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U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549



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FORM 10-KSB



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ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended
December 31, 2005

Commission File Number: 000-49787



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BOTETOURT BANKSHARES, INC.

(Exact Name of Issuer as Specified in Its Charter)



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|                                         |  |                                        
|---------------------------------------- |  | ---------------------------------------
|Virginia                                 |  | 54-1867438                             
|(State of Incorporation)                 |  | (I.R.S. Employer Identification Number)
|                                         | 
|19747 Main Street Buchanan, Virginia     |  | 24066                                  
|(Address of Principal Executive Offices) |  | (Zip Code)                             

(540) 591-5000

(Issuers telephone number, including area code)



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Securities registered pursuant to Section 12(b) of the Exchange Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $1.00



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

Check if no disclosure of delinquent filers in response to Item 405 of Regulation S-B is contained in this form, and no disclosure will be contained, to the best of the registrants knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. ̈

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

The issuers revenues for its most recent fiscal year were $15,799,426.

The aggregate market value of the voting and non-voting common equity, consisting solely of common stock, held by non-affiliates of the issuer (1,019,439 shares) computed by reference to the closing price of such stock was $27,269,993 as of
March 23, 2006.

The number of shares of outstanding common stock of the issuer as of March 23, 2006 is 1,240,521.

DOCUMENTS INCORPORATED BY REFERENCE

The
issuers Proxy Statement dated March 31, 2006 is incorporated by reference into Form 10-KSB Part III, Items 9, 10, 11, 12 and 14.

TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT:    YES ̈NO  x



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PART I

Item 1. Business

General

Botetourt Bankshares, Inc. (the Company) was incorporated as a Virginia corporation on January 17, 1997 and is the one-bank holding
company for and sole shareholder of Bank of Botetourt (the Bank). The Bank was acquired by the Company on September 30, 1997. The Company has no significant operations other than owning the stock of the Bank.

The Bank operates for the primary purpose of meeting the banking needs of individuals and small to medium sized businesses in the Banks service
area, while developing personal, hometown associations with these customers. The Bank offers a wide range of banking services including checking and savings accounts; commercial, installment, mortgage and personal loans; safe deposit boxes; and
other associated services. The Banks primary sources of revenue are interest income from its lending activities, and, to a lesser extent, from its investment portfolio. The Bank also earns fees from lending and deposit activities. The major
expenses of the Bank are interest on deposit accounts and general and administrative expenses, such as salaries, occupancy and related expenses. The Bank does not provide trust services.

Bank of Botetourt was founded in 1899 and currently operates eight offices in three counties of Virginia. The main office is in Buchanan, with other
Botetourt County office locations in Daleville, Eagle Rock and Troutville. The Banks operations center for the Bank is located in Buchanan. The Banks loan administration center is located in Troutville. The Roanoke County offices are
located on Challenger Avenue in eastern Roanoke County and on Peters Creek Road in north Roanoke County. The Rockbridge County offices are located at 65 East Midland Trail in Lexington, Virginia and 5905 North Lee Highway in Fairfield, Virginia. A
substantial portion of the Companys market is located in the large Roanoke Valley Metropolitan Statistical Area. This MSA varies widely with a medium-sized city, large rural base, mostly small businesses in many different manufacturing and
service industries, and a relatively modest governmental employment.

The Roanoke Metropolitan Statistical Area (MSA) is the commercial
center for southwest Virginia, and is located approximately 165 miles west of Richmond, Virginia, 178 miles northwest of Charlotte, North Carolina, 178 miles southeast of Charleston, West Virginia and 222 miles southwest of Washington, D.C. Hollins
University and Roanoke College, with student enrollments of approximately 1,100 and 1,700, respectively, are located in the Roanoke MSA. Virginia Tech, with a student body of approximately 25,000, and Radford University, with a student body of more
than 8,500, are each a 45-minute drive away.



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The population in the Roanoke MSA was estimated at 291,100 at year-end 2003 and projected to be 302,200
by 2010. The Roanoke MSAs recent growth has been slower than that in other key Virginia markets, according to the Virginia Employment Commission. The Roanoke MSA had an unemployment rate of 2.8% in December 2005, compared with 3.0% for
Virginia and 4.6% nationally.

Over 6,500 businesses operated in the Roanoke MSA recently. The business community in the Roanoke MSA is
diverse. The principal components of the economy are retail trade, services, transportation, manufacturing, finance, insurance, health care and real estate. The Roanoke MSAs position as a regional center creates a strong medical, legal, and
business professional community. Carilion Health Systems, Lewis-Gale Hospital, and the Veterans Administration Hospital are among the areas largest employers, although most do not directly affect the Companys performance, since these
employers are not close to the Banks current branches. Other large employers include Norfolk Southern Corporation, Wachovia Corporation, The Kroger Co., General Electric Co., and American Electric Power. Major employers located directly in the
Banks branch market of Rockbridge County, Botetourt County and northeast Roanoke County include Mohawk Carpet, Botetourt County Schools, Dynax America Corporation, Roanoke Cement Company, Koyo Steering Systems of USA, Inc., and Gala
Industries.

Lending Activities

The Banks lending services include real estate, commercial, agricultural and consumer loans. The loan portfolio constituted 85.12% of the earning assets of the Bank at December 31, 2005 and has historically
produced the highest interest rate spread above the cost of funds. The Banks loan personnel have the authority to extend credit under guidelines established and approved by the Board of Directors. Any aggregate credit that exceeds the
authority of the loan officer is forwarded to the loan committee for approval. The loan committee is composed of the Bank President, the Vice President of credit administration, all commercial loan officers, and three outside directors. All
aggregate credits that exceed the loan committees lending authority are presented to the full Board of Directors for ultimate approval or denial. The loan committee not only acts as an approval body to ensure consistent application of the
Banks loan policy but also provides valuable insight through communication and pooling of knowledge, judgment and experience of its members.

The Bank has in the past and intends to continue to make most types of real estate loans, including but not limited to, single and multi-family housing, farm loans, residential and commercial construction loans and loans for commercial real
estate. At the end of 2005 the Bank had 30.41% of the loan portfolio in single and multi-family housing, 35.31% in non-farm, non-residential loans, 5.62% in farm related real estate loans and 8.84% in real estate construction loans.

The Banks loan portfolio includes commercial and agricultural production loans totaling 11.06% of the portfolio at year-end 2005. Consumer loans
make up approximately 7.56% of the total loan portfolio. Consumer loans include loans for



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household expenditures, car loans and other loans to individuals. While this category has experienced a greater
percentage of charge-offs than the other classifications, the Bank is committed to continue to make this type of loan to fill the needs of the Banks customer base. Other loans and leases, including loans to municipalities, amounted to 1.20%.

All loans in the Banks portfolio are subject to risk from the condition of the economy in the Banks area and also that of the
nation. The Bank has used and continues to use conservative loan-to-value ratios and thorough credit evaluation to lessen the risk on all types of loans. The use of conservative appraisals has also reduced exposure on real estate loans. Thorough
credit checks and evaluation of past internal credit history has helped to reduce the amount of risk related to consumer loans. Government guarantees of loans are used when appropriate but apply to a very small percentage of the portfolio.
Commercial loans are evaluated by collateral value and ability to service debt. Businesses seeking loans must have a good product line and sales, responsible management, manageable debt load and a product that is not critically affected by downturns
in the economy.

Investments

The Bank invests a portion of its assets in U.S. Treasury and U.S. Government corporation and agency obligations, state, county and municipal obligations, and equity securities. The Banks investments are managed
in relation to loan demand and deposit growth, and are generally used to provide for the investment of excess funds at reduced yields and risks relative to increases in loan demand or to offset fluctuations in deposits. The Bank does not engage in
any hedging activities. For additional information relating to investments, see Financial Information.

Deposit Activities

Deposits are the major source of funds for lending and other investment activities. The Bank considers the
majority of its regular savings, demand, NOW and money market deposits and small denomination certificates of deposit, to be core deposits. These accounts comprised approximately 84.34% of the Banks total deposits at December 31, 2005.
Certificates of deposit in denominations of $100,000 or more represented the remaining 15.66% of deposits at year end.

Employees

At December 31, 2005, the Company had 84 full time equivalent employees, none of which are represented by a union
or covered by a collective bargaining agreement. Management considers employee relations to be good.

Competition

The Company encounters strong competition both in making loans and in attracting deposits. The deregulation of the banking industry and the
widespread



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enactment of state laws that permit multi-bank holding companies as well as an increasing level of interstate banking
have created a highly competitive environment for commercial banking. In one or more aspects of its business, the Company competes with other commercial banks, savings and loan associations, credit unions, finance companies, mutual funds, insurance
companies, brokerage and investment banking companies, and other financial intermediaries. Many of these competitors have substantially greater resources and lending limits and may offer certain services that we do not currently provide. In
addition, many of the Companys competitors are not subject to the same extensive federal regulations that govern bank holding companies and federally insured banks. Recent federal and state legislation has heightened the competitive
environment in which financial institutions must conduct their business, and the potential for competition among financial institutions of all types has increased significantly.

The Company competes by relying upon specialized services, responsive handling of customer needs, and personal contacts by its officers, directors, and
staff. Large multi-branch banking competitors tend to compete primarily by rate and the number and location of branches while smaller, independent financial institutions tend to compete primarily by rate and personal service.

Currently, in Botetourt County, the Company competes with five other commercial banks that operate 16 branches in the county. As of June 30, 2005,
the Company held 40.08% of the deposits in Botetourt County, which represents the largest market share of all financial institutions in the county. The Company held 11.59% of the market share of Rockbridge County and 3.42% of the market share of
Roanoke County.

Government Supervision and Regulation

The following discussion is a summary of the principal laws and regulations that comprise the regulatory framework applicable to the Company and the Bank.
Other laws and regulations that govern various aspects of the operations of banks and bank holding companies are not described, although violations of such laws and regulations could result in supervisory enforcement action against the Company or
the Bank. The following descriptions summarize the material terms of the principal laws and regulations and are qualified in their entirety by reference to applicable laws and regulations.

General

The Company is
subject to the periodic reporting requirements of the Securities and Exchange Act of 1934, as amended (the Exchange Act) including the filing of periodic reports with the SEC. The SEC makes such filings available on their website
www.sec.gov. These filings may also be found on the Companys and the Banks website. www.bankofbotetourt.com

As an
Exchange Act reporting company, the Company also is subject to many provisions of the Sarbanes-Oxley Act of 2002 (the SOA), which is aimed at improving



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corporate governance, public reporting, and company performance. The requirements under SOA continue to evolve, but the
Company has taken steps to ensure that it will comply fully with the SOA and any applicable rules and regulations implemented in the future. Parts of the SOA (i) require that periodic reports containing financial statements that are filed with
the SEC be accompanied by Chief Executive Officer and Chief Financial Officer certifications as to their accuracy and compliance with law; (ii) prohibit public companies, with certain limited exceptions, from making personal loans to their
directors or executive officers; (iii) force company Chief Executive Officers and Chief Financial Officers to forfeit bonuses and profits if company financial statements are restated due to misconduct; (iv) require audit committees to
pre-approve all audit and non-audit services provided by an issuers outside auditors, except for deminimis non-audit services; (v) protect employees of public companies from retaliatory action if they assist in investigations relating to
violations of the federal securities laws from retaliatory action; (vi) require companies to disclose in plain English on a rapid and current basis material changes in their financial condition or operations; (vii) require a
public companys Section 16 insiders to make Form 4 filings with the SEC within two business days following the day on which purchases or sales of the companys equity securities were made; and (viii) increase penalties for
existing crimes and create new criminal offenses. Compliance with other provisions will be required after implementing rules and regulations are adopted by the SEC and the newly created Public Company Accounting Oversight Board (PCAOB)
authorized by the SOA. While management expects the Company to continue incurring additional expenses in complying with the requirements of the SOA and the regulations adopted, it anticipates that those expenses will not have a material effect on
the Companys results of operations or financial condition.

As a bank holding company, the Company is subject to regulation under the
Bank Holding Company Act of 1956, as amended (the BHCA), and the examination and reporting requirements of the Board of Governors of the Federal Reserve System (the Federal Reserve). Under the BHCA, a bank holding company may
not directly or indirectly acquire ownership or control of more than 5% of the voting shares or substantially all of the assets of any additional bank or merge or consolidate with another bank holding company without the prior approval of the
Federal Reserve. The BHCA also generally limits the activities of a bank holding company to that of banking, managing or controlling banks, or any other activity which is determined to be so closely related to banking or to managing or controlling
banks that an exception is allowed for those activities.

As a state bank, the Bank is subject to regulation, supervision and examination
by the Virginia State Corporation Commission Bureau of Financial Institutions (Bureau). The Bank, not a member bank of the Federal Reserve System, is subject to regulation, supervision and examination by the FDIC. Federal and Virginia
laws also govern the activities in which the Bank may engage, the investments that it may make and limits the aggregate amount of loans that may be granted to one borrower to 15% of the banks capital and surplus. Various consumer and
compliance laws and regulations also affect the Banks operations.



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The earnings of the Bank, and therefore the earnings of the Company, are affected by general economic
conditions, management policies and the legislative and governmental actions of various regulatory authorities, including those referred to above.

The Bureau and FDIC conduct regular examinations of the Bank and review such matters as the adequacy of loan loss reserves, quality of loans and investments, management practices, compliance with laws, and other aspects of its operations.
In addition to these regular examinations, the Bank must furnish the FDIC with periodic reports containing a full and accurate statement of its affairs. Supervision, regulation and examination of banks by these agencies are intended primarily for
the protection of depositors rather than shareholders.

Insurance of Accounts, Assessments and Regulation by the FDIC

The deposits of the Bank are insured by the FDIC up to the limits set forth under applicable law. The deposits of the Bank are also subject
to the deposit insurance assessments of the FDIC.

The FDIC has implemented a risk-based deposit insurance assessment system under which
the assessment rate for an insured institution may vary according to regulatory capital levels of the institution and other factors (including supervisory evaluations). Under this system, depository institutions are charged on a sliding scale based
on such institutions capital levels and supervisory subgroup assignment. These rate schedules are subject to future adjustments by the FDIC. In addition, the FDIC has authority to impose special assessments from time to time. In 1995, and in
response the FDIC reduced deposit insurance assessment rates on certain insured deposits to historic low levels. However, due to legislation enacted in 1996 which requires that both Savings Association Insurance Fund (SAIF)-insured
deposits and Bank Insurance Fund (BIF)-insured deposits pay a pro rata portion of the interest due on the obligations issued by the Financing Corporation, the FDIC has imposed additional assessments on BIF-insured deposits, which include
Bank deposits.

