------------------------------------- |  | ------------- | - |  | --------------------- | - |  | --------------------------- | - |  | --------------------------- | -
|                                                              |  | Actual        |   |  | Regulatory Benchmarks |  
|Capital Ratios:                                               |  | June 30, 2008 |   |  | December 31, 2007     |   |  | For CapitalAdequacyPurposes |   |  | For WellCapitalizedPurposes |  
|Tier 1 capital to average total assets ratio (leverage ratio) |  | 8.49          | % |  | 8.96                  | % |  | 4.00                        | % |  | 5.00                        | %
|Tier 1 risk based capital ratio                               |  | 10.21         | % |  | 10.97                 | % |  | 4.00                        | % |  | 6.00                        | %
|Total risk-based capital ratio                                |  | 11.14         | % |  | 11.94                 | % |  | 8.00                        | % |  | 10.00                       | %

The above tables set forth the capital position and analysis for the Bank only. The capital ratios
for the Company on a consolidated basis are comparable to the capital ratios of the Bank.

Results of Operations

Comparison of the Three and Six Months Ended June 30, 2008 and 2007

Earnings Summary

Net income for the
three and six months ended June 30, 2008 was $524,000 and $1,028,000 respectively, compared to a net income of $498,000 and $896,000 for the same periods in 2007, an increase of 5.22% and 14.73%, respectively. Net income increased in large part
due to an increase in non-interest income and an increase in total earning assets.

Basic earnings per common share for the three and six
months ended June 30, 2008 were $0.19 and $0.37, respectively, compared with $0.18 and $0.32 for the same periods in 2007. Fully diluted earnings per common share for the three and six months ended June 30, 2008 were $0.18 and $0.35
compared with $0.17 and $0.30 for the same periods in 2007. All earnings per share amounts have been adjusted to reflect the 10% stock dividend paid by Financial in July 2007 and the 10% stock dividend to be paid in July 2008 as well as all prior
stock dividends.



18



---

##### Table of Contents

These operating results represent an annualized return on stockholders equity of 8.47% and 8.38%
for the three and six months ended June 30, 2008, respectively, compared with 8.83% and 8.09% for the same periods in 2007. The annualized return on average assets for the three and six months ended June 30, 2008 was 0.71% and 0.73%,
respectively, compared with 0.83% and 0.76% for the same periods in 2007.

Interest Income, Interest Expense, and Net Interest Income

Interest income increased to $4,627,000 and $9,177,000 for the three and six months ended June 30, 2008 from $4,298,000 and
$8,391,000 for the same periods in 2007, an increase of 7.65% and 9.37% respectively. These increases were due to an increase in interest earning assets, including loans and investment securities.

Interest expense increased to $1,998,000 and $3,983,000 for the three and six months ended June 30, 2008 from $1,899,000 and $3,684,000 for the same
periods in 2007, an increase of 5.21% and 8.12%, respectively. These increases in interest expense were primarily due to an increase in the aggregate balance in interest bearing deposit accounts, including the recently-introduced 2010 Savings
Account that will pay customers a minimum annual percentage yield of 3.00% through February 2010. The increase was partially offset by a decrease in rates paid on all other deposit accounts, including new and maturing certificates of deposit.

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 six months ended June 30, 2008 was $2,629,000 and $5,194,000, respectively compared with $2,399,000 and $4,707,000 for the same periods in 2007. The net interest margin decreased to 3.77% and
3.88% for the three and six months ended June 30, 2008, respectively, from 4.21% and 4.22% in the same periods a year ago. The growth in net interest income for the three and six months ended June 30, 2008 as compared with the comparable
three and six months in 2007 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 contributed to the decrease in the net interest margin.

Financials net interest margin analysis and average
balance sheets are shown in Schedule I on page 21.

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 and the Banks ownership interest in a title insurance agency, increased to $801,000 and $1,540,000 for the three and six month periods ended June 30, 2008, from $698,000 and $1,331,000 for the comparable periods in
2007. These 14.76% and 15.70% increases, respectively, were due in large part to increased in commissions earned by Investment Group.

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. The Mortgage Division assumes no credit or interest rate risk on these
mortgages. In July, 2005, the



19



---

##### Table of Contents

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 2008.

