##### Table of Contents

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Form 10-QSB



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Quarterly Report Pursuant
to Section 13 or 15(d)

of the Securities Exchange Act of 1934



For the Quarterly Period Ended September 30, 2005



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BANK OF THE JAMES FINANCIAL GROUP, INC.

(Name of Small Business Issuer in Its Charter)



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



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



(434) 846-2000

(Registrants telephone number, including area code)



---



Check whether
the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.    Yes  x    No ̈



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



APPLICABLE ONLY TO CORPORATE ISSUERS



State the
number of shares outstanding of each of the issuers classes of common equity, as of the latest practicable date: 1,601,047 shares of Common Stock, par value $2.67 per share, were outstanding at November 9, 2005.



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



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##### Table of Contents

TABLE OF CONTENTS



|                                                                    |  |   
|------------------------------------------------------------------- |  | --
|PART 1 
FINANCIAL INFORMATION                                      |  | 3 
|                                                                    | 
|Item 1 
Financial Statements                                       |  | 3 
|                                                                    | 
|Item 2.
Managements Discussion and Analysis or Plan of Operation   |  | 9 
|                                                                    | 
|Item 3.
Controls and Procedures                                     |  | 17
|                                                                    | 
|PART II 
OTHER INFORMATION                                         |  | 17
|                                                                    | 
|Item 1.
Legal Proceedings                                           |  | 17
|                                                                    | 
|Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds |  | 17
|                                                                    | 
|Item 3.
Defaults Upon Senior Securities                             |  | 17
|                                                                    | 
|Item 4.
Submission of Matters to a Vote of Security Holders         |  | 17
|                                                                    | 
|Item 5.
Other Information                                           |  | 18
|                                                                    | 
|Item 6.
Exhibits                                                    |  | 18
|                                                                    | 
|SIGNATURES                                                          |  | 18



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##### Table of Contents

PART 1  FINANCIAL INFORMATION



Item 1  Financial Statements



Bank of the
James Financial Group, Inc.

Consolidated Balance Sheets

(dollar amounts in thousands)



|                                                                                                                                                                          |  |                       |         |   |                      |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------- | ------- | - | -------------------- | - | ------- | -
|                                                                                                                                                                          |  | As of                 |        
|                                                                                                                                                                          |  | 9/30/2005 (unaudited) |         |   | 12/31/2004 (audited) |  
|Assets                                                                                                                                                                    |  |                       |         |   |                      |   |         |  
|                                                                                                                                                                          |  |                      
|Cash and due from banks                                                                                                                                                   |  | $                     | 5,551   |   |                      | $ | 3,980   |  
|Federal funds sold                                                                                                                                                        |  |                       |        |   |                      |   |        |  
|                                                                                                                                                                          |  |                       |         |   |                      |   |         |  
|Total cash and cash equivalents                                                                                                                                           |  |                       | 5,551   |   |                      |   | 3,980   |  
|                                                                                                                                                                          |  |                       |         |   |                      |   |         |  
|Securities held-to-maturity, at amortized cost                                                                                                                            |  |                       | 8,501   |   |                      |   | 8,999   |  
|Securities available-for-sale, at fair value                                                                                                                              |  |                       | 16,763  |   |                      |   | 10,912  |  
|Loans, net                                                                                                                                                                |  |                       | 153,789 |   |                      |   | 140,272 |  
|Premises and equipment, net                                                                                                                                               |  |                       | 4,502   |   |                      |   | 4,641   |  
|Community Bankers Bank stock                                                                                                                                             |  |                       | 56      |   |                      |   | 56      |  
|Federal Reserve Bank stock                                                                                                                                                |  |                       | 281     |   |                      |   | 281     |  
|Federal Home Loan Bank stock                                                                                                                                              |  |                       | 342     |   |                      |   | 290     |  
|Interest receivable                                                                                                                                                       |  |                       | 947     |   |                      |   | 983     |  
|Deferred tax asset                                                                                                                                                        |  |                       | 189     |   |                      |   | 117     |  
|Other assets                                                                                                                                                              |  |                       | 252     |   |                      |   | 494     |  
|                                                                                                                                                                          |  |                       |         |   |                      |   |         |  
|Total Assets                                                                                                                                                              |  | $                     | 191,173 |   |                      | $ | 171,025 |  
|                                                                                                                                                                          |  |                       |         |   |                      |   |         |  
|Liabilities and Stockholders Equity                                                                                                                                      |  |                       |         |   |                      |   |         |  
|                                                                                                                                                                          |  |                      
|Deposits                                                                                                                                                                  |  |                       |         |   |                      |   |         |  
|Noninterest bearing demand                                                                                                                                                |  |                       | 27,780  |   |                      |   | 21,699  |  
|NOW, money market and savings                                                                                                                                             |  |                       | 60,015  |   |                      |   | 74,834  |  
|Time                                                                                                                                                                      |  |                       | 82,560  |   |                      |   | 57,301  |  
|                                                                                                                                                                          |  |                       |         |   |                      |   |         |  
|Total deposits                                                                                                                                                            |  |                       | 170,355 |   |                      |   | 153,834 |  
|                                                                                                                                                                          |  |                      
|Federal funds purchased                                                                                                                                                   |  |                       | 575     |   |                      |   | 999     |  
|                                                                                                                                                                          |  |                      
|Income taxes payable                                                                                                                                                      |  |                       | 54      |   |                      |   |        |  
|Interest payable                                                                                                                                                          |  |                       | 106     |   |                      |   | 65      |  
|Repurchase agreements                                                                                                                                                     |  |                       | 5,751   |   |                      |   | 3,259   |  
|Other liabilities                                                                                                                                                         |  |                       | 132     |   |                      |   | 82      |  
|                                                                                                                                                                          |  |                       |         |   |                      |   |         |  
|Total liabilities                                                                                                                                                         |  | $                     | 176,973 |   |                      | $ | 158,239 |  
|                                                                                                                                                                          |  |                       |         |   |                      |   |         |  
|Stockholders equity                                                                                                                                                      |  |                       |         |   |                      |   |         |  
|Common stock $2.67 par value; authorized 10,000,000 shares; issued and outstanding 1,601,047 shares as of September 30, 2005 and
1,548,958 shares as of December 31, 2004 |  |                       | 4,269   |   |                      |   | 4,129   |  
|Additional paid-in-capital                                                                                                                                                |  |                       | 7,424   |   |                      |   | 7,237   |  
|Accumulated other comprehensive income                                                                                                                                    |  |                       | (182    | ) |                      |   | (13     | )
|Retained earnings                                                                                                                                                         |  |                       | 2,689   |   |                      |   | 1,433   |  
|                                                                                                                                                                          |  |                       |         |   |                      |   |         |  
|Total stockholders equity                                                                                                                                                |  | $                     | 14,200  |   |                      | $ | 12,786  |  
|                                                                                                                                                                          |  |                       |         |   |                      |   |         |  
|Total liabilities and stockholders equity                                                                                                                                |  | $                     | 191,173 |   |                      | $ | 171,025 |  
|                                                                                                                                                                          |  |                       |         |   |                      |   |         |  