The FDIC is authorized to prohibit any insured institution from engaging in any activity that the FDIC determines by
regulation or order to pose a serious threat to the respective insurance fund. Also, the FDIC may initiate enforcement actions against such banks. The FDIC may terminate the deposit insurance of any depository institution if it determines, after a
hearing, that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed in writing by the
FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If deposit insurance is terminated, the deposits at the institution at the
time of termination, less subsequent withdrawals, shall continue to be insured for a period from six months to two years, as determined by the FDIC. Management is aware of no existing circumstances that could result in termination of the Banks
deposit insurance.



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In early 2006, Congress passed the Federal Deposit Insurance Reform Act of 2005, which made certain
changes to this federal deposit insurance program. This Act merges the BIF and SAIF Insurance Funds by July 1, 2006. This Act increases retirement account coverage per depositor from a maximum of $100,000 to $250,000 and provides inflationary
adjustments beginning in 2010. This act also provides the FDIC authority to set the insurance funds reserve ratio within a specified range, and it requires dividends to banks if the reserve ratio exceeds certain levels. The new Act grants
banks an assessment credit based on their share of a past assessment base, and the amount of the credit can be used to reduce assessments in any year, subject to certain limitations.

Capital

The FDIC and the
Federal Reserve have issued risk-based and leverage capital guidelines applicable to banking organizations that they supervise. Under the risk-based capital requirements, the Company and the Bank are each generally required to maintain a minimum
ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) of 8%. At least half of the total capital is to be composed of common equity, retained earnings and qualifying
perpetual preferred stock, less certain intangibles (Tier 1 capital). The remainder may consist of certain subordinated debt, certain hybrid capital instruments and other qualifying preferred stock and a limited amount of the loan loss
allowance (Tier 2 capital and, together with Tier 1 capital, total capital).

In addition, each of the Federal
banking regulatory agencies has established minimum leverage capital ratio requirements for banking organizations. These requirements provide for a minimum leverage ratio of Tier 1 capital to adjusted average quarterly assets equal to 3% for bank
holding companies that are rated a composite 1 and 4% for all other bank holding companies. Bank holding companies are expected to maintain higher than minimum capital ratios if they have supervisory, financial, operational or managerial
weaknesses, or if they are anticipating or experiencing significant growth.

The risk-based capital standards of the FDIC and the Federal
Reserve explicitly identify concentrations of credit risk and the risk arising from non-traditional activities, including an institutions ability to manage these risks, as important factors to be taken into account by the agency in assessing
an institutions overall capital adequacy. The capital guidelines also provide that an institutions exposure to a decline in the economic value of its capital due to changes in interest rates be considered by the agency as a factor in
evaluating a banks capital adequacy. The FDIC and the Federal Reserve also have issued additional capital guidelines for bank holding companies that engage in certain trading activities. At present, these guidelines do not apply to the
Company.

Other Safety and Soundness Regulations

There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by Federal law and
regulatory



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policy that are designed to reduce potential loss exposure to the depositors of such depository institutions and to the
FDIC insurance funds in the event that the depository institution becomes in danger of default or is in default. For example, under a policy of the Federal Reserve with respect to bank holding company operations, a bank holding company is required
to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so otherwise. In addition, the cross-guarantee provisions of
Federal law require insured depository institutions under common control to reimburse the FDIC for any loss suffered or reasonably anticipated by the BIF as a result of the default of a commonly controlled insured depository institution or for any
assistance provided by the FDIC to a commonly controlled insured depository institution in danger of default. The FDIC may decline to enforce the cross-guarantee provision if it determines that a waiver is in the best interests of the BIF. The
FDICs claim for reimbursement is superior to claims of shareholders of the insured depository institution or its holding company but is subordinate to claims of depositors, secured creditors and holders of subordinated debt (other than
affiliates) of the commonly controlled insured depository institution.

The Federal banking agencies also have broad powers under current
Federal law to take prompt corrective action to resolve problems of insured depository institutions. The Federal Deposit Insurance Act requires that the federal banking agencies establish five capital levels for insured depository institutions -
well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. It also requires or permits such agencies to take certain
supervisory actions should an insured institutions capital level fall. For example, an adequately capitalized institution is restricted from accepting brokered deposits. An undercapitalized or significantly
undercapitalized institution must develop a capital restoration plan and is subject to a number of mandatory and discretionary supervisory actions. These powers and authorities are in addition to the traditional powers of the Federal banking
agencies to deal with undercapitalized institutions.

Federal regulatory authorities also have broad enforcement powers over the Company
and the Bank, including the power to impose fines and other civil and criminal penalties, and to appoint a receiver in order to conserve the assets of any such institution for the benefit of depositors and other creditors.

Reporting Terrorist Activities: The Federal Bureau of Investigation (FBI) has sent, and will send, banking regulatory agencies lists of the
names of persons suspected of involvement in the September 11, 2001 terrorist attacks and other attacks as they may occur and are investigated. The Bank has been requested, and may be requested in the future, to search its records for any
relationships or transactions with persons on those lists. In addition, on an ongoing basis, the Office of Foreign Assets Control (OFAC), a division of the Department of the Treasury, is responsible for helping to insure that United
States entities do not engage in transactions with enemies of the United States, as defined by various Executive Orders and Acts of Congress. If the Bank finds a name on any transaction, account or wire transfer that is on an OFAC list,
it must freeze that account, file a suspicious activity report and notify the FBI. The Bank actively checks high-risk OFAC areas such as new accounts, wire transfers and customer files.



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Payment of Dividends

The Company is a legal entity separate and distinct from the Bank. Virtually all of the cash revenues of the Company results from dividends paid to the
Company by the Bank. Under Virginia law a Virginia chartered bank may not declare a dividend in excess of its undivided profits. In addition, as a Virginia corporation the Bank may not declare a dividend if after the dividend it cannot pay its debts
as they become due or its assets would exceed its liabilities. A bank may not declare or pay any dividend if, after making the dividend, the bank would be undercapitalized, as defined in regulations of the FDIC. In addition, the Company
is subject to various general regulatory policies relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The Federal Reserve has indicated that banking organizations should generally pay
dividends only if, (1) the organizations net income available to common shareholders over the past year has been sufficient to fully fund the dividends, and (2) the prospective rate of earnings retention appears consistent with the
organizations capital needs, asset quality and overall financial condition.

Community Reinvestment

The requirements of the Community Reinvestment Act (CRA) are applicable to the Bank. The CRA imposes on financial institutions an affirmative
and ongoing obligation to meet the credit needs of their local communities, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of those institutions. A financial institutions efforts in meeting
community credit needs currently are evaluated as part of the examination process pursuant to a number of assessment factors. These factors also are considered in evaluating mergers, acquisitions and applications to open a branch or facility. The
Company strives to meet the credit needs of all aspects of its market, consistent with safe and sound banking practices. Bank of Botetourt holds an outstanding rating, as publicly disclosed in its most recent CRA examination report issued by the
FDIC.

Interstate Banking and Branching

Current Federal law authorizes interstate acquisitions of banks and bank holding companies without geographic limitation. A bank headquartered in one state is able to merge with a bank headquartered in another state,
as long as neither of the states has opted out of such interstate merger authority prior to such date. Virginia, North Carolina, West Virginia and Maryland all permit such mergers. Once a bank has established branches in a state through an
interstate merger transaction, the bank may establish and acquire additional branches at any location in the state where a bank headquartered in that state could have established or acquired branches under applicable Federal or state law.



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Economic and Monetary Polices

The operations of the Company are affected not only by general economic conditions, but also by the economic and monetary policies of various regulatory
authorities. In particular, the Federal Reserve regulates money, credit and interest rates in order to influence general economic conditions. These policies have a significant influence on overall growth and distribution of loans, investments and
deposits and affect interest rates charged on loans or paid for time and savings deposits. Federal Reserve monetary policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so
in the future.

Item 2. Properties

The Company
and the Bank are headquartered in the Main Office at 19747 Main Street, Buchanan, Virginia. The Bank owns and operates branches at the following locations.



|                        |  |            |  |               |  |            
|----------------------- |  | ---------- |  | ------------- |  | -----------
|Office Location & Phone |  | YearOpened |  | SquareFootage |  | OwnedLeased
|Main Office             |  | 1923       |  | 6200          |  | Owned      
|Buchanan Office         |  |            |  |               |  |            
|19747 Main Street       |  |            |  |               |  |            
|Buchanan, VA 24066      |  |            |  |               |  |            
|540-254-1721            |  |            |  |               |  |            
|                        |  |            | 
|Daleville Office        |  | 1989       |  | 3000          |  | Owned      
|670 Roanoke Rd          |  |            |  |               |  |            
|Daleville, VA 24083     |  |            |  |               |  |            
|540-992-4777            |  |            |  |               |  |            
|                        |  |            | 
|Eagle Rock Office       |  | 1993       |  | 1600          |  | Owned      
|58 Railroad Ave         |  |            |  |               |  |            
|Eagle Rock, VA 24085    |  |            |  |               |  |            
|540-884-2265            |  |            |  |               |  |            
|                        |  |            | 
|Troutville Office       |  | 1995       |  | 5000          |  | Owned      
|5462 Lee Highway        |  |            |  |               |  |            
|Troutville, VA 24175    |  |            |  |               |  |            
|540-966-3850            |  |            |  |               |  |            
|                        |  |            | 
|Operations Center       |  | 1995       |  | 8500          |  | Owned      
|19800 Main Street       |  |            |  |               |  |            
|Buchanan, VA 24066      |  |            |  |               |  |            
|540-473-1173            |  |            |  |               |  |            



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|                           |  |      |  |      |  |      
|-------------------------- |  | ---- |  | ---- |  | -----
|Bonsack Office             |  | 1997 |  | 1850 |  | Owned
|3801 Challenger Ave        |  |      |  |      |  |      
|Roanoke, VA 24012          |  |      |  |      |  |      
|540-777-2265               |  |      |  |      |  |      
|                           |  |      | 
|Lexington Office           |  | 2003 |  | 7600 |  | Owned
|65 East Midland Trail      |  |      |  |      |  |      
|Lexington, VA 24450        |  |      |  |      |  |      
|540-463-7224               |  |      |  |      |  |      
|                           |  |      | 
|Peters Creek Office        |  | 2001 |  | 1650 |  | Owned
|3130 Peters Creek Rd       |  |      |  |      |  |      
|Roanoke, VA 24019          |  |      |  |      |  |      
|540-777-2010               |  |      |  |      |  |      
|                           |  |      | 
|Fairfield Office           |  | 2004 |  | 2000 |  | Owned
|5905 North Lee Highway     |  |      |  |      |  |      
|Fairfield, VA 24435        |  |      |  |      |  |      
|540-377-5270               |  |      |  |      |  |      
|                           |  |      | 
|Loan Administration Center |  | 2005 |  | 1860 |  | Owned
|21 Stoney Battery Rd       |  |      |  |      |  |      
|Troutville, VA 24175       |  |      |  |      |  |      
|540-591-5000               |  |      |  |      |  |      

Item 3. Legal Proceedings

In the ordinary course of operations, the Company and the Bank expect to be parties to various legal proceedings. At present, there are no pending or
threatened proceedings against the Company or the Bank which, if determined adversely, would have a material effect on the business, results of operations, or financial position of the Company or the Bank.

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

No matters were submitted to a vote of Companys shareholders during the fourth quarter of 2005.



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PART II

Item 5. Market Price of and Dividends on the Registrants Common Equity and Related Stockholder Matters

Shares of
the Companys Common Stock are neither listed on any stock exchange nor quoted on the Nasdaq Stock Market and trades infrequently. Shares of Common Stock have periodically been sold in a limited number of privately negotiated transactions.
Based on information available to it, the Company believes that from January 1, 2005 to December 31, 2005, the selling price of shares of Common Stock ranged from $22.50 to $29.00. There may, however, have been other transactions at other
prices not known to the Company.

Market Price and Dividends



|            |  |       |  |      
|----------- |  | ----- |  | -----
|            |  | High  |  | Low  
|2004:       |  |       |  |      
|1st Quarter |  | 23.25 |  | 20.00
|2nd Quarter |  | 23.50 |  | 20.50
|3rd Quarter |  | 24.00 |  | 23.00
|4th Quarter |  | 24.00 |  | 22.50
|            |  |      
|2005:       |  |       |  |      
|1st Quarter |  | 24.00 |  | 22.50
|2nd Quarter |  | 24.00 |  | 23.50
|3rd Quarter |  | 24.00 |  | 22.50
|4th Quarter |  | 29.00 |  | 25.00

Dividends Declared



|        |  |     
|------- |  | ----
|2004:   |  |     
|January |  | 0.11
|April   |  | 0.11
|July    |  | 0.12
|October |  | 0.12
|        | 
|2005:   |  |     
|January |  | 0.14
|April   |  | 0.14
|July    |  | 0.16
|October |  | 0.16

As of March 15, 2006, there were approximately 825 record holders of Common stock.



---

The Company is a legal entity separate and distinct from its subsidiary, and its cash revenues depend
primarily on the payment of dividends from the Bank. The Bank is subject to certain legal restrictions on the amount of dividends it is permitted to pay to the Company. In addition, the final determination of the timing, amount and payment of
dividends on shares of the Companys Common Stock is at the discretion of the Companys Board of Directors and will depend upon the earnings of the Company and the Bank, the financial condition of the Company and other factors, including
general economic conditions and applicable governmental regulations and policies.



---

Managements Discussion and Analysis



Managements Discussion and Analysis of Operations

Overview

Managements Discussion and Analysis is provided to
assist in the understanding and evaluation of Botetourt Bankshares, Inc.s financial condition and its results of operations. The following discussion should be read in conjunction with the Companys consolidated financial statements.

Botetourt Bankshares, Inc., the parent company of Bank of Botetourt, currently operates eight offices in three counties of Virginia. The main office is in
Buchanan, with other Botetourt County office locations in Daleville, Eagle Rock and Troutville. The Banks operations center is located in Buchanan and the loan administration center is located in Troutville. The Roanoke County offices are
located on Challenger Avenue in eastern Roanoke County and on Peters Creek Road in north Roanoke County. The Rockbridge County offices are located at 65 East Midland Trail in Lexington and 5905 N. Lee Highway in Fairfield.