We anticipate that Investment Group and the
Mortgage Division will continue to contribute additional non-interest income in the remainder of 2008.

Non-Interest Expense

Non-interest expense for the three and six months ended June 30, 2008 increased to $2,512,000 and $4,951,000 from $2,247,000 and
$4,433,000 for the comparable periods in 2007. These 11.79% and 11.69% increases in non-interest expense from the prior comparable periods can be attributed to increased occupancy expenses, along with an increase in personnel expense. Total
personnel expense increased to $1,288,000 and $2,569,000 for the three and six month periods ended June 30, 2008, from $1,204,000 and $2,391,000 for the comparable periods in 2007. Compensation for some employees of the Mortgage Division and
Investment Group is commission-based and therefore subject to fluctuation. The Bank also had increases in depreciation expense, data processing fees, and other operating expenses, all of which are related to the growth of the Bank.

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 $130,000 and $255,000 to the allowance for
loan loss for the three and six months ended June 30, 2008 compared to provisions of $94,000 and $245,000 for the comparable periods in 2007. Management believes that the current allowance for loan loss of $2,275,000 (or 0.92% of total loans)
at June 30, 2008 is adequate.

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



|                                |  |                                  |       |   |                                |   |       |              |  |   |              |   |  |   |       |  
|------------------------------- |  | -------------------------------- | ----- | - | ------------------------------ | - | ----- | ------------ |  | - | ------------ | - |  | - | ----- | -
|                                |  | Three months ended(in thousands) |       |   | Six months ended(in
thousands) |  
|                                |  | June 30,2008                     |       |   | June 30,2007                   |   |       | June 30,2008 |  |   | June 30,2007 |  
|Balance, beginning of period    |  | $                                | 2,244 |   |                                | $ | 2,179 |              |  | $ | 2,146        |   |  | $ | 2,091 |  
|Provision for loan losses       |  |                                  | 130   |   |                                |   | 94    |              |  |   | 255          |   |  |   | 245   |  
|Loans charged off               |  |                                  | (112  | ) |                                |   | (107  | )            |  |   | (149         | ) |  |   | (175  | )
|Recoveries of loans charged off |  |                                  | 13    |   |                                |   | 10    |              |  |   | 23           |   |  |   | 15    |  
|                                |  |                                  |       |   |                                |   |       |              |  |   |              |   |  |   |       |  
|Balance, end of period          |  | $                                | 2,275 |   |                                | $ | 2,176 |              |  | $ | 2,275        |   |  | $ | 2,176 |  
|                                |  |                                  |       |   |                                |   |       |              |  |   |              |   |  |   |       |  

Income Taxes

For the three and six months ended June 30, 2008, Financial had an income tax expense of $264,000 and $500,000, respectively. Based on its 2007 income tax liability, Financial made an income tax payment of
$553,000 during the quarter ended June 30, 2008.