See accompanying notes
to these consolidated financial statements



3



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##### Table of Contents

Bank of the James Financial Group, Inc.

Consolidated Statements of Operation Year-to-Date

(dollar amounts in thousands) (unaudited)



|                                                    |  |                                          |       |   |                                         |   |       |      |  |   |       |   |  |   |       |  
|--------------------------------------------------- |  | ---------------------------------------- | ----- | - | --------------------------------------- | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                                    |  | For the Three Months Ended September 30, |       |   | For the Nine Months Ended September 30, |  
|                                                    |  | 2005                                     |       |   | 2004                                    |   |       | 2005 |  |   | 2004  |  
|Interest Income                                     |  |                                          |       |   |                                         |   |       |      |  |   |       |   |  |   |       |  
|Loans                                               |  | $                                        | 2,844 |   |                                         | $ | 2,148 |      |  | $ | 7,914 |   |  | $ | 6,122 |  
|Federal funds sold                                  |  |                                          | 19    |   |                                         |   | 9     |      |  |   | 45    |   |  |   | 39    |  
|Securities                                          |  |                                          |       |   |                                         |   |       |      |  |   |       |   |  |   |       |  
|US Government and agency obligations                |  |                                          | 253   |   |                                         |   | 232   |      |  |   | 689   |   |  |   | 576   |  
|Other                                               |  |                                          | 31    |   |                                         |   | 18    |      |  |   | 80    |   |  |   | 58    |  
|                                                    |  |                                          |       |   |                                         |   |       |      |  |   |       |   |  |   |       |  
|Total interest income                               |  |                                          | 3,147 |   |                                         |   | 2,407 |      |  |   | 8,728 |   |  |   | 6,795 |  
|                                                    |  |                                          |       |   |                                         |   |       |      |  |   |       |   |  |   |       |  
|Interest Expense                                    |  |                                          |       |   |                                         |   |       |      |  |   |       |   |  |   |       |  
|Federal funds purchased                             |  |                                          | 5     |   |                                         |   |      |      |  |   | 15    |   |  |   |      |  
|Reverse repurchase agreements                       |  |                                          | 27    |   |                                         |   | 9     |      |  |   | 53    |   |  |   | 18    |  
|Deposits                                            |  |                                          |       |   |                                         |   |       |      |  |   |       |   |  |   |       |  
|NOW, money market savings                           |  |                                          | 265   |   |                                         |   | 260   |      |  |   | 830   |   |  |   | 610   |  
|Time deposits                                       |  |                                          | 708   |   |                                         |   | 372   |      |  |   | 1,757 |   |  |   | 1,189 |  
|                                                    |  |                                          |       |   |                                         |   |       |      |  |   |       |   |  |   |       |  
|Total interest expense                              |  |                                          | 1,005 |   |                                         |   | 641   |      |  |   | 2,655 |   |  |   | 1,817 |  
|                                                    |  |                                          |       |   |                                         |   |       |      |  |   |       |   |  |   |       |  
|Net interest income                                 |  |                                          | 2,142 |   |                                         |   | 1,766 |      |  |   | 6,073 |   |  |   | 4,978 |  
|                                                    |  |                                          |       |  
|Provision for loan losses                           |  |                                          | 255   |   |                                         |   | 503   |      |  |   | 629   |   |  |   | 634   |  
|                                                    |  |                                          |       |   |                                         |   |       |      |  |   |       |   |  |   |       |  
|Net interest income after provision for loan losses |  |                                          | 1,887 |   |                                         |   | 1,263 |      |  |   | 5,444 |   |  |   | 4,344 |  
|                                                    |  |                                          |       |   |                                         |   |       |      |  |   |       |   |  |   |       |  
|Other operating income                              |  |                                          |       |   |                                         |   |       |      |  |   |       |   |  |   |       |  
|Service charges, fees, commissions                  |  |                                          | 590   |   |                                         |   | 528   |      |  |   | 1,600 |   |  |   | 1,306 |  
|Gain on sale of securities                          |  |                                          | 4     |   |                                         |   |      |      |  |   | 10    |   |  |   |      |  
|                                                    |  |                                          |       |   |                                         |   |       |      |  |   |       |   |  |   |       |  
|Total other operating income                        |  |                                          | 594   |   |                                         |   | 528   |      |  |   | 1,610 |   |  |   | 1,306 |  
|                                                    |  |                                          |       |  
|Other operating expenses                            |  |                                          |       |   |                                         |   |       |      |  |   |       |   |  |   |       |  
|Salaries and employee benefits                      |  |                                          | 831   |   |                                         |   | 657   |      |  |   | 2,443 |   |  |   | 1,845 |  
|Occupancy                                           |  |                                          | 133   |   |                                         |   | 98    |      |  |   | 383   |   |  |   | 259   |  
|Equipment                                           |  |                                          | 200   |   |                                         |   | 191   |      |  |   | 582   |   |  |   | 547   |  
|Supplies                                            |  |                                          | 74    |   |                                         |   | 68    |      |  |   | 212   |   |  |   | 204   |  
|Outside expenses                                    |  |                                          | 198   |   |                                         |   | 211   |      |  |   | 638   |   |  |   | 617   |  
|Marketing                                           |  |                                          | 57    |   |                                         |   | 52    |      |  |   | 203   |   |  |   | 187   |  
|Credit expense                                      |  |                                          | 57    |   |                                         |   | 57    |      |  |   | 163   |   |  |   | 123   |  
|Other                                               |  |                                          | 176   |   |                                         |   | 152   |      |  |   | 438   |   |  |   | 382   |  
|Sarbanes-Oxley compliance                           |  |                                          | 17    |   |                                         |   |      |      |  |   | 92    |   |  |   |      |  
|                                                    |  |                                          |       |   |                                         |   |       |      |  |   |       |   |  |   |       |  
|Total other operating expenses                      |  |                                          | 1,743 |   |                                         |   | 1,486 |      |  |   | 5,154 |   |  |   | 4,164 |  
|                                                    |  |                                          |       |   |                                         |   |       |      |  |   |       |   |  |   |       |  
|Income before income taxes                          |  |                                          | 738   |   |                                         |   | 305   |      |  |   | 1,900 |   |  |   | 1,486 |  
|Income tax (expense)                                |  |                                          | (249  | ) |                                         |   | (104  | )    |  |   | (644  | ) |  |   | (505  | )
|                                                    |  |                                          |       |   |                                         |   |       |      |  |   |       |   |  |   |       |  
|Net Income                                          |  | $                                        | 489   |   |                                         | $ | 201   |      |  | $ | 1,256 |   |  | $ | 981   |  
|                                                    |  |                                          |       |   |                                         |   |       |      |  |   |       |   |  |   |       |  
|Income per common share  basic                     |  | $                                        | 0.31  |   |                                         | $ | 0.13  |      |  | $ | 0.79  |   |  | $ | 0.64  |  
|                                                    |  |                                          |       |   |                                         |   |       |      |  |   |       |   |  |   |       |  
|Income per common share  diluted                   |  | $                                        | 0.29  |   |                                         | $ | 0.12  |      |  | $ | 0.75  |   |  | $ | 0.63  |  
|                                                    |  |                                          |       |   |                                         |   |       |      |  |   |       |   |  |   |       |  