The individual market conditions of each county vary from rural to urban with Botetourt County being the most rural and Roanoke County the most urban. The southern
portion of Botetourt County has enjoyed both residential and industrial growth due to the development of subdivisions and industrial parks. Bank of Botetourt and bank personnel work with local government and business leaders in an effort to continue
to attract industry to Botetourt County.

Earnings increased by 33.75% in 2005 to $ 3.210 million compared to $2.400 million for 2004 and $1.926
million in 2003. Return on average assets amounted to 1.43% in 2005, 1.17% in 2004, and 1.03% in 2003. All of these percentages compare favorably to members of our peer group. During 2005, 2004 and 2003, revenues from the Bank of Botetourt
represented approximately 99% of Botetourt Bankshares, Inc.s total revenues.

Average equity to average assets shows the Company with a strong
capital position with a ratio of 9.17% at December 31, 2005. Our capital position continues to be in line with our peer groups average.

The
total assets of Botetourt Bankshares, Inc. grew to $238.5 million in 2005 from $213.3 million in 2004, an 11.81% increase, continuing our strategy to grow the Company.

On July 20, 2002, the Sarbanes-Oxley Act was signed to increase the reliability of financial statements issued by public companies. The Act increases the number of independent parties responsible for the issuance
of the financial statements and increases the independence of those already involved in the financial statement process. At December 31, 2005, the Company was in compliance with the Act.

Management plans to continue increasing market share by expanding to contiguous markets using earnings from operations to fund the Companys growth. Currently,
management of Botetourt Bankshares, Inc. has no plans to raise capital for its expansion through external sources.

Critical Accounting Policies

The Companys financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). The notes
to the audited consolidated financial statements included in the Companys Annual Report on Form 10-KSB for the year ended December 31, 2005 contain a summary of its significant accounting policies. Management believes the Companys
policies with respect to the methodology for the determination of the allowance for loan losses involves a higher degree of complexity and requires management to make difficult and subjective judgments that often require assumptions or estimates
about highly uncertain matters. Accordingly, the Company considers the policies related to those areas critical.



---

Managements Discussion and Analysis



Table 1. Net Interest Income and Average Balances (thousands)



|                                              |                |      |                        |  |            |        |  |                |   |                        |   |            |  |   |                |  |                        |   |            |   |         |  |   |        |  |      |  
|--------------------------------------------- | -------------- | ---- | ---------------------- |  | ---------- | ------ |  | -------------- | - | ---------------------- | - | ---------- |  | - | -------------- |  | ---------------------- | - | ---------- | - | ------- |  | - | ------ |  | ---- | -
|                                              |                | 2005 |                        |  | 2004       |        |  | 2003           |  
|                                              | AverageBalance |      | InterestIncome/Expense |  | Yield/Cost |        |  | AverageBalance |   | InterestIncome/Expense |   | Yield/Cost |  |   | AverageBalance |  | InterestIncome/Expense |   | Yield/Cost |  
|Interest-earning assets:                      |                |      |                        |  |            |        |  |                |   |                        |   |            |  |   |                |  |                        |   |            |   |         |  |   |        |  |      |  
|Deposit in other banks                        |                | $    | 188                    |  | $          | 5      |  | 2.66           | % |                        | $ | 208        |  | $ | 2              |  | 0.96                   | % |            | $ | 232     |  | $ | 2      |  | 0.87 | %
|Taxable investment securities                 |                |      | 16,587                 |  |            | 569    |  | 3.43           | % |                        |   | 14,663     |  |   | 521            |  | 3.55                   | % |            |   | 25,530  |  |   | 977    |  | 3.83 | %
|Nontaxable investment securities              |                |      | 9,440                  |  |            | 405    |  | 4.29           | % |                        |   | 9,412      |  |   | 408            |  | 4.33                   | % |            |   | 9,010   |  |   | 405    |  | 4.50 | %
|Federal funds sold                            |                |      | 4,534                  |  |            | 159    |  | 3.51           | % |                        |   | 3,639      |  |   | 55             |  | 1.51                   | % |            |   | 4,088   |  |   | 45     |  | 1.10 | %
|Loans, net1                                   |                |      | 175,862                |  |            | 13,150 |  | 7.48           | % |                        |   | 158,934    |  |   | 11,029         |  | 6.94                   | % |            |   | 129,681 |  |   | 10,023 |  | 7.73 | %
|                                              |                |      |                        |  |            |        |  |                |   |                        |   |            |  |   |                |  |                        |   |            |   |         |  |   |        |  |      |  
|Total interest-earning assets                 |                |      | 206,611                |  |            | 14,288 |  |                |   |                        |   | 186,856    |  |   | 12,015         |  |                        |   |            |   | 168,541 |  |   | 11,452 |  |      |  
|                                              |                |      |                        |  |            |        |  |                |   |                        |   |            |  |   |                |  |                        |   |            |   |         |  |   |        |  |      |  
|Yield on average interest-earning assets      |                |      |                        |  |            |        |  | 6.92           | % |                        |   |            |  |   |                |  | 6.43                   | % |            |   |         |  |   |        |  | 6.80 | %
|                                              |                |      |                        |  |            |        |  |                |   |                        |   |            |  |   |                |  |                        |   |            |   |         |  |   |        |  |      |  
|Noninterest-earning assets:                   |                |      |                        |  |            |        |  |                |   |                        |   |            |  |   |                |  |                        |   |            |   |         |  |   |        |  |      |  
|Cash and due from banks                       |                |      | 8,404                  |  |            |        |  |                |   |                        |   | 10,752     |  |   |                |  |                        |   |            |   | 9,654   |  |   |        |  |      |  
|Premises and equipment                        |                |      | 5,825                  |  |            |        |  |                |   |                        |   | 5,713      |  |   |                |  |                        |   |            |   | 4,955   |  |   |        |  |      |  
|Interest receivable and other                 |                |      | 3,670                  |  |            |        |  |                |   |                        |   | 3,311      |  |   |                |  |                        |   |            |   | 3,259   |  |   |        |  |      |  
|                                              |                |      |                        |  |            |        |  |                |   |                        |   |            |  |   |                |  |                        |   |            |   |         |  |   |        |  |      |  
|Total noninterest-earning assets              |                |      | 17,899                 |  |            |        |  |                |   |                        |   | 19,776     |  |   |                |  |                        |   |            |   | 17,868  |  |   |        |  |      |  
|                                              |                |      |                        |  |            |        |  |                |   |                        |   |            |  |   |                |  |                        |   |            |   |         |  |   |        |  |      |  
|Total assets                                  |                | $    | 224,510                |  |            |        |  |                |   |                        | $ | 206,632    |  |   |                |  |                        |   |            | $ | 186,409 |  |   |        |  |      |  
|                                              |                |      |                        |  |            |        |  |                |   |                        |   |            |  |   |                |  |                        |   |            |   |         |  |   |        |  |      |  
|Interest-bearing liabilities:                 |                |      |                        |  |            |        |  |                |   |                        |   |            |  |   |                |  |                        |   |            |   |         |  |   |        |  |      |  
|Demand deposits                               |                | $    | 21,885                 |  |            | 22     |  | 0.10           | % |                        | $ | 20,589     |  |   | 21             |  | 0.10                   | % |            | $ | 18,056  |  |   | 23     |  | 0.13 | %
|Savings and money markets                     |                |      | 38,453                 |  |            | 289    |  | 0.75           | % |                        |   | 39,405     |  |   | 264            |  | 0.67                   | % |            |   | 33,709  |  |   | 266    |  | 0.79 | %
|Time deposits                                 |                |      | 112,043                |  |            | 3,742  |  | 3.34           | % |                        |   | 99,445     |  |   | 3,041          |  | 3.06                   | % |            |   | 93,737  |  |   | 3,384  |  | 3.61 | %
|Other borrowings                              |                |      | 544                    |  |            | 17     |  | 3.13           | % |                        |   | 953        |  |   | 14             |  | 1.47                   | % |            |   | 888     |  |   | 13     |  | 1.47 | %
|                                              |                |      |                        |  |            |        |  |                |   |                        |   |            |  |   |                |  |                        |   |            |   |         |  |   |        |  |      |  
|Total interest-bearing liabilities            |                |      | 172,925                |  |            | 4,070  |  |                |   |                        |   | 160,392    |  |   | 3,340          |  |                        |   |            |   | 146,390 |  |   | 3,686  |  |      |  
|                                              |                |      |                        |  |            |        |  |                |   |                        |   |            |  |   |                |  |                        |   |            |   |         |  |   |        |  |      |  
|Cost on average interest- bearing liabilities |                |      |                        |  |            |        |  | 2.35           | % |                        |   |            |  |   |                |  | 2.08                   | % |            |   |         |  |   |        |  | 2.52 | %
|                                              |                |      |                        |  |            |        |  |                |   |                        |   |            |  |   |                |  |                        |   |            |   |         |  |   |        |  |      |  
|Noninterest-bearing liabilities               |                |      |                        |  |            |        |  |                |   |                        |   |            |  |   |                |  |                        |   |            |   |         |  |   |        |  |      |  
|Demand deposits                               |                |      | 29,992                 |  |            |        |  |                |   |                        |   | 26,788     |  |   |                |  |                        |   |            |   | 22,014  |  |   |        |  |      |  
|Interest payable and other                    |                |      | 1,016                  |  |            |        |  |                |   |                        |   | 913        |  |   |                |  |                        |   |            |   | 964     |  |   |        |  |      |  
|                                              |                |      |                        |  |            |        |  |                |   |                        |   |            |  |   |                |  |                        |   |            |   |         |  |   |        |  |      |  
|Total noninterest-bearing liabilities         |                |      | 31,008                 |  |            |        |  |                |   |                        |   | 27,701     |  |   |                |  |                        |   |            |   | 22,978  |  |   |        |  |      |  
|                                              |                |      |                        |  |            |        |  |                |   |                        |   |            |  |   |                |  |                        |   |            |   |         |  |   |        |  |      |  
|Total liabilities                             |                |      | 203,933                |  |            |        |  |                |   |                        |   | 188,093    |  |   |                |  |                        |   |            |   | 169,368 |  |   |        |  |      |  
|                                              |                |      |                        |  |            |        |  |                |  
|Stockholders equity                          |                |      | 20,577                 |  |            |        |  |                |   |                        |   | 18,539     |  |   |                |  |                        |   |            |   | 17,041  |  |   |        |  |      |  
|                                              |                |      |                        |  |            |        |  |                |   |                        |   |            |  |   |                |  |                        |   |            |   |         |  |   |        |  |      |  
|Total liabilities and stockholders equity    |                | $    | 224,510                |  |            |        |  |                |   |                        | $ | 206,632    |  |   |                |  |                        |   |            | $ | 186,409 |  |   |        |  |      |  
|                                              |                |      |                        |  |            |        |  |                |   |                        |   |            |  |   |                |  |                        |   |            |   |         |  |   |        |  |      |  
|Net interest income                           |                |      |                        |  | $          | 10,218 |  |                |   |                        |   |            |  | $ | 8,675          |  |                        |   |            |   |         |  | $ | 7,766  |  |      |  
|                                              |                |      |                        |  |            |        |  |                |   |                        |   |            |  |   |                |  |                        |   |            |   |         |  |   |        |  |      |  
|Net yield on interest-earning assets          |                |      |                        |  |            |        |  | 4.95           | % |                        |   |            |  |   |                |  | 4.64                   | % |            |   |         |  |   |        |  | 4.61 | %
|                                              |                |      |                        |  |            |        |  |                |   |                        |   |            |  |   |                |  |                        |   |            |   |         |  |   |        |  |      |  

---

|(1) | Average loan balances include nonaccrual loans
|--- | ----------------------------------------------



---

Managements Discussion and Analysis



Net Interest Income

Net interest income, the principal source of bank earnings, is the amount of income generated by earning assets (primarily loans and investment securities) less the interest expense incurred on interest-bearing liabilities (primarily
deposits used to fund earning assets). Table 1 summarizes the major components of net interest income for the past three years and also provides yields and average balances.

Net interest income increased in 2005 to $10.2 million compared to $8.7 million in 2004 and $7.8 million in 2003. Competition for deposits and loans continue to be a major factor in net margins as does predatory
pricing and competition from unregulated organizations. The net interest margin for 2005 increased by 31 basis points to 4.95% compared to 4.64% for 2004 and 4.61% for 2003. The effects of changes in volumes and rates on net interest income in 2005
compared to 2004, and 2004 compared to 2003 are shown in Table 2.

Interest income for 2005 increased by $2.3 million to $14.3 million from $12.0 million
in 2004. Interest income in 2003 totaled $11.5 million. The increase in interest income in 2005 from 2004 and in 2004 over 2003 were both the result of an increase in loan volume and a rising interest rate environment.

Interest expense increased in 2005 by $730,000 to $4.1 million from $3.3 million in 2004. The increase in 2005 from 2004 was due primarily to growth in interest-bearing
deposits and higher interest rates paid on deposits. The $400,000 decrease in 2004 from 2003 to $3.3 million from $3.7 million was due primarily to lower rates paid on deposits. Interest paid on time deposits, which make up the largest portion of
interest-bearing deposits, increased $701,000, or 23.1%, from 2004 to 2005. The average rate paid on time deposits increased 28 basis points to 3.34% in 2005 from 3.06% in 2004.