20



---

##### Table of Contents

Schedule I

Net Interest Margin Analysis

Average Balance Sheets

For the Three Months Ended June 30, 2008 and 2007



|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|----------------------------------------- |  | ------------------- | ------- | - | ---------------------- | - | ----------------------- |  | ---- | ------------------- |  | - | ---------------------- | - | ----------------------- | - | ----- |  | ---- | -
|                                          |  | 2008                |         |   | 2007                   |  
|                                          |  | AverageBalanceSheet |         |   | InterestIncome/Expense |   | AverageRatesEarned/Paid |  |      | AverageBalanceSheet |  |   | InterestIncome/Expense |   | AverageRatesEarned/Paid |  
|ASSETS                                    |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|                                          |  |                     |         |   |                        |  
|Loans, including fees                     |  | $                   | 238,770 |   |                        | $ | 4,068                   |  | 6.83 | %                   |  | $ | 201,737                |   |                         | $ | 3,962 |  | 7.88 | %
|Federal funds sold                        |  |                     | 1,690   |   |                        |   | 9                       |  | 2.14 | %                   |  |   | 889                    |   |                         |   | 12    |  | 5.41 | %
|Securities                                |  |                     | 37,237  |   |                        |   | 505                     |  | 5.45 | %                   |  |   | 25,005                 |   |                         |   | 307   |  | 4.92 | %
|Federal agency equities                   |  |                     | 1,866   |   |                        |   | 45                      |  | 9.67 | %                   |  |   | 780                    |   |                         |   | 17    |  | 8.74 | %
|CBB equity                                |  |                     | 56      |   |                        |   |                        |  |     |                     |  |   | 56                     |   |                         |   |      |  |     |  
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Total earning assets                      |  |                     | 279,619 |   |                        |   | 4,627                   |  | 6.64 | %                   |  |   | 228,467                |   |                         |   | 4,298 |  | 7.55 | %
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Allowance for loan losses                 |  |                     | (2,260  | ) |                        |   |                         |  |      |                     |  |   | (2,197                 | ) |                         |   |       |  |      |  
|Non-earning assets                        |  |                     | 17,579  |   |                        |   |                         |  |      |                     |  |   | 14,838                 |   |                         |   |       |  |      |  
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Total assets                              |  | $                   | 294,938 |   |                        |   |                         |  |      |                     |  | $ | 241,108                |   |                         |   |       |  |      |  
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|LIABILITIES AND STOCKHOLDERS EQUITY      |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|                                          |  |                     |         |   |                        |  
|Deposits                                  |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Demand interest bearing                   |  | $                   | 39,601  |   |                        | $ | 152                     |  | 1.54 | %                   |  | $ | 42,816                 |   |                         | $ | 296   |  | 2.77 | %
|Savings                                   |  |                     | 32,606  |   |                        |   | 197                     |  | 2.42 | %                   |  |   | 13,032                 |   |                         |   | 55    |  | 1.69 | %
|Time deposits                             |  |                     | 129,873 |   |                        |   | 1,433                   |  | 4.43 | %                   |  |   | 120,278                |   |                         |   | 1,463 |  | 4.88 | %
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Total interest bearing deposits           |  |                     | 202,080 |   |                        |   | 1,782                   |  | 3.54 | %                   |  |   | 176,126                |   |                         |   | 1,814 |  | 4.13 | %
|                                          |  |                     |         |   |                        |  
|Other borrowed funds                      |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Fed funds purchased                       |  |                     | 714     |   |                        |   | 4                       |  | 2.25 | %                   |  |   | 893                    |   |                         |   | 13    |  | 5.84 | %
|Repurchase agreements                     |  |                     | 12,790  |   |                        |   | 76                      |  | 2.38 | %                   |  |   | 9,225                  |   |                         |   | 72    |  | 3.13 | %
|Other borrowings                          |  |                     | 19,325  |   |                        |   | 136                     |  | 2.82 | %                   |  |   |                       |   |                         |   |      |  |     |  
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Total interest-bearing liabilities        |  |                     | 234,909 |   |                        |   | 1,998                   |  | 3.41 | %                   |  |   | 186,244                |   |                         |   | 1,899 |  | 4.09 | %
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Non-interest bearing deposits             |  |                     | 34,680  |   |                        |   |                         |  |      |                     |  |   | 31,905                 |   |                         |   |       |  |      |  
|Other liabilities                         |  |                     | 664     |   |                        |   |                         |  |      |                     |  |   | 500                    |   |                         |   |       |  |      |  
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Total liabilities                         |  |                     | 270,253 |   |                        |   |                         |  |      |                     |  |   | 218,649                |   |                         |   |       |  |      |  
|                                          |  |                     |         |   |                        |  
|Stockholders equity                      |  |                     | 24,685  |   |                        |   |                         |  |      |                     |  |   | 22,459                 |   |                         |   |       |  |      |  
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Total liabilities and Stockholders equity |  | $                   | 294,938 |   |                        |   |                         |  |      |                     |  | $ | 241,108                |   |                         |   |       |  |      |  
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Net interest earnings                     |  |                     |         |   |                        | $ | 2,629                   |  |      |                     |  |   |                        |   |                         | $ | 2,399 |  |      |  
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Net interest margin                       |  |                     |         |   |                        |   |                         |  | 3.77 | %                   |  |   |                        |   |                         |   |       |  | 4.21 | %
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Interest spread                           |  |                     |         |   |                        |   |                         |  | 3.23 | %                   |  |   |                        |   |                         |   |       |  | 3.46 | %
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  