See accompanying notes
to these consolidated financial statements



4



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##### Table of Contents

Bank of the James Financial Group, Inc.

Consolidated Statements of Cash Flows

Nine months ending September 30, 2005 and September 30, 2004

(in thousands) (unaudited)



|                                                                                 |  |           |   |  |           |  
|-------------------------------------------------------------------------------- |  | --------- | - |  | --------- | -
|                                                                                 |  | 9/30/2005 |   |  | 9/30/2004 |  
|Cash flows from operating activities                                             |  |           |   |  |           |  
|Net Income                                                                       |  | 1,256     |   |  | 981       |  
|Adjustments to reconcile net income to net cash provided by operating activities |  |           |   |  |           |  
|                                                                                 |  |          
|Depreciation                                                                     |  | 462       |   |  | 398       |  
|Provision for loan losses                                                        |  | 629       |   |  | 634       |  
|(Increase) decrease in interest receivable                                       |  | 36        |   |  | (197      | )
|(Increase) decrease in other assets                                              |  | 264       |   |  | (422      | )
|Increase (decrease) in income taxes payable                                      |  | 69        |   |  | (165      | )
|Increase (decrease) in interest payable                                          |  | 41        |   |  | 8         |  
|Increase (decrease) in other liabilities                                         |  | 50        |   |  | (47       | )
|                                                                                 |  |           |   |  |           |  
|Net cash provided by operating activities                                        |  | 2,807     |   |  | 1,190     |  
|                                                                                 |  |           |   |  |           |  
|Cash flows from investing activities                                             |  |           |   |  |           |  
|(Increase) decrease in balance of held-to-maturity securities                    |  | 498       |   |  | (2,010    | )
|(Increase) decrease in balance of available-for-sale securities                  |  | (6,107    | ) |  | (6,739    | )
|Purchases of Federal Home Loan Bank stock                                        |  | (52       | ) |  | (72       | )
|Origination of loans, net of principal collected                                 |  | (14,174   | ) |  | (18,541   | )
|Recoveries on loans charged off                                                  |  | 28        |   |  | 94        |  
|Purchases of premises and equipment                                              |  | (345      | ) |  | (916      | )
|                                                                                 |  |           |   |  |           |  
|Net cash used in investing activities                                            |  | (20,152   | ) |  | (28,184   | )
|                                                                                 |  |           |   |  |           |  
|Cash flows from financing activities                                             |  |           |   |  |           |  
|Net increase in deposits                                                         |  | 16,521    |   |  | 20,024    |  
|Net increase (decrease) in federal funds purchased                               |  | (424      | ) |  |          |  
|Net increase in repurchase agreements                                            |  | 2,492     |   |  | 4,062     |  
|Proceeds from exercise of stock options                                          |  | 327       |   |  | 24        |  
|                                                                                 |  |           |   |  |           |  
|Net cash provided by financing activities                                        |  | 18,916    |   |  | 24,110    |  
|                                                                                 |  |           |   |  |           |  
|Increase (decrease) in cash and cash equivalents                                 |  | 1,571     |   |  | (2,884    | )
|                                                                                 |  |          
|Cash and cash equivalents at beginning of period                                 |  | 3,980     |   |  | 10,217    |  
|                                                                                 |  |           |   |  |           |  
|Cash and cash equivalents at end of period                                       |  | 5,551     |   |  | 7,333     |  
|                                                                                 |  |           |   |  |           |  