Table 2. Rate/Volume Variance Analysis (thousands)



|                                 |                                |                       |       |                       |                       |   |                                |   |      |                       |       |        |  |   |       |   |  |   |      |   |  |   |       |  
|-------------------------------- | ------------------------------ | --------------------- | ----- | --------------------- | --------------------- | - | ------------------------------ | - | ---- | --------------------- | ----- | ------ |  | - | ----- | - |  | - | ---- | - |  | - | ----- | -
|                                 |                                | 2005 Compared to 2004 |       |                       | 2004 Compared to 2003 |  
|                                 | InterestIncome/ExpenseVariance |                       |       | VarianceAttributed To |                       |   | InterestIncome/ExpenseVariance |   |      | VarianceAttributed To |      
|                                 |                                | Rate                  |       |                       | Volume                |   |                                |   | Rate |                       |       | Volume | 
|Interest-earning assets:         |                                |                       |       |                       |                       |   |                                |   |      |                       |       |        |  |   |       |   |  |   |      |   |  |   |       |  
|Deposits in other banks          |                                | $                     | 3     |                       |                       | $ | 3                              |   |      | $                     |      |        |  | $ |      |   |  | $ |     |   |  | $ |      |  
|Taxable investment securities    |                                |                       | 48    |                       |                       |   | (17                            | ) |      |                       | 65    |        |  |   | (456  | ) |  |   | (67  | ) |  |   | (389  | )
|Nontaxable investment securities |                                |                       | (3    | )                     |                       |   | (4                             | ) |      |                       | 1     |        |  |   | 3     |   |  |   | (12  | ) |  |   | 15    |  
|Federal funds sold               |                                |                       | 104   |                       |                       |   | 88                             |   |      |                       | 16    |        |  |   | 10    |   |  |   | 1    |   |  |   | 9     |  
|Loans                            |                                |                       | 2,121 |                       |                       |   | 894                            |   |      |                       | 1,227 |        |  |   | 1,006 |   |  |   | (833 | ) |  |   | 1,839 |  
|                                 |                                |                       |       |                       |                       |   |                                |   |      |                       |       |        |  |   |       |   |  |   |      |   |  |   |       |  
|Total                            |                                |                       | 2,273 |                       |                       |   | 964                            |   |      |                       | 1,309 |        |  |   | 563   |   |  |   | (911 | ) |  |   | 1,474 |  
|                                 |                                |                       |       |                       |                       |   |                                |   |      |                       |       |        |  |   |       |   |  |   |      |   |  |   |       |  
|Interest-bearing liabilities:    |                                |                       |       |                       |                       |   |                                |   |      |                       |       |        |  |   |       |   |  |   |      |   |  |   |       |  
|Demand deposits                  |                                |                       | 1     |                       |                       |   |                               |   |      |                       | 1     |        |  |   | (2    | ) |  |   |     |   |  |   | (2    | )
|Savings deposits                 |                                |                       | 25    |                       |                       |   | 31                             |   |      |                       | (6    | )      |  |   | (2    | ) |  |   |     |   |  |   | (2    | )
|Time deposits                    |                                |                       | 701   |                       |                       |   | 295                            |   |      |                       | 406   |        |  |   | (343  | ) |  |   | (570 | ) |  |   | 227   |  
|Other borrowings                 |                                |                       | 3     |                       |                       |   | 5                              |   |      |                       | (2    | )      |  |   | 1     |   |  |   |     |   |  |   | 1     |  
|                                 |                                |                       |       |                       |                       |   |                                |   |      |                       |       |        |  |   |       |   |  |   |      |   |  |   |       |  
|Total                            |                                |                       | 730   |                       |                       |   | 331                            |   |      |                       | 399   |        |  |   | (346  | ) |  |   | (570 | ) |  |   | 224   |  
|                                 |                                |                       |       |                       |                       |   |                                |   |      |                       |       |        |  |   |       |   |  |   |      |   |  |   |       |  
|Net interest income              |                                | $                     | 1,543 |                       |                       | $ | 633                            |   |      | $                     | 910   |        |  | $ | 909   |   |  | $ | (341 | ) |  | $ | 1,250 |  
|                                 |                                |                       |       |                       |                       |   |                                |   |      |                       |       |        |  |   |       |   |  |   |      |   |  |   |       |  

---

|(1) | The variance in interest attributed to both volume and rate has been allocated to variance
attributed to volume and variance attributed to rate in proportion to the absolute value of the change in each.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Balances of nonaccrual loans have been included in average loan balances.
|--- | -------------------------------------------------------------------------



---

Managements Discussion and Analysis



Provision for Loan Losses

The allowance for loan losses is established to provide for probable losses in the Companys loan portfolio. Loan losses and recoveries are charged or credited directly to the allowance. Management determines the provision for loan
losses required to maintain an allowance adequate to provide for any potential losses. The factors considered in making this decision are the collectibility of past due loans, volume of new loans, composition of the loan portfolio, known local
business problems, and general economic outlook.

The Bank has experienced above average loan growth during the past three years as economic conditions in
the Banks market area have remained strong. Nonperforming assets as year-end 2005 were 1.08% of loans outstanding as compared to 0.98% at year-end 2004. Bank management has implemented a comprehesive loan review program which includes a risk
rating system for all loans. The allowance for loan losses is evaluated on a regular basis by management and is based upon managements periodic review of the collectibility of the loans in light of historical experience, the nature and volume
of the loan portfolio, adverse situations that may affect the borrowers ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that
are susceptible to significant revision as more information becomes available. The allowance consists of specific, general and unallocated components. The adequacy of the allowance is determined by analysis of the different components. Management
continues to analyze the loan loss reserve. The loan loss provision allocated for 2005 reflects the amount determined by management to maintain the reserve at a level adequate based on the overall risk in the portfolio.

In 2005, management decreased the provision for loan losses reserve to $450,000 from $725,000 in 2004 due to overall improvement of asset quality in the loan portfolio
and less rapid loan growth. The provision for loan losses was $625,000 in 2003. The Banks allowance for loan losses as a percentage of total loans at the end of 2005 was 1.22% as compared to 1.25% in 2004 and 1.17% in 2003.

Additional information is contained in Tables 12, 13 and 14, and is discussed in Nonperforming and Problem Assets.

Other Income

Noninterest income consists of revenues generated from
a broad range of financial services and activities. The majority of noninterest income is a result of service charges on a growing deposit account base including charges for insufficient funds items and fees charged for nondeposit services such as
safe deposit box rental fees, and gains realized on the sale of fixed assets. Noninterest income totaled $1.511 million in 2005, an increase of $191,000 from the $1.320 million recorded in 2004. Noninterest income in 2003 totaled $1.148 million. The
primary sources of noninterest income for the past three years are summarized in Table 3.

Table 3. Sources of Noninterest Income
(thousands)



|                                    |  |      |       |      |   |       |  |   |      
|----------------------------------- |  | ---- | ----- | ---- | - | ----- |  | - | -----
|                                    |  | 2005 |       | 2004 |   | 2003 
|Service charges on deposit accounts |  | $    | 859   |      | $ | 760   |  | $ | 622  
|Other service charges and fees      |  |      | 179   |      |   | 182   |  |   | 181  
|Title insurance commissions         |  |      | 225   |      |   | 175   |  |   | 176  
|Safe deposit box rent               |  |      | 20    |      |   | 19    |  |   | 20   
|Gain on the sale of securities      |  |      | 7     |      |   | 1     |  |   | 2    
|Other income                        |  |      | 221   |      |   | 183   |  |   | 147  
|                                    |  |      |       |      |   |       |  |   |      
|Total noninterest income            |  | $    | 1,511 |      | $ | 1,320 |  | $ | 1,148
|                                    |  |      |       |      |   |       |  |   |      



---

Managements Discussion and Analysis



Other Expense

Noninterest expense for 2005 increased by $791,000 or 13.6% to $6.6 million. Noninterest expense in 2004 was $5.8 million and $5.6 million in 2003 (see Table 4). The overhead ratio of noninterest expense to adjusted total revenues (net
interest income plus noninterest income excluding securities transactions) was 56.5% in 2005, 58.4% in 2004 and 62.5% in 2003.

The opening of the
Banks Fairfield branch in Rockbridge County in 2004 and the loan administration center in 2005 resulted in higher personnel, occupancy, and furniture and equipment expenses. Expenses related to foreclosed assets increased in 2005 due to the
sale of other real estate owned property at a loss. Table 4 provides a further breakdown of noninterest expense for the past three years.

Table 4. Sources on Noninterest Expense (thousands)



|                                 |  |      |       |      |   |       |  |   |      
|-------------------------------- |  | ---- | ----- | ---- | - | ----- |  | - | -----
|                                 |  | 2005 |       | 2004 |   | 2003 
|Salaries & wages                 |  | $    | 2,872 |      | $ | 2,523 |  | $ | 2,344
|Employee benefits                |  |      | 942   |      |   | 856   |  |   | 774  
|                                 |  |      |       |      |   |       |  |   |      
|Total personnel expense          |  |      | 3,814 |      |   | 3,379 |  |   | 3,118
|                                 |  |      |      
|Occupancy expense                |  |      | 391   |      |   | 360   |  |   | 291  
|Furniture & equipment            |  |      | 570   |      |   | 458   |  |   | 429  
|Printing & supplies              |  |      | 123   |      |   | 115   |  |   | 111  
|FDIC deposit insurance           |  |      | 26    |      |   | 26    |  |   | 26   
|Professional services            |  |      | 102   |      |   | 100   |  |   | 95   
|Postage                          |  |      | 81    |      |   | 82    |  |   | 84   
|Telephone                        |  |      | 124   |      |   | 118   |  |   | 116  
|Courier fees                     |  |      | 51    |      |   | 44    |  |   | 36   
|Education & seminars             |  |      | 41    |      |   | 32    |  |   | 34   
|Travel expense                   |  |      | 27    |      |   | 24    |  |   | 25   
|Director fees and expense        |  |      | 91    |      |   | 71    |  |   | 62   
|Advertising and public relations |  |      | 143   |      |   | 176   |  |   | 141  
|Insurance                        |  |      | 48    |      |   | 26    |  |   | 25   
|Capital stock tax                |  |      | 140   |      |   | 118   |  |   | 107  
|Outside services                 |  |      | 164   |      |   | 155   |  |   | 168  
|Foreclosed assets, net           |  |      | 37    |      |   | 1     |  |   | 62   
|Other operating expense          |  |      | 652   |      |   | 549   |  |   | 639  
|                                 |  |      |       |      |   |       |  |   |      
|Total noninterest expense        |  | $    | 6,625 |      | $ | 5,834 |  | $ | 5,569
|                                 |  |      |       |      |   |       |  |   |      

Income Taxes

Income tax expense is based on amounts reported in the statements of income (after adjustments for non-taxable income and non-deductible expenses) and consists of taxes currently due plus deferred taxes on temporary differences in the
recognition of income and expense for tax and financial statement purposes. The deferred tax assets and liabilities represent the future Federal income tax return consequences of those differences, which will be taxable or deductible, depending when
the assets and liabilities are recovered or settled.

Income tax expense (substantially all Federal) was $1,444,578 in 2005, $1,035,716 in 2004 and
$794,027 for 2003 representing 31.0%, 30.1% and 29.2% of income before income taxes, respectively. Tax expense increased $408,862 or 39.5% from 2004 to 2005 due to increased earnings.



---

Managements Discussion and Analysis



The Banks deferred income tax benefits and liabilities result primarily from temporary differences (discussed
above) in provisions for loan losses, depreciation, deferred compensation, deferred income, pension expense, and investment security discount accretion.

At December 31, 2005, the Company had a net deferred income tax asset of approximately $344,000, which was included in other assets, compared to a net deferred income tax asset of $43,000 at December 31, 2004 which also was
included in other assets. The deferred income tax asset in 2005 consisted primarily of a deferred tax benefit of a $598,000 temporary difference in provision for loan losses offset by a $276,000 temporary difference in depreciation and a $66,000
temporary difference in accrued pension cost.

Earning Assets

Average earning assets increased $19.7 million in 2005 from the 2004 average of $186.9 million. Total average earning assets represented 92.0% and 90.4% of total average assets in 2005 and 2004, respectively. Average federal funds sold
accounted for 2.0% of total average assets compared to 1.8% in 2004. Average federal funds sold increased from $3.6 million for 2004 to $4.5 million for 2005. The Bank is required to maintain certain average cash reserve balances during the year.
During 2005, the requirement was lower due to the credits the Bank had earned. The lower requirement allowed the Bank to allocate more cash to interest-earning assets such as federal funds sold. Average interest bearing bank balances accounted for
0.1% of total average assets in both 2005 and 2004. Average loans accounted for 78.3% of total average assets in 2005 compared to 76.9% in 2004. For 2003, average net loans represented 69.6% of average assets. A summary of average assets for the
past three years is shown in Table 5.

Table 5. Average Asset Mix (thousands)



|                        |                |      |         |  |      |                |   |      |   |         |                |       |   |  |   |         |  |       |  
|----------------------- | -------------- | ---- | ------- |  | ---- | -------------- | - | ---- | - | ------- | -------------- | ----- | - |  | - | ------- |  | ----- | -
|                        |                | 2005 |         |  | 2004 |                |   | 2003 |  
|                        | AverageBalance |      | %       |  |      | AverageBalance |   | %    |   |         | AverageBalance |       | % | 
|Earning assets:         |                |      |         |  |      |                |   |      |   |         |                |       |   |  |   |         |  |       |  
|Loans, net              |                | $    | 175,862 |  | $    | 78.3           | % |      | $ | 158,934 |                | 76.9  | % |  | $ | 129,681 |  | 69.6  | %
|Investment securities   |                |      | 26,027  |  |      | 11.6           | % |      |   | 24,075  |                | 11.6  | % |  |   | 34,540  |  | 18.5  | %
|Federal funds sold      |                |      | 4,534   |  |      | 2.0            | % |      |   | 3,639   |                | 1.8   | % |  |   | 4,088   |  | 2.2   | %
|Deposits in other banks |                |      | 188     |  |      | 0.1            | % |      |   | 208     |                | 0.1   | % |  |   | 232     |  | 0.1   | %
|                        |                |      |         |  |      |                |   |      |   |         |                |       |   |  |   |         |  |       |  
|Total earning assets    |                |      | 206,611 |  |      | 92.0           | % |      |   | 186,856 |                | 90.4  | % |  |   | 168,541 |  | 90.4  | %
|                        |                |      |         |  |      |                |   |      |   |         |                |       |   |  |   |         |  |       |  
|Nonearning assets:      |                |      |         |  |      |                |   |      |   |         |                |       |   |  |   |         |  |       |  
|Cash and due from banks |                |      | 8,404   |  |      | 3.8            | % |      |   | 10,752  |                | 5.2   | % |  |   | 9,654   |  | 5.2   | %
|Premises and equipment  |                |      | 5,825   |  |      | 2.6            | % |      |   | 5,713   |                | 2.8   | % |  |   | 4,955   |  | 2.7   | %
|Other assets            |                |      | 3,670   |  |      | 1.6            | % |      |   | 3,311   |                | 1.6   | % |  |   | 3,259   |  | 1.7   | %
|                        |                |      |         |  |      |                |   |      |   |         |                |       |   |  |   |         |  |       |  
|Total nonearning assets |                |      | 17,899  |  |      | 8.0            | % |      |   | 19,776  |                | 9.6   | % |  |   | 17,868  |  | 9.6   | %
|                        |                |      |         |  |      |                |   |      |   |         |                |       |   |  |   |         |  |       |  
|Total assets            |                | $    | 224,510 |  |      | 100.0          | % |      | $ | 206,632 |                | 100.0 | % |  | $ | 186,409 |  | 100.0 | %
|                        |                |      |         |  |      |                |   |      |   |         |                |       |   |  |   |         |  |       |  

Loans

Average
net loans totaled $175.9 million during 2005, an increase of $17.0 million or 10.7% more than 2004. This reflects the continuing efforts to grow the loan portfolio prudently. A significant portion of the loan portfolio, $148.8 million or 80.2%, is
made up of loans secured by various types of real estate. Total loans secured by 1-4 family residential properties represented 30.3% of total loans at the end of 2005 while nonfarm/nonresidential properties made up 35.3%.