21



---

##### Table of Contents

Net Interest Margin Analysis

Average Balance Sheets

For the Six Months Ended June 30, 2008 and 2007



|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|----------------------------------------- |  | ------------------- | ------- | - | ---------------------- | - | ----------------------- |  | ---- | ------------------- |  | - | ---------------------- | - | ----------------------- | - | ----- |  | ---- | -
|                                          |  | 2008                |         |   | 2007                   |  
|                                          |  | AverageBalanceSheet |         |   | InterestIncome/Expense |   | AverageRatesEarned/Paid |  |      | AverageBalanceSheet |  |   | InterestIncome/Expense |   | AverageRatesEarned/Paid |  
|ASSETS                                    |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|                                          |  |                     |         |   |                        |  
|Loans, including fees                     |  | $                   | 234,061 |   |                        | $ | 8,225                   |  | 7.09 | %                   |  | $ | 198,415                |   |                         | $ | 7,737 |  | 7.86 | %
|Federal funds sold                        |  |                     | 1,424   |   |                        |   | 18                      |  | 2.55 | %                   |  |   | 494                    |   |                         |   | 14    |  | 5.71 | %
|Securities                                |  |                     | 32,756  |   |                        |   | 889                     |  | 5.47 | %                   |  |   | 25,297                 |   |                         |   | 617   |  | 4.92 | %
|Federal agency equities                   |  |                     | 1,539   |   |                        |   | 45                      |  | 5.90 | %                   |  |   | 762                    |   |                         |   | 23    |  | 6.09 | %
|CBB equity                                |  |                     | 56      |   |                        |   |                        |  |     |                     |  |   | 56                     |   |                         |   |      |  |     |  
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Total earning assets                      |  |                     | 269,836 |   |                        |   | 9,177                   |  | 6.86 | %                   |  |   | 225,024                |   |                         |   | 8,391 |  | 7.52 | %
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Allowance for loan losses                 |  |                     | (2,226  | ) |                        |   |                         |  |      |                     |  |   | (2,157                 | ) |                         |   |       |  |      |  
|Non-earning assets                        |  |                     | 15,894  |   |                        |   |                         |  |      |                     |  |   | 14,571                 |   |                         |   |       |  |      |  
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Total assets                              |  | $                   | 283,504 |   |                        |   |                         |  |      |                     |  | $ | 237,438                |   |                         |   |       |  |      |  
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|LIABILITIES AND STOCKHOLDERS EQUITY      |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|                                          |  |                     |         |   |                        |  
|Deposits                                  |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Demand interest bearing                   |  | $                   | 41,889  |   |                        | $ | 350                     |  | 1.68 | %                   |  | $ | 41,905                 |   |                         | $ | 572   |  | 2.75 | %
|Savings                                   |  |                     | 22,315  |   |                        |   | 238                     |  | 2.15 | %                   |  |   | 13,738                 |   |                         |   | 115   |  | 1.69 | %
|Time deposits                             |  |                     | 132,400 |   |                        |   | 3,012                   |  | 4.59 | %                   |  |   | 116,198                |   |                         |   | 2,784 |  | 4.83 | %
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Total interest bearing deposits           |  |                     | 196,604 |   |                        |   | 3,600                   |  | 3.69 | %                   |  |   | 171,841                |   |                         |   | 3,471 |  | 4.07 | %
|Other borrowed funds                      |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Fed funds purchased                       |  |                     | 2,409   |   |                        |   | 49                      |  | 4.08 | %                   |  |   | 2,826                  |   |                         |   | 83    |  | 5.92 | %
|Repurchase agreements                     |  |                     | 12,065  |   |                        |   | 157                     |  | 2.61 | %                   |  |   | 8,546                  |   |                         |   | 130   |  | 3.07 | %
|Other borrowings                          |  |                     | 13,274  |   |                        |   | 177                     |  | 2.67 | %                   |  |   |                       |   |                         |   |      |  |     |  
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Total interest-bearing liabilities        |  |                     | 224,352 |   |                        |   | 3,983                   |  | 3.56 | %                   |  |   | 183,213                |   |                         |   | 3,684 |  | 4.05 | %
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Non-interest bearing deposits             |  |                     | 33,983  |   |                        |   |                         |  |      |                     |  |   | 32,233                 |   |                         |   |       |  |      |  
|Other liabilities                         |  |                     | 702     |   |                        |   |                         |  |      |                     |  |   | 621                    |   |                         |   |       |  |      |  
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Total liabilities                         |  |                     | 259,037 |   |                        |   |                         |  |      |                     |  |   | 216,067                |   |                         |   |       |  |      |  
|Stockholders equity                      |  |                     | 24,467  |   |                        |   |                         |  |      |                     |  |   | 21,371                 |   |                         |   |       |  |      |  
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Total liabilities and Stockholders equity |  | $                   | 283,504 |   |                        |   |                         |  |      |                     |  | $ | 237,438                |   |                         |   |       |  |      |  
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Net interest earnings                     |  |                     |         |   |                        | $ | 5,194                   |  |      |                     |  |   |                        |   |                         | $ | 4,707 |  |      |  
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Net interest margin                       |  |                     |         |   |                        |   |                         |  | 3.88 | %                   |  |   |                        |   |                         |   |       |  | 4.22 | %
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Interest spread                           |  |                     |         |   |                        |   |                         |  | 3.30 | %                   |  |   |                        |   |                         |   |       |  | 3.46 | %
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  