See accompanying notes
to these consolidated financial statements



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##### Table of Contents

Bank of the James Financial Group, Inc.

September 30, 2005 and 2004



Notes to Unaudited Financial Statements



Note 1  Basis of Presentation



The unaudited consolidated financial statements have been prepared by Bank of the James Financial Group, Inc. (Financial) 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 nine month period ended September 30, 2005, in conformity with accounting principles generally accepted in the United States of America. Additional information concerning
the organization and business of Financial, accounting policies followed, and other related information are contained in Financials Annual Report on Form 10-KSB for the year ended December 31, 2004. These financial statements should be
read in conjunction with the audited consolidated financial statements and footnotes for the year ended December 31, 2004 included in Financials Annual Report on Form 10-KSB. Results for the nine month period ended September 30, 2005
are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.



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



Note 2  Use of Estimates



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



Note 3  Earnings Per Share



For the quarters ended September 30, 2005 and 2004, basic earnings per share has
been computed based upon the weighted average common shares outstanding of 1,600,783 and 1,546,827, respectively. All earnings per share amounts have been adjusted to reflect the 10% stock dividend paid by Financial in January, 2004 and the 50%
stock split effected in the form of a stock dividend paid by Financial in March, 2005.



Currently, only the option shares granted to certain officers and 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 nine months ended September 30, 2005 and 2004.



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|                                      |  |                                 |           |                            |   |           |  |      |           |  |   |          
|------------------------------------- |  | ------------------------------- | --------- | -------------------------- | - | --------- |  | ---- | --------- |  | - | ---------
|                                      |  | Three months endedSeptember 30, |           | Year to date September 30,
|                                      |  | 2005                            |           | 2004                       |   | 2005      |  | 2004
|Net income                            |  | $                               | 489,000   |                            | $ | 201,000   |  | $    | 1,256,000 |  | $ | 981,000  
|                                      |  |                                 |           |                            |   |           |  |      |           |  |   |          
|Weight average number of shares       |  |                                 | 1,600,783 |                            |   | 1,546,827 |  |      | 1,586,938 |  |   | 1,531,733
|Options effect of incremental shares  |  |                                 | 73,511    |                            |   | 96,293    |  |      | 78,815    |  |   | 36,153   
|                                      |  |                                 |           |                            |   |           |  |      |           |  |   |          
|Weighted average diluted shares       |  |                                 | 1,674,294 |                            |   | 1,643,120 |  |      | 1,665,753 |  |   | 1,567,886
|                                      |  |                                 |           |                            |   |           |  |      |           |  |   |          
|Basic EPS (weighted avg shares)       |  | $                               | 0.31      |                            | $ | 0.13      |  | $    | 0.79      |  | $ | 0.64     
|                                      |  |                                 |           |                            |   |           |  |      |           |  |   |          
|Diluted EPS (including option shares) |  | $                               | 0.29      |                            | $ | 0.12      |  | $    | 0.75      |  | $ | 0.63     
|                                      |  |                                 |           |                            |   |           |  |      |           |  |   |          



Note
4 - Stock Options



In accordance with SFAS No. 123, Accounting for
Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure  An Amendment of FASB Statement No. 123, Financial has adopted the disclosureonly
option and elected to apply the provisions of APB No. 25 for financial statement purposes. No stock-based employee compensation cost is reflected in net income for these plans.



Pro forma information regarding net income and earnings per share have been determined as if Financial had accounted for its employee stock
options using the fair value method, and is presented below.



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|                                                                                               |  |                                 |       |      |   |     
|---------------------------------------------------------------------------------------------- |  | ------------------------------- | ----- | ---- | - | ----
|                                                                                               |  | Nine months Ended September 30,
|                                                                                               |  | 2005                            |       | 2004
|Net Income:                                                                                    |  |                                 |       |      |   |     
|As reported                                                                                    |  | $                               | 1,256 |      | $ | 981 
|                                                                                               |  |                                
|Deduct: total stock-based compensation cost determined under the fair value method, net of tax |  |                                 | 101   |      |   | 73  
|                                                                                               |  |                                 |       |      |   |     
|Pro forma                                                                                      |  | $                               | 1,155 |      | $ | 908 
|                                                                                               |  |                                 |       |      |   |     
|Basic earnings per share:                                                                      |  |                                 |       |      |   |     
|As reported                                                                                    |  | $                               | 0.79  |      | $ | 0.64
|Pro forma                                                                                      |  | $                               | 0.73  |      | $ | 0.59
|Diluted earnings per share:                                                                    |  |                                 |       |      |   |     
|As reported                                                                                    |  | $                               | 0.75  |      | $ | 0.63
|Pro forma                                                                                      |  | $                               | 0.69  |      | $ | 0.58



The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for the three-month periods ended September 30, 2005 and 2004: dividend yield of 0%, expected volatility of 10%, a
risk-free interest rate of 4.08%, and expected lives of 7 years.