The Bank makes both consumer and commercial loans to all neighborhoods within its market area, including the low- and moderate-income areas. The market area is generally
defined to be all or portions of the Botetourt, Roanoke and Rockbridge counties of Virginia and the cities of Lexington, Buena Vista and Roanoke, Virginia. The Bank places emphasis on consumer based installment loans and commercial loans to small
and medium sized



---

Managements Discussion and Analysis



businesses. Predatory pricing and competition from unregulated organizations have also been a factor when generating new
loans. The amounts of loans outstanding by type for the last five years, and the maturity distribution of variable and fixed rate loans as of year-end 2005 are presented in Table 6 and Table 7, respectively.

Table 6. Loan Portfolio Summary (thousands)



|                                        |  |      |         |      |   |         |  |      |         |      |   |         |  |   |        
|--------------------------------------- |  | ---- | ------- | ---- | - | ------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|                                        |  | 2005 |         | 2004 |   | 2003    |  | 2002 |         | 2001
|Commercial, financial and agricultural  |  | $    | 96,630  |      | $ | 88,404  |  |      | 74,649  |      | $ | 54,878  |  | $ | 50,122 
|Real estate, construction               |  |      | 16,412  |      |   | 23,194  |  |      | 18,834  |      |   | 15,352  |  |   | 18,851 
|Real estate, mortgage                   |  |      | 56,320  |      |   | 43,931  |  |      | 38,560  |      |   | 31,818  |  |   | 34,410 
|Installment loans to individuals, other |  |      | 16,257  |      |   | 15,518  |  |      | 13,960  |      |   | 13,711  |  |   | 14,518 
|Leases                                  |  |      | 5       |      |   | 40      |  |      | 74      |      |   | 126     |  |   | 275    
|                                        |  |      |         |      |   |         |  |      |         |      |   |         |  |   |        
|Total                                   |  | $    | 185,624 |      | $ | 171,087 |  | $    | 146,077 |      | $ | 115,885 |  | $ | 118,176
|                                        |  |      |         |      |   |         |  |      |         |      |   |         |  |   |        

Interest rates charged on loans vary with the degree of risk, maturity and amount of the loan. Competitive
pressures, money market rates, availability of funds, and government regulation also influence interest rates. On average, loans yielded 7.5% in 2005 compared to an average yield of 6.9% in 2004.

Table 7. Maturity Schedule of Loans (thousands)



|                                   |  |                    |         |                                      |   |                             |  |   |        |       |   |        |  |   |         |  |       |  
|---------------------------------- |  | ------------------ | ------- | ------------------------------------ | - | --------------------------- |  | - | ------ | ----- | - | ------ |  | - | ------- |  | ----- | -
|                                   |  | 2005               |        
|                                   |  | Other Real Estate1 |         | CommercialFinanical and
Agricultural |   | Constructionand Development |  |   |        | Total |  
|                                   |  |                    |         | Others                               |   | Amount                      |  | % |       
|Fixed rate loans:                  |  |                    |         |                                      |   |                             |  |   |        |       |   |        |  |   |         |  |       |  
|Three months or less               |  | $                  | 2,135   |                                      | $ | 997                         |  | $ | 1,083  |       | $ | 2,047  |  | $ | 6,262   |  | 3.4   | %
|Over three months to twelve months |  |                    | 5,285   |                                      |   | 1,087                       |  |   | 2,596  |       |   | 1,120  |  |   | 10,088  |  | 5.4   | %
|Over twelve months to three years  |  |                    | 3,816   |                                      |   | 2,425                       |  |   | 1,597  |       |   | 4,073  |  |   | 11,911  |  | 6.4   | %
|Over three years to five years     |  |                    | 2,000   |                                      |   | 3,444                       |  |   | 396    |       |   | 4,125  |  |   | 9,965   |  | 5.4   | %
|Over five years to fifteen years   |  |                    | 10,304  |                                      |   | 514                         |  |   | 261    |       |   | 650    |  |   | 11,729  |  | 6.3   | %
|Over fifteen years                 |  |                    | 2,148   |                                      |   |                            |  |   | 22     |       |   |       |  |   | 2,170   |  | 1.2   | %
|                                   |  |                    |         |                                      |   |                             |  |   |        |       |   |        |  |   |         |  |       |  
|Total fixed rate loans             |  |                    | 25,688  |                                      |   | 8,467                       |  |   | 5,955  |       |   | 12,015 |  |   | 52,125  |  | 28.1  | %
|                                   |  |                    |         |                                      |   |                             |  |   |        |       |   |        |  |   |         |  |       |  
|Variable rate loans:               |  |                    |         |                                      |   |                             |  |   |        |       |   |        |  |   |         |  |       |  
|Three months or less               |  |                    | 39,129  |                                      |   | 9,579                       |  |   | 8,887  |       |   | 3,061  |  |   | 60,656  |  | 32.7  | %
|Over three months to twelve months |  |                    | 6,872   |                                      |   | 322                         |  |   | 287    |       |   | 125    |  |   | 7,606   |  | 4.1   | %
|Over twelve months to three years  |  |                    | 35,244  |                                      |   | 1,288                       |  |   | 804    |       |   |       |  |   | 37,336  |  | 20.1  | %
|Over three years to five years     |  |                    | 25,006  |                                      |   | 225                         |  |   | 445    |       |   | 883    |  |   | 26,559  |  | 14.3  | %
|Over five years to fifteen years   |  |                    | 482     |                                      |   |                            |  |   | 34     |       |   | 826    |  |   | 1,342   |  | 0.7   | %
|Over fifteen years                 |  |                    |        |                                      |   |                            |  |   |       |       |   |       |  |   |        |  |      | %
|                                   |  |                    |         |                                      |   |                             |  |   |        |       |   |        |  |   |         |  |       |  
|Total variable rate loans          |  |                    | 106,733 |                                      |   | 11,414                      |  |   | 10,457 |       |   | 4,895  |  |   | 133,499 |  | 71.9  | %
|                                   |  |                    |         |                                      |   |                             |  |   |        |       |   |        |  |   |         |  |       |  
|Total loans:                       |  |                    |         |                                      |   |                             |  |   |        |       |   |        |  |   |         |  |       |  
|Three months or less               |  |                    | 41,264  |                                      |   | 10,576                      |  |   | 9,970  |       |   | 5,108  |  |   | 66,918  |  | 36.1  | %
|Over three months to twelve months |  |                    | 12,157  |                                      |   | 1,409                       |  |   | 2,883  |       |   | 1,245  |  |   | 17,694  |  | 9.5   | %
|Over twelve months to three years  |  |                    | 39,060  |                                      |   | 3,713                       |  |   | 2,401  |       |   | 4,073  |  |   | 49,247  |  | 26.5  | %
|Over three years to five years     |  |                    | 27,006  |                                      |   | 3,669                       |  |   | 841    |       |   | 5,008  |  |   | 36,524  |  | 19.7  | %
|Over five years to fifteen years   |  |                    | 10,786  |                                      |   | 514                         |  |   | 295    |       |   | 1,476  |  |   | 13,071  |  | 7.0   | %
|Over fifteen years                 |  |                    | 2,148   |                                      |   |                            |  |   | 22     |       |   |       |  |   | 2,170   |  | 1.2   | %
|                                   |  |                    |         |                                      |   |                             |  |   |        |       |   |        |  |   |         |  |       |  
|Total loans                        |  | $                  | 132,421 |                                      | $ | 19,881                      |  | $ | 16,412 |       | $ | 16,910 |  | $ | 185,624 |  | 100.0 | %
|                                   |  |                    |         |                                      |   |                             |  |   |        |       |   |        |  |   |         |  |       |  

---

|(1) | Other Real Estate includes commercial real estate.
|--- | --------------------------------------------------



---

Managements Discussion and Analysis



Investment Securities

The Bank uses its investment portfolio to provide liquidity for unexpected deposit decreases or increased loan generation, to meet the Banks interest rate sensitivity goals, and to generate income. Management of the investment
portfolio has always been conservative with virtually all investments taking the form of purchases of U.S. Treasury, U.S. Government agencies, and State and local bond issues. All securities are high quality and high grade. Management views the
investment portfolio as a source of income and purchases securities with the intent of retaining them until maturity. However, adjustments are necessary in the portfolio to provide an adequate source of liquidity that can be used to meet funding
requirements for loan demand and deposit fluctuations and to control interest rate risk. Therefore, from time to time, management may sell certain securities prior to their maturity. Table 8 presents the investment portfolio at the end of 2005 by
major types of investments and maturity ranges.

At December 31, 2005, the market value of the investment portfolio was $29.73 million, representing a
$13,000 unrealized appreciation above amortized cost. This compared to a market value of $26.03 million and a $578,000 unrealized appreciation above amortized cost a year earlier.

Table 8. Investment Securities (thousands)



|                                        |  |                    |       |   |                           |   |        |                            |  |   |               |   |  |       |      |   |             |   |        |   |  |   |       
|--------------------------------------- |  | ------------------ | ----- | - | ------------------------- | - | ------ | -------------------------- |  | - | ------------- | - |  | ----- | ---- | - | ----------- | - | ------ | - |  | - | ------
|                                        |  | Amortized Cost Due |       |   |                          
|December 31, 2005                       |  | In OneYear orLess  |       |   | After OneThroughFive Yrs. |   |        | After FiveThroughTen Years |  |   | AfterTenYears |   |  | Total |      |   | MarketValue
|Investment securities:                  |  |                    |       |   |                           |   |        |                            |  |   |               |   |  |       |      |   |             |   |        |   |  |   |       
|US Government Agencies and Treasuries   |  | $                  | 6,748 |   |                           | $ | 13,328 |                            |  | $ |              |   |  | $     |     |   |             | $ | 20,076 |   |  | $ | 19,701
|State and political subs.               |  |                    | 470   |   |                           |   | 4,069  |                            |  |   | 4,749         |   |  |       | 100  |   |             |   | 9,388  |   |  |   | 9,394 
|Other                                   |  |                    |      |   |                           |   | 250    |                            |  |   |              |   |  |       |     |   |             |   | 250    |   |  |   | 632   
|                                        |  |                    |       |   |                           |   |        |                            |  |   |               |   |  |       |      |   |             |   |        |   |  |   |       
|Total                                   |  | $                  | 7,218 |   |                           | $ | 17,647 |                            |  | $ | 4,749         |   |  | $     | 100  |   |             | $ | 29,714 |   |  | $ | 29,727
|                                        |  |                    |       |   |                           |   |        |                            |  |   |               |   |  |       |      |   |             |   |        |   |  |   |       
|Weighted average yields:                |  |                    |       |   |                           |   |        |                            |  |   |               |   |  |       |      |   |             |   |        |   |  |   |       
|U.S. Government agencies and Treasuries |  |                    | 3.27  | % |                           |   | 3.91   | %                          |  |   |              | % |  |       |     | % |             |   |        |   |  |   |       
|States and political subs.              |  |                    | 6.84  | % |                           |   | 5.99   | %                          |  |   | 5.35          | % |  |       | 4.95 | % |             |   |        |   |  |   |       
|Other                                   |  |                    |      | % |                           |   | 6.00   | %                          |  |   |              | % |  |       |     | % |             |   |        |   |  |   |       
|                                        |  |                    |       |   |                           |  
|Consolidated                            |  |                    | 3.50  | % |                           |   | 4.42   | %                          |  |   | 5.35          | % |  |       | 4.95 | % |             |   | 4.35   | % |  |   |       



|                                        |           |      |             |      |           |        |             |   |        |  |   |       
|--------------------------------------- | --------- | ---- | ----------- | ---- | --------- | ------ | ----------- | - | ------ |  | - | ------
|                                        |           | 2004 |             | 2003
|                                        | BookValue |      | MarketValue |      | BookValue |        | MarketValue
|Investment securities:                  |           |      |             |      |           |        |             |   |        |  |   |       
|U.S. Government agencies and Treasuries |           | $    | 15,536      |      | $         | 15,442 |             | $ | 19,684 |  | $ | 19,749
|States and political subdivisions       |           |      | 9,666       |      |           | 9,887  |             |   | 9,081  |  |   | 9,498 
|Other                                   |           |      | 250         |      |           | 701    |             |   | 250    |  |   | 657   
|                                        |           |      |             |      |           |        |             |   |        |  |   |       
|Total                                   |           | $    | 25,452      |      | $         | 26,030 |             | $ | 29,015 |  | $ | 29,904
|                                        |           |      |             |      |           |        |             |   |        |  |   |       

Deposits

The
Bank relies on deposits generated in its market area to provide the majority of funds needed to support lending activities and for investments in liquid assets. More specifically, core deposits (total deposits less certificates of deposits in
denominations of $100,000 or more) are the primary funding source. The Banks balance sheet growth is largely determined by the availability of deposits in its markets, the cost of attracting the deposits, and the prospects of profitably
utilizing the available deposits by increasing the loan or investment portfolios. Market conditions have resulted in depositors shopping for deposit rates more than in the past. An increased customer awareness of interest rates adds to the
importance of rate management. The Banks management must continuously monitor market pricing, competitors rates, and internal interest rate spreads to maintain the Banks growth and profitability. The Bank attempts to structure
rates so as to promote deposit and asset growth while at the same time increasing overall profitability of the Bank.



---

Managements Discussion and Analysis



Average total deposits for the year ended December 31, 2005 amounted to $202.4 million which was an increase of
$16.1 million, or 8.7% over 2004. The percentage of the Banks average deposits that are interest-bearing decreased to 85.2% in 2005 from 85.6% in 2004. Average demand deposits which earn no interest increased to $30.0 million in 2005 from
$26.8 million in 2004 and $22.0 million in 2003. Average deposits and average rates paid for the past three years are summarized in Table 9.