22



---

##### Table of Contents

|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

Not applicable.



|Item 4. | Controls and Procedures
|------- | -----------------------

EVALUATION OF
DISCLOSURE CONTROLS AND PROCEDURES

Financials management, including Financials principal executive officer and principal
financial officer, have evaluated the effectiveness of the Companys disclosure controls and procedures, as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the
Exchange Act). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, Financials disclosure controls and procedures were
effective for the purpose of ensuring that the information required to be disclosed in the reports that Financial files or submits under the Exchange Act with the Securities and Exchange Commission (the SEC) (1) is recorded,
processed, summarized and reported within the time periods specified in the SECs rules and forms, and (2) is accumulated and communicated to the Companys management, including its principal executive and principal financial
officers, as appropriate to allow timely decisions regarding required disclosure.

There have been no significant changes during the
quarter ended June 30, 2008, in the Companys internal controls over financial reporting (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) or in other factors that could have significantly affected those
controls subsequent to the date of our most recent evaluation of internal controls over financial reporting, including any corrective actions with regard to significant deficiencies and material weaknesses.

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 1A. | Risk Factors
|-------- | ------------

There have been no material changes
from the risk factors disclosed in the Companys Annual Report on Form 10-K for the year ended December 31, 2007, as filed with the SEC on March 26, 2008.



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

Stock Repurchases

On October 1, 2007 the Board of Directors of Financial authorized a stock repurchase program which
allows for the repurchase of up to 27,500 (split adjusted) shares of its common stock. The shares reported in the table as shares that may be repurchased under the plan represent shares eligible through the term of the plan. The repurchases are to
be made from time to time in the open market as conditions allow and will be structured to comply with SEC Rule 10b-18. Management reports monthly to the Board of Directors on the status of the repurchase program. The Board of Directors has reserved
the right to suspend, terminate, modify or cancel this repurchase program at any time for any reason. The following table lists shares repurchased during the quarter ended June 30, 2008 and the maximum amount available to repurchase under the
repurchase plan.