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



CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS



This report contains statements that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. The words believe, estimate, expect, intend,
anticipate, plan and similar expressions and variations thereof identify certain of such forward-looking statements which speak only as of the dates on which they were made. Bank of the James Financial Group, Inc. undertakes
no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Readers are cautioned that any such forward-looking statements are not guarantees of future performance
and involve risks and uncertainties, and that actual results may differ materially from those indicated in the forward-looking statements as a result of various factors. Such factors include, but are not limited to competition, general economic
conditions, potential changes in interest rates, and changes in the value of real estate securing loans made by Bank of the James, the wholly-owned subsidiary of Bank of the James Financial Group, Inc.



GENERAL



Critical Accounting Policies



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



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



Overview



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



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##### Table of Contents

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



As of the date hereof, the sole business of Financial is the ownership of the
capital stock of the Bank. Financial had no business until January 1, 2004 when it acquired the common stock of the Bank and unless otherwise noted all of the financial statements and results referenced for the periods prior to January 1,
2004 herein refer to the results and statements of the Bank.



Financial declared a 10% stock dividend payable to shareholders of record as of January 2, 2004, which dividend was paid on January 27, 2004. Financial declared a 50% stock split effected in the form of a stock dividend payable to
shareholders of record as of February 4, 2005, which dividend was paid on March 4, 2005. All earnings per share amounts have been adjusted to reflect these two stock dividends.



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



The operating results of the Bank depend primarily upon its 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. The Banks net
income also is affected by its provision for loan loss, as well as the level of its other operating income, including loan fees and service charges, and its other operating expenses, including salaries and employee benefits, occupancy expense,
Federal Deposit Insurance Corporation assessments, 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 five full service offices: the main office located at 828 Main Street in Lynchburg (opened October 25, 2004) (the Main Street Office), a branch located at 615 Church Street in Lynchburg (opened July 22,
1999), a branch located at 5204 Fort



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##### Table of Contents

Avenue in Lynchburg (opened November 13, 2000), a branch located on South Amherst Highway in Amherst County (the Madison Heights Branch)
(opened June 4, 2002), and a branch located at 17000 Forest Road in Forest (the Forest Branch) (opened February 4, 2004). 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 1027 Water Wheel Drive in Moneta (opened July, 2005).



The Bank continuously evaluates locations for additional branches and will consider opening one or more additional branches in the next twelve months if
suitable location(s) are found and acquired. In connection with the evaluation of additional branches,



| |  |  | The Bank has entered into an agreement to purchase certain real property and improvements thereto located at the intersection of Timberlake Road and Turnpike Drive, in Campbell
County, Virginia for $349,000. Management believes that this location is suitable for use as a branch bank. The Banks obligation to close the transaction is subject to customary terms and conditions, including satisfactory completion of due
diligence. Management has not yet determined whether the Bank will renovate the existing improvements or construct new improvements for use as a branch bank. If the Bank proceeds with opening a branch bank at this location, in addition to
construction costs, it will need to furnish the facilities with furniture, fixtures, and equipment necessary for the operation of a branch bank. If all contingencies are satisfied, Management anticipates that closing will occur in the fourth quarter
of 2005.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Bank has entered into an agreement to purchase certain real property and improvements thereto located at 164 Main St., Amherst, Virginia for $396,000. Management believes that
this location is suitable for use as a branch bank. The Banks obligation to close the transaction is subject to customary terms and conditions, including satisfactory completion of due diligence. Management has not yet determined whether the
Bank will renovate the existing improvements or construct new improvements for use as a branch bank. If the Bank proceeds with opening a branch bank at this location, in addition to construction costs, it will need to furnish the facilities with
furniture, fixtures, and equipment necessary for the operation of a branch bank. If all contingencies are satisfied, Management anticipates that closing will occur in the fourth quarter of 2005.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Bank has identified several other locations that may be suitable for additional branches. The Bank has conducted extensive negotiations concerning the possible purchase of one
location and the possible lease of another. To date, the Bank has not entered into binding agreements for either location.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Except as set forth herein, the Bank does not expect to purchase any significant property or equipment in the upcoming 12 months.



Future branch openings are subject to regulatory approval.



The following discussion represents managements discussion and analysis
of the financial condition and results of operations of Financial as of September 30, 2005 and December 31, 2004 and for the nine months ended September 30, 2005. It should be read in conjunction with the condensed financial
statements included elsewhere herein.



11



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##### Table of Contents

OFF-BALANCE SHEET ARRANGEMENTS



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



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



|                             |  |                    |           
|---------------------------- |  | ------------------ | ----------
|                             |  | September 30, 2005
|Commitments to extend credit |  | $                  | 31,418,000
|Letters of Credit            |  |                    | 2,243000  
|                             |  |                    |           
|Total:                       |  | $                  | 33,841,000
|                             |  |                    |           



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



SUMMARY OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



The comparison of the financial condition and operating results between September 30, 2005 and December 31, 2004 and September 30, 2004, as
applicable, should be read in the context of the length of time for which the Bank has been operating. The Bank began operations on July 22, 1999, opened its second location in November, 2000, opened its mortgage division in April, 2001, opened
its third location in June, 2002, opened its fourth location in February, 2004, and opened its fifth location in October, 2004.