Table 9. Deposit Mix (thousands)



|                                |  |                |         |             |      |      |                |      |             |         |  |                |   |             |   |         |  |      |  
|------------------------------- |  | -------------- | ------- | ----------- | ---- | ---- | -------------- | ---- | ----------- | ------- |  | -------------- | - | ----------- | - | ------- |  | ---- | -
|                                |  | 2005           |         |             | 2004 |      |                | 2003 |            
|                                |  | AverageBalance |         | AverageRate |      |      | AverageBalance |      | AverageRate |         |  | AverageBalance |   | AverageRate |  
|Interest-bearing deposits:      |  |                |         |             |      |      |                |      |             |         |  |                |   |             |   |         |  |      |  
|NOW accounts                    |  | $              | 21,885  |             | $    | 0.10 | %              |      | $           | 20,589  |  | 0.10           | % |             | $ | 18,056  |  | 0.13 | %
|Money Market                    |  |                | 12,861  |             |      | 1.25 | %              |      |             | 14,087  |  | 0.98           | % |             |   | 9,491   |  | 0.76 | %
|Savings                         |  |                | 25,592  |             |      | 0.50 | %              |      |             | 25,319  |  | 0.50           | % |             |   | 24,218  |  | 0.80 | %
|Small denomination certificates |  |                | 81,926  |             |      | 3.22 | %              |      |             | 76,517  |  | 2.99           | % |             |   | 73,503  |  | 3.58 | %
|Large denomination certificates |  |                | 30,117  |             |      | 3.68 | %              |      |             | 22,928  |  | 3.30           | % |             |   | 20,234  |  | 3.70 | %
|                                |  |                |         |             |      |      |                |      |             |         |  |                |   |             |   |         |  |      |  
|Total interest-bearing deposits |  |                | 172,381 |             |      | 2.35 | %              |      |             | 159,440 |  | 2.09           | % |             |   | 145,502 |  | 2.52 | %
|Noninteresting-bearing deposits |  |                | 29,992  |             |      |      |                |      |             | 26,788  |  |                |   |             |   | 22,014  |  |      |  
|                                |  |                |         |             |      |      |                |      |             |         |  |                |   |             |   |         |  |      |  
|Total deposits                  |  | $              | 202,373 |             |      |      |                |      | $           | 186,228 |  |                |   |             | $ | 167,516 |  |      |  
|                                |  |                |         |             |      |      |                |      |             |         |  |                |   |             |   |         |  |      |  

The average balance of certificates of deposit issued in denominations of $100,000 or more increased by $7.2
million or 31.4%, in 2005. Managements strategy has been to support loan and investment growth with core deposits and not to solicit aggressively the more volatile, large denomination certificates of deposit. Table 10 provides maturity
information relating to Certificate of Deposits of $100,000 or more at December 31, 2005.

Table 10. Large Time Deposit Maturities
(thousands)

Analysis of time deposits of $100,000 or more at December 31, 2005:



|                                                   |  |   |       
|-------------------------------------------------- |  | - | ------
|Remaining maturity of three months or less         |  | $ | 2,806 
|Remaining maturity over three through twelve month |  |   | 13,854
|Remaining maturity over twelve months              |  |   | 17,166
|                                                   |  |   |       
|Total time deposits of $100,000 or more            |  | $ | 33,826
|                                                   |  |   |       

Capital Adequacy

Stockholders equity was $21.7 million at December 31, 2005, an 11.3% increase over the 2004 year-end total of $19.5 million. The increase was primarily a result of earnings partially offset by dividends and a decrease in the
market value of available for sale securities. Average stockholders equity as a percentage of average total assets amounted to 9.2% in 2005 and 9.0% in 2004.

Regulatory guidelines relating to capital adequacy provide minimum risk-based ratios that assess capital adequacy while encompassing all credit risks, including those related to off-balance sheet activities. Capital ratios under these
guidelines are computed by weighing the relative risk of each asset category to derive risk-adjusted assets. The risk-based capital guidelines require minimum ratios of core (Tier 1) capital (common stockholders equity) to risk-weighted assets
of 4.0% and total regulatory capital (core capital plus allowance for loan losses up to 1.25% of risk-weighted assets) to risk-weighted assets of 8.0%. As of December 31, 2005 the Company and Bank had ratios of Tier 1 capital to risk-weighted
assets of 11.9% and 11.2%, respectively, and ratios of total capital to risk-weighted assets of 13.2% and 12.4%, respectively. These ratios continue to compare favorably to our peer group.



---

Managements Discussion and Analysis



Table 11. Year-End Risk-Based Capital (thousands)



|                                                                               |              |      |         |                  |      |   |              |   |  |                  |         |   |  |   |         |  
|------------------------------------------------------------------------------ | ------------ | ---- | ------- | ---------------- | ---- | - | ------------ | - |  | ---------------- | ------- | - |  | - | ------- | -
|                                                                               |              | 2005 |         |                  | 2004 |  
|                                                                               | Consolidated |      |         | Bank ofBotetourt |      |   | Consolidated |   |  | Bank ofBotetourt |        
|Tier I capital                                                                 |              | $    | 21,671  |                  |      | $ | 20,270       |   |  | $                | 19,028  |   |  | $ | 17,640  |  
|Qualifying allowance for loan losses(limited to 1.25% of risk-weighted assets) |              |      | 2,271   |                  |      |   | 2,271        |   |  |                  | 2,122   |   |  |   | 2,119   |  
|                                                                               |              |      |         |                  |      |   |              |   |  |                  |         |   |  |   |         |  
|Total regulatory capital                                                       |              | $    | 23,942  |                  |      | $ | 22,541       |   |  | $                | 21,150  |   |  | $ | 19,759  |  
|                                                                               |              |      |         |                  |      |   |              |   |  |                  |         |   |  |   |         |  
|Total risk-weighted assets                                                     |              | $    | 181,776 |                  |      | $ | 181,579      |   |  | $                | 169,778 |   |  | $ | 169,490 |  
|                                                                               |              |      |         |                  |      |   |              |   |  |                  |         |   |  |   |         |  
|Tier I as a percent of risk-weighted assets                                    |              |      | 11.9    | %                |      |   | 11.2         | % |  |                  | 11.2    | % |  |   | 10.4    | %
|Total regulatory capital as a percent of risk-weighted assets                  |              |      | 13.2    | %                |      |   | 12.4         | % |  |                  | 12.5    | % |  |   | 11.7    | %
|Leverage ratio*                                                                |              |      | 9.2     | %                |      |   | 8.6          | % |  |                  | 8.9     | % |  |   | 8.3     | %

---

|* | Tier I capital divided by average total assets for the quarter ended December 31.
|- | ---------------------------------------------------------------------------------

In addition, a minimum leverage ratio of Tier I capital to average total assets for the previous quarter is required by federal bank regulators, ranging from 3.0% to
5.0%, subject to the regulators evaluation of the Banks overall safety and soundness. As of December 31, 2005, the Company and the Bank had ratios of year-end Tier I capital to average total assets for the fourth quarter of 2005 of
9.2% and 8.6%, respectively. Table 11 sets forth summary information with respect to the Company and the Banks capital ratios at December 31, 2005 and 2004. All capital ratio levels indicate that the Company and the Bank are well
capitalized.

At December 31, 2005 the Company had 1,240,121 shares of common stock outstanding, which were held by approximately 825 shareholders of
record.

Nonperforming and Problem Assets

Certain
credit risks are inherent in making loans, particularly commercial and consumer loans. Management prudently assesses these risks and attempts to manage them effectively. The Bank attempts to use shorter-term loans and, although a portion of the
loans have been made based upon the value of collateral, it tries to rely primarily on the cash flow of the borrower as the source of repayment rather than the value of the collateral.

The Bank does not accrue interest, amortize deferred net loan fees or costs, or accrete discount on any asset (1) which is maintained on a cash basis because of deterioration in the financial condition of the
borrower, (2) for which payment in full of principal or interest is not expected, or (3) upon which principal or interest has been in default for a period of 90 days or more unless the asset is both well secured and in the process of
collection. An asset is well secured if it is secured (1) by collateral in the form of liens on or pledges of real or personal property, including securities, that have a realizable value sufficient to discharge the debt (including
accrued interest) in full, or (2) by the guarantee of a financially responsible party. An asset is in the process of collection if collection of the asset is proceeding in due course either (1) through legal action, including
judgement enforcement procedures, or (2) in appropriate circumstances, through collection efforts not involving legal actions that are reasonably expected to result in repayment of the debt or in its restoration to a current status in the near
future.



---

Managements Discussion and Analysis



For purposes of applying the third test for non-accrual status listed above, the date on which an asset reaches
non-accrual status is determined by its contractual terms. If the principal or interest on an asset becomes due and unpaid for 90 days or more on a date that falls between report dates, the asset should be placed in non-accrual status as of the date
it becomes 90 days past due and it should remain in non-accrual status until it meets the criteria for restoration to accrual status.

The Bank also
attempts to reduce repayment risks by adhering to internal credit policies and procedures. These policies and procedures include officer and customer limits, periodic loan documentation review and follow up on exceptions to credit policies.

Nonperforming assets are analyzed in Table 12 for the last five years.

Table 12. Nonperforming Assets



|                                    |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|----------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | --------- | -
|                                    |  | 2005 |           |   | 2004 |   |           | 2003 |  |   | 2002      |   |  | 2001 |          
|Non-accrual loans                   |  | $    | 308,000   |   |      | $ | 488,000   |      |  | $ | 219,000   |   |  | $    | 771,000   |   |  | $ | 293,000   |  
|Loans past due 90 days or more      |  |      | 1,685,000 |   |      |   | 1,127,000 |      |  |   | 876,000   |   |  |      | 1,161,000 |   |  |   | 1,080,000 |  
|Foreclosed properties               |  |      |          |   |      |   | 65,000    |      |  |   | 136,000   |   |  |      | 70,000    |   |  |   | 70,000    |  
|                                    |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|                                    |  | $    | 1,993,000 |   |      | $ | 1,680,000 |      |  | $ | 1,231,000 |   |  | $    | 2,002,000 |   |  | $ | 1,443,000 |  
|                                    |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Interest income, orginal terms      |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Non-accrual loans                   |  | $    | 77,270    |   |      | $ | 54,501    |      |  | $ | 25,150    |   |  | $    | 83,231    |   |  | $ | 25,234    |  
|Loans past due 90 days or more      |  |      | 73,958    |   |      |   | 72,261    |      |  |   | 83,997    |   |  |      | 102,350   |   |  |   | 4,502     |  
|Troubled debt restructurings        |  |      |          |   |      |   |          |      |  |   |          |   |  |      |          |   |  |   |          |  
|                                    |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|                                    |  | $    | 151,228   |   |      | $ | 126,762   |      |  | $ | 109,147   |   |  | $    | 185,581   |   |  | $ | 29,736    |  
|                                    |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Interest income, recognized         |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Non-accrual loans                   |  | $    | 140       |   |      | $ | 8,259     |      |  | $ | 1,112     |   |  | $    | 9,034     |   |  | $ | 6,001     |  
|Loans past due 90 days or more      |  |      | 78,088    |   |      |   | 33,122    |      |  |   | 44,823    |   |  |      | 58,539    |   |  |   | 2,780     |  
|Troubled debt restructurings        |  |      |          |   |      |   |          |      |  |   |          |   |  |      |          |   |  |   |          |  
|                                    |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Total                               |  | $    | 78,288    |   |      | $ | 41,381    |      |  | $ | 45,935    |   |  | $    | 67,573    |   |  | $ | 8,781     |  
|                                    |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Nonperforming assets to total loans |  |      | 1.08      | % |      |   | 0.98      | %    |  |   | 0.85      | % |  |      | 1.73      | % |  |   | 1.22      | %
|                                    |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  

The allowance for loan losses is maintained at a level management believes to be adequate to absorb potential
losses. Some of the factors that management considers in determining the appropriate level of the allowance for loan losses are: past loss experience, an evaluation of the current loan portfolio, identified loan problems, the loan volume
outstanding, the present and expected economic conditions in general, and in particular, how such conditions relate to the market areas that the Bank serves. Bank regulators also periodically review the Banks loans and other assets to assess
their quality. Credits deemed uncollectible are charged to the allowance. Provisions for loan losses and recoveries on loans previously charged off are added to the allowance. The accrual of interest on loans is discontinued on a loan when, in the
opinion of management, there is an indication that the borrower may be unable to meet payments as they become due.

The provision for loan losses, net
charge-offs and the activity in the allowance for loan losses is detailed in Table 13.



---

Managements Discussion and Analysis



Table 13. Loan Losses



|                                           |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|------------------------------------------ |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | --------- | -
|                                           |  | 2005 |           |   | 2004 |   |           | 2003 |  |   | 2002      |   |  | 2001 |          
|Allowance for loan losses, beginning       |  | $    | 2,131,534 |   |      | $ | 1,688,812 |      |  | $ | 1,413,997 |   |  | $    | 1,303,042 |   |  | $ | 1,083,955 |  
|Provision for loan losses, added           |  |      | 450,000   |   |      |   | 725,000   |      |  |   | 625,000   |   |  |      | 975,000   |   |  |   | 550,000   |  
|                                           |  |      |           |   |     
|Loans charged off                          |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Commercial, financial and agricultural     |  |      | (150,221  | ) |      |   | (130,490  | )    |  |   | (283,628  | ) |  |      | (509,480  | ) |  |   | (128,835  | )
|Real estate, construction                  |  |      | (41,884   | ) |      |   |           |      |  |   |          |   |  |      | (50,029   | ) |  |   |          |  
|Real estate, mortgage                      |  |      |          |   |      |   | (58,275   | )    |  |   | (11,023   | ) |  |      | (63,698   | ) |  |   |          |  
|Installment loans to individuals           |  |      | (169,306  | ) |      |   | (150,960  | )    |  |   | (331,700  | ) |  |      | (269,980  | ) |  |   | (223,574  | )
|                                           |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|                                           |  |      | (361,411  | ) |      |   | (339,725  | )    |  |   | (626,351  | ) |  |      | (893,187  | ) |  |   | (352,409  | )
|                                           |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Recoveries of loans previously charged off |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Commercial, financial and agricultural     |  |      | 3,601     |   |      |   | 7,778     |      |  |   | 192,258   |   |  |      | 4,952     |   |  |   | 5,119     |  
|Real estate, construction                  |  |      |          |   |      |   |          |      |  |   |          |   |  |      |          |   |  |   |          |  
|Real estate, mortgage                      |  |      | 1,350     |   |      |   | 1,764     |      |  |   | 24,282    |   |  |      | 91        |   |  |   |          |  
|Installment loans to individuals           |  |      | 46,000    |   |      |   | 47,905    |      |  |   | 59,626    |   |  |      | 24,099    |   |  |   | 16,377    |  
|                                           |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|                                           |  |      | 50,951    |   |      |   | 57,447    |      |  |   | 276,166   |   |  |      | 29,142    |   |  |   | 21,496    |  
|                                           |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Net charge-offs                            |  |      | (310,460  | ) |      |   | (282,278  | )    |  |   | (350,185  | ) |  |      | (864,045  | ) |  |   | (330,913  | )
|                                           |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Allowance for loan losses, ending          |  | $    | 2,271,074 |   |      | $ | 2,131,534 |      |  | $ | 1,688,812 |   |  | $    | 1,413,997 |   |  | $ | 1,303,042 |  
|                                           |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  

Net loan charge-offs as a percentage of average loans were 0.18% in 2005. Net loan charge-offs as a percentage of
average loans were 0.18% in 2004 and 0.27% in 2003. Gross charge-offs during 2005 totaled $361,411. Recoveries during 2005 totaled $50,951.