23



---

##### Table of Contents

|                                        |  |                               |  |                                 |  |                                                                              |  |                                                                          
|--------------------------------------- |  | ----------------------------- |  | ------------------------------- |  | ---------------------------------------------------------------------------- |  | -------------------------------------------------------------------------
|Period                                  |  | TotalNumber ofSharesPurchased |  | Average Price PaidPer Share ($) |  | Total Number ofShares Purchasedas Part of PubliclyAnnounced Plansor
Programs |  | Maximum Numberof Shares ThatMay Yet BePurchased Underthe Plans orPrograms
|Month # 1 April 1through April 30, 2008 |  | 210                           |  | 11.36                           |  | 6,207                                                                        |  | 21,293                                                                   
|Month # 2 May 1 through May 31, 2008    |  | 198                           |  | 14.27                           |  | 6,417                                                                        |  | 21,083                                                                   
|Month # 3 June 1 through June 30, 2008  |  |                              |  |                                |  |                                                                             |  | 21,083                                                                   
|                                        |  |                               |  |                                 |  |                                                                              |  |                                                                          
|Total                                   |  | 407                           |  | 12.78                           |  | 6,616                                                                        |  | 20,884                                                                   

All share totals reflect the 10% stock dividend declared on May 20, 2008 and paid on July 22, 2008 to
shareholders of record on June 17, 2008.



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------

Not applicable



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

(a) The Bank held its annual meeting of shareholders on May 20, 2008 at 4:00 p.m. in Lynchburg, Virginia.

(b) At the annual
meeting, the shareholders elected the following directors:

Robert R. Chapman III

Donna Schewel Clark

Augustus A. Petticolas,
Jr.

Richard R. Zechini

The
terms of the following directors continued after the term of the meeting:

Lewis C. Addision

William C. Bryant III

James F. Daly

Donald M. Giles

Watt R.
Foster, Jr.

Thomas W. Pettyjohn, Jr.

J. Todd Scruggs

Kenneth S. White

(c) In addition to the election of the Directors at the annual meeting, the shareholders voted on the following matter: ratify the selection by the Company of Yount, Hyde & Barbour, P.C., independent public
accountants, to audit the financial statements of the Company for the fiscal year ending on December 31, 2008 (Proposal Two).



24



---

##### Table of Contents

At the annual meeting, the number of votes for, against or withheld, as well as the number of abstentions
and broker non-votes, as to each such matter was as follows:

Proposal OneElection of Directors



|                            |  |                        |  |                       |  |                      |  |                         
|--------------------------- |  | ---------------------- |  | --------------------- |  | -------------------- |  | ------------------------
|Name                        |  | Numberof VotesCast
For |  | Number ofVotesAgainst |  | Number ofAbstentions |  | Number ofBrokerNon-Votes
|Robert R. Chapman III       |  | 1,742,520              |  |                      |  | 3,850                |  |                        
|Donna Schewel Clark         |  | 1,741,112              |  |                      |  | 5,258                |  |                        
|Augustus A. Petticolas, Jr. |  | 1,740,479              |  |                      |  | 5,891                |  |                        
|Richard R. Zechini          |  | 1,736,350              |  |                      |  | 10,020               |  |                        

Proposal TwoRatification of Auditors



|                       |  |                       |  |                      |  |                          
|---------------------- |  | --------------------- |  | -------------------- |  | -------------------------
|Numberof VotesCast For |  | Number ofVotesAgainst |  | Number ofAbstentions |  | Number ofBroker Non-Votes
|1,691,550              |  | 51,970                |  | 2,850                |  |                         



|(d) | Not applicable.
|--- | ---------------



|Item 5. | Other Information
|------- | -----------------

Not applicable.



|Item 6. | Exhibits
|------- | --------

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



|            |  |                                                                                                                                              
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|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 August 13, 2008                      
|            | 
|31.2        |  | Certification of J. Todd Scruggs Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 13 2008                                
|            | 
|32.1        |  | Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002, dated August 13, 2008



25



---

##### 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: August 13, 2008 |  | By                                      |  | /S/ Robert R. Chapman III                                     
|                      |  |                                         |  | Robert R. Chapman III, President                              
|                      |  |                                         |  | (Principal Executive Officer)                                 
|                      |  |                                        
|Date: August 13, 2008 |  | By                                      |  | /S/ J. Todd Scruggs                                           
|                      |  |                                         |  | J. Todd Scruggs, Secretary and Treasurer                      
|                      |  |                                         |  | (Principal Financial Officer and Principal Accounting Officer)



26



---

##### 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 August 13, 2008                      
|            | 
|31.2        |  | Certification of J. Todd Scruggs Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 13, 2008                            
|            | 
|32.1        |  | Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002, dated August 13, 2008



27