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



Financial Condition Summary

September 30, 2005 as Compared to December 31, 2004



Total assets were $191,173,000 on September 30, 2005 compared with $171,025,000 at December 31, 2004. This
increase in total assets can be attributed to deposit growth, particularly the continued growth of the Forest Branch, the Madison Heights Branch, and the Main Street Office. Total deposits grew from $153,834,000 for the year ended December 31,
2004 to $170,355,000 on September 30, 2005, an increase of 11.07%. In addition, the Banks effort to increase non-FDIC insured sweep accounts (repurchase agreements) resulted in an increased balance in these accounts to $5,751,000 on
September 30, 2005 from $3,259,000 on December 31, 2004.



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##### Table of Contents

The increase in total assets is due in part to an increase in rates (as a result of the increasing rate
environment) that the Bank offers on its deposit products, the addition of new lenders, and the Banks reputation for service. Loans, net of unearned income and allowance, increased to $153,789,000 on September 30, 2005 from $140,272,000
on December 31, 2004. Total loans increased to $155,473,000 on September 30, 2005 from $141,691,000 on December 31, 2004. The following summarizes the composition of the Banks loan portfolio as of the dates indicated (dollar
amounts in thousands):



|                         |  |                    |         |            |                    |   |        |                   |            |  |        |        |  |   |            |   |  |        |  
|------------------------ |  | ------------------ | ------- | ---------- | ------------------ | - | ------ | ----------------- | ---------- |  | ------ | ------ |  | - | ---------- | - |  | ------ | -
|                         |  | September 30, 2005 |         |            | September 30, 2004 |   |        | December 31, 2004 |           
|                         |  | Amount             |         | Percentage |                    |   | Amount |                   | Percentage |  |        | Amount |  |   | Percentage |  
|Commercial               |  | $                  | 32,380  |            | 20.83              | % |        | $                 | 34,353     |  | 25.66  | %      |  | $ | 35,163     |   |  | 24.82  | %
|Real estate construction |  |                    | 26,361  |            | 16.96              | % |        |                   | 15,349     |  | 11.47  | %      |  |   | 22,251     |   |  | 15.70  | %
|Real estate mortgage     |  |                    | 74,415  |            | 47.86              | % |        |                   | 63,959     |  | 47.78  | %      |  |   | 63,215     |   |  | 44.61  | %
|Consumer                 |  |                    | 22,184  |            | 14.27              | % |        |                   | 20,127     |  | 15.03  | %      |  |   | 21,240     |   |  | 14.99  | %
|Other                    |  |                    | 133     |            | 0.08               | % |        |                   | 82         |  | 0.06   | %      |  |   | (178       | ) |  | -0.12  | %
|                         |  |                    |         |            |                    |   |        |                   |            |  |        |        |  |   |            |   |  |        |  
|Total loans              |  | $                  | 155,473 |            | 100.00             | % |        | $                 | 133,870    |  | 100.00 | %      |  | $ | 141,691    |   |  | 100.00 | %
|                         |  |                    |         |            |                    |   |        |                   |            |  |        |        |  |   |            |   |  |        |  



Non accrual loans
decreased to $242,000 on September 30, 2005 from $380,000 on December 31, 2004. As previously reported, as of the end of the quarter ended June 30, 2005, the Bank carried on its balance sheet a single family residence that it had
purchased at foreclosure to protect its collateral position. This property was classified as other real estate owned in amount of $618,000, which was accounted for in the other assets section of Statement of Financial
Condition. During the quarter ended September 30, 2004, the Bank sold this property. The Bank currently has no other other real estate owned on its balance sheet.



Cash and cash equivalents increased to $5,551,000 on September 30, 2005 from $3,980,000 on December 31, 2004. This
increase is a result of routine fluctuations in deposits, an increased number of transactional accounts and professional settlement accounts, both of which are subject to fluctuations, and will contribute to variations in cash and cash equivalents.



Securities held-to-maturity decreased to $8,501,000 on
September 30, 2005 from $8,999,000 on December 31, 2004. Securities available-for-sale increased to $16,763,000 on September 30, 2005 from $10,912,000 on December 31, 2004. The following table summarizes the Banks holdings
for both securities held-to-maturity and securities available-for-sale as of September 30, 2005 and December 31, 2004 (amounts in 000s):