The loan
portfolio also included loans to various borrowers (watch loans) at year-end for which management had concerns about the ability of the borrowers to continue to comply with present loan repayment terms, and which could result in some of these loans
being uncollectible. Management monitors these loans carefully and has provided for these loans to the extent deemed necessary in the allowance for loan losses.

The allowance for loan losses was approximately $2.27 million, or 1.22% of gross loans outstanding at December 31, 2005, an increase of $139,540 above the reserve at December 31, 2004. Management realizes that general economic
trends greatly affect loan losses and no assurances can be made about future losses. Management does, however, consider the allowance for loan losses to be adequate at December 31, 2005.

The allocation of the reserve for loan losses is detailed in Table 14 below:

Table 14. Allocation of the Reserve for Loan Losses (thousands)



|                                        |  |        |       |          |       |   |        |      |          |  |       |        |  |          |       |  |        |   |          |   |       |        |       |          |  |   |       |  |       |  
|--------------------------------------- |  | ------ | ----- | -------- | ----- | - | ------ | ---- | -------- |  | ----- | ------ |  | -------- | ----- |  | ------ | - | -------- | - | ----- | ------ | ----- | -------- |  | - | ----- |  | ----- | -
|                                        |  | 2005   |       |          | 2004  |   |        | 2003 |          |  | 2002  |        |  | 2001     |      
|Balance at end of period applicable to  |  | Amount |       | Percent1 |       |   | Amount |      | Percent1 |  |       | Amount |  | Percent1 |       |  | Amount |   | Percent1 |   |       | Amount |       | Percent1 | 
|Commercial, financial and agricultural  |  | $      | 1,330 |          | 52.1  | % |        | $    | 1,145    |  | 51.7  | %      |  | $        | 859   |  | 51.1   | % |          | $ | 652   |        | 47.3  | %        |  | $ | 878   |  | 42.4  | %
|Real estate, construction               |  |        | 265   |          | 8.8   | % |        |      | 199      |  | 13.5  | %      |  |          | 135   |  | 12.9   | % |          |   | 148   |        | 13.2  | %        |  |   | 165   |  | 16.0  | %
|Real estate, mortgage                   |  |        | 175   |          | 30.3  | % |        |      | 356      |  | 25.7  | %      |  |          | 458   |  | 26.4   | % |          |   | 324   |        | 27.6  | %        |  |   | 120   |  | 29.1  | %
|Installment loans to individuals, other |  |        | 501   |          | 8.8   | % |        |      | 432      |  | 9.1   | %      |  |          | 236   |  | 9.5    | % |          |   | 290   |        | 11.8  | %        |  |   | 140   |  | 12.3  | %
|Leases                                  |  |        |      |          |      | % |        |      |         |  |      | %      |  |          | 1     |  | 0.1    | % |          |   |      |        | 0.1   | %        |  |   |      |  | 0.2   | %
|                                        |  |        |       |          |       |   |        |      |          |  |       |        |  |          |       |  |        |   |          |   |       |        |       |          |  |   |       |  |       |  
|Total                                   |  | $      | 2,271 |          | 100.0 | % |        | $    | 2,132    |  | 100.0 | %      |  | $        | 1,689 |  | 100.0  | % |          | $ | 1,414 |        | 100.0 | %        |  | $ | 1,303 |  | 100.0 | %
|                                        |  |        |       |          |       |   |        |      |          |  |       |        |  |          |       |  |        |   |          |   |       |        |       |          |  |   |       |  |       |  

---

|(1) | Represents the percentage of loans in each category to the total loans outstanding.
|--- | -----------------------------------------------------------------------------------



---

Managements Discussion and Analysis



Liquidity and Interest Rate Sensitivity

The principal goals of the Banks asset and liability management strategy are the maintenance of adequate liquidity and the management of interest rate risk. Liquidity is the ability to convert assets to cash to
fund depositors withdrawals or borrowers loans without significant loss. Interest rate risk management balances the effects of interest rate changes on assets that earn interest or liabilities on which interest is paid, to protect the
Bank from wide fluctuations in its net interest income which could result from interest rates changes.

Management must ensure that adequate funds are
available at all times to meet the needs of its customers. On the asset side of the balance sheet, maturing investments, loan payments, maturing loans, federal funds sold, and unpledged investment securities are principal sources of liquidity. On
the liability side of the balance sheet, liquidity sources include core deposits, the ability to increase large denomination certificates, federal funds lines from correspondent banks, borrowings from the Federal Reserve Bank and the Federal Home
Loan Bank, as well as the ability to generate funds through the issuance of long-term debt and equity.

The liquidity ratio (the level of liquid assets
divided by total deposits plus short-term liabilities) is considered to be adequate by management.

Table 15. Interest Rate Sensitivity
(thousands)



|                                                            |           |                                        |        |            |  |   |             |    |  |               |         |   |       |   |        |   |  |   |         |  
|----------------------------------------------------------- | --------- | -------------------------------------- | ------ | ---------- |  | - | ----------- | -- |  | ------------- | ------- | - | ----- | - | ------ | - |  | - | ------- | -
|                                                            |           | December 31, 2005 Maturities/Repricing |        |            |  |  
|                                                            | 1-3Months |                                        |        | 4-12Months |  |   | 13-60Months |    |  | Over 60Months |         |   | Total |  
|Earnings assets:                                            |           |                                        |        |            |  |   |             |    |  |               |         |   |       |   |        |   |  |   |         |  
|Loans                                                       |           | $                                      | 63,042 |            |  | $ | 23,899      |    |  | $             | 83,092  |   |       | $ | 15,591 |   |  | $ | 185,624 |  
|Investments                                                 |           |                                        | 270    |            |  |   | 6,893       |    |  |               | 17,330  |   |       |   | 4,810  |   |  |   | 29,303  |  
|Interest-bearing deposits with banks                        |           |                                        | 292    |            |  |   |            |    |  |               |        |   |       |   |       |   |  |   | 292     |  
|Federal funds sold                                          |           |                                        | 6,752  |            |  |   |            |    |  |               |        |   |       |   |       |   |  |   | 6,752   |  
|                                                            |           |                                        |        |            |  |   |             |    |  |               |         |   |       |   |        |   |  |   |         |  
|Total                                                       |           | $                                      | 70,356 |            |  | $ | 30,792      |    |  | $             | 100,422 |   |       | $ | 20,401 |   |  | $ | 221,971 |  
|                                                            |           |                                        |        |            |  |   |             |    |  |               |         |   |       |   |        |   |  |   |         |  
|Interest-bearing deposits:                                  |           |                                        |        |            |  |   |             |    |  |               |         |   |       |   |        |   |  |   |         |  
|NOW accounts                                                |           | $                                      | 5,942  |            |  | $ |            |    |  | $             | 17,827  |   |       | $ |       |   |  | $ | 23,769  |  
|Money market                                                |           |                                        | 3,756  |            |  |   |            |    |  |               | 11,267  |   |       |   |       |   |  |   | 15,023  |  
|Savings                                                     |           |                                        | 12,290 |            |  |   |            |    |  |               | 12,289  |   |       |   |       |   |  |   | 24,579  |  
|Certificates of deposit                                     |           |                                        | 13,991 |            |  |   | 52,403      |    |  |               | 54,713  |   |       |   |       |   |  |   | 121,107 |  
|Federal funds purchased                                     |           |                                        |       |            |  |   |            |    |  |               |        |   |       |   |       |   |  |   |        |  
|                                                            |           |                                        |        |            |  |   |             |    |  |               |         |   |       |   |        |   |  |   |         |  
|Total                                                       |           | $                                      | 35,979 |            |  | $ | 52,403      |    |  | $             | 96,096  |   |       | $ |       |   |  | $ | 184,478 |  
|                                                            |           |                                        |        |            |  |   |             |    |  |               |         |   |       |   |        |   |  |   |         |  
|Interest sensitivity gap                                    |           | $                                      | 34,377 |            |  | $ | (21,611     | )  |  | $             | 4,326   |   |       | $ | 20,401 |   |  | $ | 37,493  |  
|Cumulative interest sensitivity gap                         |           | $                                      | 34,377 |            |  | $ | 12,766      |    |  | $             | 17,092  |   |       | $ | 37,493 |   |  | $ | 37,493  |  
|Ratio of sensitivity gap to total earning assets            |           |                                        | 15.49  | %          |  |   | (9.74       | )% |  |               | 1.95    | % |       |   | 9.19   | % |  |   | 16.89   | %
|Cumulative ratio of sensitivity gap to total earning assets |           |                                        | 15.49  | %          |  |   | 5.75        | %  |  |               | 7.70    | % |       |   | 16.89  | % |  |   | 16.89   | %



---

Managements Discussion and Analysis



Interest rate risk is the effect that changes in interest rates would have on interest income and interest expense as
interest-sensitive assets and interest-sensitive liabilities either reprice or mature. Management attempts to maintain the portfolios of earning assets and interest-bearing liabilities with maturities or repricing opportunities at levels that will
afford protection from erosion of net interest margin, to the extent practical, from changes in interest rates. Table 15 shows the sensitivity of the Banks balance sheet on December 31, 2005. This table reflects the sensitivity of the
balance sheet as of that specific date and is not necessarily indicative of the position on other dates. At December 31, 2005, the Bank appeared to be asset-sensitive with earning assets exceeding interest-bearing liabilities subject to changes
in interest rates. Included in the interest-bearing liabilities subject to interest rate changes within three months are a portion of NOW accounts, money market accounts, and savings accounts which historically have not been as interest-sensitive as
other types of interest-bearing deposits. A larger portion of these accounts are included in the thirteen to sixty month time period due to the fact that they are not considered as interest rate sensitive as other deposit liabilities. The Bank
appears to be liability-sensitive in the four to twelve month time horizon and asset-sensitive in the thirteen to sixty month time horizon.

Matching
sensitive positions alone does not ensure that the Bank has no interest rate risk. All banks have interest rate risk. The repricing characteristics of assets are different from the repricing characteristics of funding sources. Thus, net interest
income can be impacted by changes in interest rates even if the repricing opportunities of assets and liabilities are perfectly matched.

The following table shows key financial ratios that often are used to compare the performance of financial institutions.

Table 16. Key Financial Ratios



|                                 |  |       |   |  |       |   |  |       |  
|-------------------------------- |  | ----- | - |  | ----- | - |  | ----- | -
|                                 |  | 2005  |   |  | 2004  |   |  | 2003  |  
|Return on average assets         |  | 1.43  | % |  | 1.17  | % |  | 1.03  | %
|Return on average equity         |  | 15.60 | % |  | 12.95 | % |  | 11.30 | %
|Average equity to average assets |  | 9.17  | % |  | 8.97  | % |  | 9.14  | %
|Dividend payout ratio            |  | 23.10 | % |  | 23.63 | % |  | 24.27 | %



---

Item 7

Independent Auditors Report

Board of Directors and Stockholders

Botetourt Bankshares, Inc.

Buchanan, Virginia

We have audited the consolidated balance sheets of Botetourt Bankshares, Inc. and subsidiaries as of December 31, 2005 and 2004 and the related consolidated statements of income, stockholders equity and
cash flows for each of the three years in the period ended December 31, 2005. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with auditing standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting
amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Botetourt Bankshares, Inc. and subsidiaries at December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31,
2005 in conformity with accounting principles generally accepted in the United States of America.



|                          
|--------------------------
|/s/ Larrowe & Company, PLC
|Galax, Virginia           
|January 20, 2006          