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|                              |  |                |        |                  |   |    |           |   |      |   |  |   |       
|----------------------------- |  | -------------- | ------ | ---------------- | - | -- | --------- | - | ---- | - |  | - | ------
|SecuritiesSeptember 30, 2005 |  | AmortizedCosts |        | Gross Unrealized |   |    | FairValue
|                              |  | Gains          |        | Losses           |   |   
|Held to Maturity              |  |                |        |                  |   |    |           |   |      |   |  |   |       
|US Govt & agency obligations |  | $              | 8,501  |                  | $ | 27 |           | $ | (94  | ) |  | $ | 8,434 
|                              |  |                |        |                  |   |    |           |   |      |   |  |   |       
|Available for Sale            |  |                |        |                  |   |    |           |   |      |   |  |   |       
|US Govt & agency obligations |  | $              | 14,052 |                  | $ |   |           | $ | (216 | ) |  | $ | 13,836
|Mortgage-backed securities    |  |                | 2,987  |                  |   | 2  |           |   | (62  | ) |  |   | 2,927 
|                              |  |                |        |                  |   |    |           |   |      |   |  |   |       
|                              |  | $              | 17,039 |                  | $ | 2  |           | $ | (278 | ) |  | $ | 16,763
|                              |  |                |        |                  |   |    |           |   |      |   |  |   |       
|                              |  |                |       
|SecuritiesDecember 31, 2004  |  | AmortizedCosts |        | Gross Unrealized |   |    | FairValue
|                              |  | Gains          |        | Losses           |   |   
|Held to Maturity              |  |                |        |                  |   |    |           |   |      |   |  |   |       
|US Govt & agency obligations |  | $              | 8,999  |                  | $ | 80 |           | $ | (33  | ) |  | $ | 9,046 
|Available for Sale            |  |                |        |                  |   |    |           |   |      |   |  |   |       
|US Govt & agency obligations |  | $              | 9,636  |                  | $ | 7  |           | $ | (4   | ) |  | $ | 9,639 
|Mortgage-backed securities    |  |                | 1,295  |                  |   | 6  |           |   | (28  | ) |  |   | 1,273 
|                              |  |                |        |                  |   |    |           |   |      |   |  |   |       
|                              |  | $              | 10,931 |                  | $ | 13 |           | $ | (32  | ) |  | $ | 10,912
|                              |  |                |        |                  |   |    |           |   |      |   |  |   |       



The decrease from
December 31, 2004 in securities held-to-maturity was due in large part to the call of certain securities by the issuer of such securities. The increase from December 31, 2004 in securities available-for-sale was primarily due to
managements effort to improve cash management by allocating cash to investment securities from lower yielding federal funds.



As of September 30, 2005 and December 31, 2004 the Banks regulatory capital levels exceeded those established for well-capitalized
institutions.



Results of Operations

Comparison of the Three and Nine Months Ended September 30, 2005 and 2004



Earnings Summary



Net income for the three and nine months ended September 30, 2005 was $489,000 and $1,256,000, respectively, compared to a net income of $201,000 and
$981,000 for the same periods in 2004. Basic earnings per common share for the three and nine months ended September 30, 2005 were $0.31 and $0.79, respectively, compared to basic earnings per common share of $0.13 and $0.64 for the same
periods in 2004. Fully diluted earnings per common share for the three and nine months ended September 30, 2005 were $0.29 and $0.75, respectively, compared to fully diluted earnings per common share of $0.12 and $0.63 for the same periods in
2004. All earnings per share amounts have been adjusted to reflect the 10% stock dividend paid by Financial in January, 2004 and the 50% stock split effected in the form of a stock dividend paid by Financial in March, 2005.



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##### Table of Contents

In addition to the factors discussed below, the increase in net income (and earnings per share) when
compared to the quarter ended September 30, 2004 is due in part to the fact that the results for the quarter ended September 30, 2004 were impacted negatively by the downgrade of certain loans (see Results of
OperationsAllowance for Loan Losses below). These downgrades result in a comparatively high addition to the loan loss reserve during the quarter ended September 30, 2004, which reduced net income for that period.



These operating results represent an annualized return on shareholders
equity of 13.67% and 12.35% for the three and nine months ended September 30, 2005 compared with 6.46% and 10.99% for the same periods in 2004. The annualized return on average assets for the three and nine months ended September 30, 2005
was 1.03% and 0.93% compared with 0.49% and 0.84% for the same period in 2004.



Interest Income; Interest Expense; and Net Interest Income



Interest income increased to $3,147,000 and $8,728,000 for the three and nine months ended June 30, 2005 from $2,407,000 and $6,795,000 for the same
periods in 2004. This increase was due to an increase in interest earning assets, including loans and investment securities, as well as an increase in rates paid to the Bank on its interest earning assets. In particular, a significant portion of the
Banks loan portfolio is invested in variable rate loans, the rates on which have continued to increase in the current rising interest rate environment.



Interest expense increased to $1,005,000 and $2,655,000 for the three and nine months ended September 30, 2005 from $641,000 and $1,817,000 for the
same periods in 2004. This increase in interest expense was primarily due to both an increase in the aggregate balance in interest bearing deposit accounts and, in response to the interest rate increases by Federal Open Market Committee
(FOMC), an increase in the interest rates paid by the Bank on deposit accounts. In addition, interest expense increased in part because the Bank has increased the interest rates that it offers on certificates of deposit in response both
to competition and the FOMC rate increases. The Bank expects this trend to continue during the current fiscal year.



The fundamental source of the Banks revenue is net interest income, which is determined by the difference between (i) interest and dividend
income on interest earning assets, which consist primarily of loans, investment securities and other investments, and (ii) interest expense on interest-bearing liabilities, which consist principally of deposits and other borrowings. Net
interest income for the three and nine months ended September 30, 2005 was $1,887,000 and $5,444,000 compared with $1,263,000 and $4,344,000 for the same periods in 2004. The net interest margin increased to 4.75% and 4.73% for the three and
nine months ended September 30, 2005 from 4.49% and 4.49% in the same periods a year ago. The growth in net interest income and the increase in net interest margin for the three and nine months ended September 30, 2005 as compared with the
comparable three and nine months in 2004 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.



Non-Interest Income



Non-interest income, which is comprised primarily of fees and charges on transactional deposit accounts, mortgage loan origination fees, and the
Banks ownership interest in a title insurance agency, increased to $594,000 and $1,610,000 for the three and nine month periods ended September 30, 2005, from $528,000 and $1,306,000 for the comparable periods in 2004. This increase was
due in large part to an increase in mortgage origination volume from $15,835,000 and $41,461,000 for the three and nine month periods ended September 30, 2005 from $15,060,000 and $35,445,00 for the comparable periods in 2004. In addition,
revenues from fees and service charges increased as the number of transactional deposit accounts increased.



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##### Table of Contents

The Bank, through Bank of the James Mortgage, a Division of Bank of the James (the Mortgage
Division) originates consumer residential mortgage loans. Through the Mortgage Division, the Bank originates conforming and non-conforming home mortgages in the Region 2000 area, as defined above. 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 Mortgage Division opened it 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 2005.



Non-Interest Expense



Non-interest expense for the three and nine months ended September 30,
2005 was $1,743,000 and $5,154,000 compared to $1,486,000 and $4,164,000 for the three and nine months ended September 30, 2004. The increase in non-interest expense can be attributed to increased occupancy expenses, along with an increase in
compensation expense related to an increase in the number of employees necessary to accommodate the Banks growth and expansion as well as expense in complying with the Sarbanes-Oxley Act of 2002 (SOx). Management expects that the
Forest Branch, the Main Street Office, both of which opened in 2004, will generate interest earning assets to compensate for the costs incurred in opening and operating those branches. Total personnel expense increased to $831,000 and $2,443,000 for
the three and nine month periods ended September 30, 2005, from $657,000 and $1,845,000 for the comparable periods in 2004. Part of this increase was related to the addition of several mortgage loan officers in the Mortgage Division and the
higher level of mortgage loan originations. Compensation for some employees of the Mortgage Division is commission-based and therefore subject to fluctuation. The Bank also had increases in depreciation expense, data processing fees, other operating
expenses.



The cost of compliance with SOx set forth in the
Consolidated Statement of Operations reflects only the direct costs to outside consultants and does not include indirect costs including salaries of Bank personnel and administrative costs related to SOx compliance. The Securities and Exchange
Commission has delayed the date by which Financial must comply with the internal control requirements of Section 404 of the Sarbanes-Oxley Act until July, 2007. Management expects that this delay will enable the Bank to use more of its internal
resources and thereby decrease the Banks reliance on outside consulting sources. Management expects that the delay will reduce expenses associated with evaluating the internal control structure.



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. The amount added to the allowance for loan loss for the three and nine months ended September 30, 2005 was $255,000 and $629,000 compared with $503,000 and $634,000 for the
comparable periods in 2004. This increase was due in large part to growth in the loan portfolio and the application of the loan loss calculation for impaired loans. Management believes that the current allowance for loan loss of $1,684,000 (or 1.08%
of total loans) at September 30, 2005 is adequate.



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##### Table of Contents

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



|                                |  |                    |       |   |                    |   |       |  
|------------------------------- |  | ------------------ | ----- | - | ------------------ | - | ----- | -
|                                |  | Nine months ended  |      
|                                |  | September 30, 2005 |       |   | September 30, 2004 |  
|Balance, beginning of period    |  | $                  | 1,419 |   |                    | $ | 1,451 |  
|Provision for loan losses       |  |                    | 629   |   |                    |   | 634   |  
|Loans charged off               |  |                    | (392  | ) |                    |   | (725  | )
|Recoveries of loans charged off |  |                    | 28    |   |                    |   | 94    |  
|                                |  |                    |       |   |                    |   |       |  
|Net charge offs                 |  |                    | (364  | ) |                    |   | (631  | )
|                                |  |                    |       |   |                    |   |       |  
|Balance, end of period          |  | $                  | 1,684 |   |                    | $ | 1,454 |  
|                                |  |                    |       |   |                    |   |       |  



Income Taxes



For the quarter ended September 30, 2005, the Bank
accrued an income tax liability of $219,000 and, based on its 2004 income tax liability, made an estimated income tax payment of $7,000 during the quarter ended September 30, 2005.



Item 3. Controls and Procedures



Evaluation of Disclosure Controls and Procedures



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



PART II  OTHER INFORMATION



Item 1. Legal Proceedings



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



Item 2. Unregistered Sales of Equity Securities and Use of ProceedsNot Applicable



Item 3. Defaults Upon Senior SecuritiesNot Applicable



Item 4. Submission of Matters to a Vote of Security HoldersNot Applicable



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##### Table of Contents

Item 5. Other InformationNot Applicable



Item 6. Exhibits



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



|            |  |                                                                                                                                               
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibit                                                                                                                        
|31.1        |  | Certification of Robert R. Chapman III Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 9, 2005                      
|            | 
|31.2        |  | Certification of J. Todd Scruggs Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 9, 2005                            
|            | 
|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 November 9, 2005



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
|                       |  |                  
|Date: November 9, 2005 |  | By                |  | /S/ Robert R. Chapman III                                                                              
|                       |  |                   |  | Robert R. Chapman III, President (Principal Executive
Officer)                                         
|                       |  |                  
|                       |  | By                |  | /S/ J. Todd Scruggs                                                                                    
|                       |  |                   |  | J. Todd Scruggs, Secretary and Treasurer (Principal Financial Officer and Principal Accounting Officer)



18



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##### Table of Contents

Index of Exhibits



|            |  |                                                                                                                                               
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibit                                                                                                                        
|31.1        |  | Certification of Robert R. Chapman III Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 9, 2005                      
|            | 
|31.2        |  | Certification of J. Todd Scruggs Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 9, 2005                            
|            | 
|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 November 9, 2005



19