---

Consolidated Balance Sheets

December 31, 2005 and 2004



|                                                                                                                                                 |  |      |             |      |   |            
|------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | ----------- | ---- | - | -----------
|                                                                                                                                                 |  | 2005 |             | 2004
|Assets                                                                                                                                           |  |      |             |      |   |            
|                                                                                                                                                 |  |     
|Cash and due from banks                                                                                                                          |  | $    | 8,985,579   |      | $ | 5,789,445  
|Interest-bearing deposits with banks                                                                                                             |  |      | 291,648     |      |   | 194,700    
|Federal funds sold                                                                                                                               |  |      | 6,752,000   |      |   | 3,782,000  
|Investment securities available for sale                                                                                                         |  |      | 27,940,163  |      |   | 23,752,840 
|Investment securities held to maturity                                                                                                           |  |      | 1,809,776   |      |   | 2,259,662  
|Restricted equity securities                                                                                                                     |  |      | 474,000     |      |   | 439,700    
|Loans, net of allowance for loan losses of $2,271,074 in 2005 and $2,131,534 in 2004                                                             |  |      | 183,352,611 |      |   | 168,955,408
|Property and equipment, net                                                                                                                      |  |      | 5,784,284   |      |   | 5,795,172  
|Accrued income                                                                                                                                   |  |      | 1,222,811   |      |   | 981,683    
|Foreclosed assets                                                                                                                                |  |      |            |      |   | 50,000     
|Other assets                                                                                                                                     |  |      | 1,920,863   |      |   | 1,346,241  
|                                                                                                                                                 |  |      |             |      |   |            
|Total assets                                                                                                                                     |  | $    | 238,533,735 |      | $ | 213,346,851
|                                                                                                                                                 |  |      |             |      |   |            
|Liabilities and Stockholders Equity                                                                                                             |  |      |             |      |   |            
|                                                                                                                                                 |  |     
|Liabilities                                                                                                                                      |  |      |             |      |   |            
|Noninterest-bearing deposits                                                                                                                     |  | $    | 31,365,352  |      | $ | 27,790,202 
|Interest-bearing deposits                                                                                                                        |  |      | 184,477,729 |      |   | 164,857,274
|                                                                                                                                                 |  |      |             |      |   |            
|Total deposits                                                                                                                                   |  |      | 215,843,081 |      |   | 192,647,476
|                                                                                                                                                 |  |     
|Accrued interest payable                                                                                                                         |  |      | 548,317     |      |   | 394,572    
|Other liabilities                                                                                                                                |  |      | 407,292     |      |   | 848,630    
|                                                                                                                                                 |  |      |             |      |   |            
|Total liabilities                                                                                                                                |  |      | 216,798,690 |      |   | 193,890,678
|                                                                                                                                                 |  |      |             |      |   |            
|Commitments and contingencies                                                                                                                    |  |      |            |      |   |           
|                                                                                                                                                 |  |     
|Stockholders equity                                                                                                                             |  |      |             |      |   |            
|Common stock, $1.00 par value; 2,500,000 shares authorized; 1,240,121 and 1,232,745 shares issued and outstanding in 2005 and 2004,
respectively |  |      | 1,240,121   |      |   | 1,232,745  
|Additional paid-in capital                                                                                                                       |  |      | 1,510,751   |      |   | 1,361,970  
|Retained earnings                                                                                                                                |  |      | 18,960,299  |      |   | 16,491,678 
|Accumulated other comprehensive income (loss)                                                                                                    |  |      | 23,874      |      |   | 369,780    
|                                                                                                                                                 |  |      |             |      |   |            
|Total stockholders equity                                                                                                                       |  |      | 21,735,045  |      |   | 19,456,173 
|                                                                                                                                                 |  |      |             |      |   |            
|Total liabilities and stockholders equity                                                                                                       |  | $    | 238,533,735 |      | $ | 213,346,851
|                                                                                                                                                 |  |      |             |      |   |            

See Notes to Consolidated Financial Statements



---

Consolidated Statements of Income

Years ended December 31, 2005, 2004 and 2003



|                                                    |  |      |            |      |   |            |  |   |           
|--------------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- |  | - | ----------
|                                                    |  | 2005 |            | 2004 |   | 2003      
|Interest income                                     |  |      |            |      |   |            |  |   |           
|Loans and fees on loans                             |  | $    | 13,150,346 |      | $ | 11,028,391 |  | $ | 10,022,700
|Federal funds sold                                  |  |      | 158,555    |      |   | 55,295     |  |   | 44,976    
|Investment securities:                              |  |      |            |      |   |            |  |   |           
|Taxable                                             |  |      | 569,211    |      |   | 520,900    |  |   | 976,549   
|Exempt from federal income tax                      |  |      | 371,339    |      |   | 380,673    |  |   | 379,407   
|Dividend income                                     |  |      | 33,247     |      |   | 27,249     |  |   | 25,575    
|Deposits with banks                                 |  |      | 5,422      |      |   | 2,481      |  |   | 2,406     
|                                                    |  |      |            |      |   |            |  |   |           
|Total interest income                               |  |      | 14,288,120 |      |   | 12,014,989 |  |   | 11,451,613
|                                                    |  |      |            |      |   |            |  |   |           
|Interest expense                                    |  |      |            |      |   |            |  |   |           
|Deposits                                            |  |      | 4,052,837  |      |   | 3,325,837  |  |   | 3,673,333 
|Federal funds purchased                             |  |      | 16,848     |      |   | 13,751     |  |   | 12,475    
|                                                    |  |      |            |      |   |            |  |   |           
|Total interest expense                              |  |      | 4,069,685  |      |   | 3,339,588  |  |   | 3,685,808 
|                                                    |  |      |            |      |   |            |  |   |           
|Net interest income                                 |  |      | 10,218,435 |      |   | 8,675,401  |  |   | 7,765,805 
|                                                    |  |      |           
|Provision for loan losses                           |  |      | 450,000    |      |   | 725,000    |  |   | 625,000   
|                                                    |  |      |            |      |   |            |  |   |           
|Net interest income after provision for loan losses |  |      | 9,768,435  |      |   | 7,950,401  |  |   | 7,140,805 
|                                                    |  |      |            |      |   |            |  |   |           
|Noninterest income                                  |  |      |            |      |   |            |  |   |           
|Service charges on deposit accounts                 |  |      | 859,425    |      |   | 760,277    |  |   | 622,215   
|Other service charges and fees                      |  |      | 178,603    |      |   | 181,832    |  |   | 180,746   
|Commissions on title services                       |  |      | 224,748    |      |   | 174,729    |  |   | 176,166   
|Net realized gains (losses) on sales of securities  |  |      | 7,198      |      |   | 656        |  |   | 1,750     
|Other income                                        |  |      | 241,332    |      |   | 202,010    |  |   | 167,766   
|                                                    |  |      |            |      |   |            |  |   |           
|Total noninterest income                            |  |      | 1,511,306  |      |   | 1,319,504  |  |   | 1,148,643 
|                                                    |  |      |            |      |   |            |  |   |           
|Noninterest expense                                 |  |      |            |      |   |            |  |   |           
|Salaries and employee benefits                      |  |      | 3,814,394  |      |   | 3,378,528  |  |   | 3,118,394 
|Occupancy                                           |  |      | 391,494    |      |   | 359,963    |  |   | 291,308   
|Equipment                                           |  |      | 569,671    |      |   | 458,379    |  |   | 428,727   
|Foreclosed assets, net                              |  |      | 36,665     |      |   | 1,059      |  |   | 62,317    
|Advertising and public relations                    |  |      | 142,994    |      |   | 176,090    |  |   | 141,228   
|Outside services                                    |  |      | 163,507    |      |   | 154,746    |  |   | 168,776   
|Other general and administrative                    |  |      | 1,506,416  |      |   | 1,305,226  |  |   | 1,358,455 
|                                                    |  |      |            |      |   |            |  |   |           
|Total noninterest expense                           |  |      | 6,625,141  |      |   | 5,833,991  |  |   | 5,569,205 
|                                                    |  |      |            |      |   |            |  |   |           
|Income before income taxes                          |  |      | 4,654,600  |      |   | 3,435,914  |  |   | 2,720,243 
|                                                    |  |      |           
|Income tax expense                                  |  |      | 1,444,578  |      |   | 1,035,716  |  |   | 794,027   
|                                                    |  |      |            |      |   |            |  |   |           
|Net income                                          |  | $    | 3,210,022  |      | $ | 2,400,198  |  | $ | 1,926,216 
|                                                    |  |      |            |      |   |            |  |   |           
|Basic earnings per share                            |  | $    | 2.60       |      | $ | 1.95       |  | $ | 1.57      
|                                                    |  |      |            |      |   |            |  |   |           
|Diluted earnings per share                          |  | $    | 2.60       |      | $ | 1.95       |  | $ | 1.56      
|                                                    |  |      |            |      |   |            |  |   |           
|Basic weighted average shares outstanding           |  |      | 1,235,657  |      |   | 1,232,645  |  |   | 1,230,520 
|                                                    |  |      |            |      |   |            |  |   |           
|Diluted weighted average shares outstanding         |  |      | 1,236,967  |      |   | 1,233,356  |  |   | 1,230,880 
|                                                    |  |      |            |      |   |            |  |   |           

See Notes to Consolidated Financial Statements



---

Consolidated Statements of Changes in Stockholders Equity

Years ended December 31, 2005, 2004 and 2003



|                                                                                                              |        |              |        |                          |           |                  |   |           |                                            |   |            |       |  |   |          |   |  |   |            |  
|------------------------------------------------------------------------------------------------------------- | ------ | ------------ | ------ | ------------------------ | --------- | ---------------- | - | --------- | ------------------------------------------ | - | ---------- | ----- |  | - | -------- | - |  | - | ---------- | -
|                                                                                                              |        | Common Stock |        | AdditionalPaid-InCapital |           | RetainedEarnings |   |           | AccumulatedOtherComprehensiveIncome (Loss) |   |            | Total | 
|                                                                                                              | Shares |              | Amount |                          |           |                  |  
|Balance, December 31, 2002                                                                                    |        | 1,228,514    |        | $                        | 1,228,514 |                  | $ | 1,281,166 |                                            | $ | 13,199,861 |       |  | $ | 579,364  |   |  | $ | 16,288,905 |  
|                                                                                                              |        |              |        |                          |           |                 
|Net income                                                                                                    |        |             |        |                          |          |                  |   |          |                                            |   | 1,926,216  |       |  |   |         |   |  |   | 1,926,216  |  
|Net change in unrealized appreciation on investment securities available for sale, net of taxes of $(19,579)  |        |             |        |                          |          |                  |   |          |                                            |   |           |       |  |   | (38,006  | ) |  |   | (38,006    | )
|Reclassified securities gains realized, net of taxes of $(595)                                                |        |             |        |                          |          |                  |   |          |                                            |   |           |       |  |   | (1,155   | ) |  |   | (1,155     | )
|                                                                                                              |        |              |        |                          |           |                  |   |           |                                            |   |            |       |  |   |          |   |  |   |            |  
|Total comprehensive income                                                                                    |        | 1,887,055    |        |                          |           |                  |   |           |                                            |   |            |       |  |   |          |   |  |   |            |  
|                                                                                                              |        |              |        |                          |           |                 
|Dividends declared ($.38 per share)                                                                           |        |             |        |                          |          |                  |   |          |                                            |   | (467,534   | )     |  |   |         |   |  |   | (467,534   | )
|Stock issued                                                                                                  |        | 2,410        |        |                          | 2,410     |                  |   | 47,024    |                                            |   |           |       |  |   |         |   |  |   | 49,434     |  
|                                                                                                              |        |              |        |                          |           |                  |   |           |                                            |   |            |       |  |   |          |   |  |   |            |  
|Balance, December 31, 2003                                                                                    |        | 1,230,924    |        |                          | 1,230,924 |                  |   | 1,328,190 |                                            |   | 14,658,543 |       |  |   | 540,203  |   |  |   | 17,757,860 |  
|                                                                                                              |        |              |        |                          |           |                 
|Net income                                                                                                    |        |             |        |                          |          |                  |   |          |                                            |   | 2,400,198  |       |  |   |         |   |  |   | 2,400,198  |  
|Net change in unrealized appreciation on investment securities available for sale, net of taxes of $(87,570)  |        |             |        |                          |          |                  |   |          |                                            |   |           |       |  |   | (169,990 | ) |  |   | (169,990   | )
|Reclassified securities gains realized, net of taxes of $(223)                                                |        |             |        |                          |          |                  |   |          |                                            |   |           |       |  |   | (433     | ) |  |   | (433       | )
|                                                                                                              |        |              |        |                          |           |                  |   |           |                                            |   |            |       |  |   |          |   |  |   |            |  
|Total comprehensive income                                                                                    |        |              |        |                          |           |                  |   |           |                                            |   |            |       |  |   |          |   |  |   | 2,229,775  |  
|                                                                                                              |        |              |        |                          |           |                 
|Dividends declared ($.46 per share)                                                                           |        |             |        |                          |          |                  |   |          |                                            |   | (567,063   | )     |  |   |         |   |  |   | (567,063   | )
|Stock issued                                                                                                  |        | 1,821        |        |                          | 1,821     |                  |   | 33,780    |                                            |   |           |       |  |   |         |   |  |   | 35,601     |  
|                                                                                                              |        |              |        |                          |           |                  |   |           |                                            |   |            |       |  |   |          |   |  |   |            |  
|Balance, December 31, 2004                                                                                    |        | 1,232,745    |        |                          | 1,232,745 |                  |   | 1,361,970 |                                            |   | 16,491,678 |       |  |   | 369,780  |   |  |   | 19,456,173 |  
|                                                                                                              |        |              |        |                          |           |                 
|Net income                                                                                                    |        |             |        |                          |          |                  |   |          |                                            |   | 3,210,022  |       |  |   |         |   |  |   | 3,210,022  |  
|Net change in unrealized appreciation on investment securities available for sale, net of taxes of $(175,747) |        |             |        |                          |          |                  |   |          |                                            |   |           |       |  |   | (341,155 | ) |  |   | (341,155   | )
|Reclassified securities gains realized, net of taxes of $(2,447)                                              |        |             |        |                          |          |                  |   |          |                                            |   |           |       |  |   | (4,751   | ) |  |   | (4,751     | )
|                                                                                                              |        |              |        |                          |           |                  |   |           |                                            |   |            |       |  |   |          |   |  |   |            |  
|Total comprehensive income                                                                                    |        |              |        |                          |           |                  |   |           |                                            |   |            |       |  |   |          |   |  |   | 2,864,116  |  
|                                                                                                              |        |              |        |                          |           |                 
|Dividends declared ($.60 per share)                                                                           |        |             |        |                          |          |                  |   |          |                                            |   | (741,401   | )     |  |   |         |   |  |   | (741,401   | )
|Stock issued                                                                                                  |        | 7,376        |        |                          | 7,376     |                  |   | 148,781   |                                            |   |           |       |  |   |         |   |  |   | 156,157    |  
|                                                                                                              |        |              |        |                          |           |                  |   |           |                                            |   |            |       |  |   |          |   |  |   |            |  
|Balance, December 31, 2005                                                                                    |        | 1,240,121    |        | $                        | 1,240,121 |                  | $ | 1,510,751 |                                            | $ | 18,960,299 |       |  | $ | 23,874   |   |  | $ | 21,735,045 |  
|                                                                                                              |        |              |        |                          |           |                  |   |           |                                            |   |            |       |  |   |          |   |  |   |            |  

See Notes to Consolidated Financial Statements



---

Consolidated Statements of Cash Flows

Years ended December 31, 2005, 2004 and 2003



|                                                                        |  |      |             |   |      |   |             |      |  |   |             |  
|----------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                                                        |  | 2005 |             |   | 2004 |   |             | 2003 | 
|Cash flows from operating activities                                    |  |      |             |   |      |   |             |      |  |   |             |  
|Net income                                                              |  | $    | 3,210,022   |   |      | $ | 2,400,198   |      |  | $ | 1,926,216   |  
|Adjustments to reconcile net income to net cash provided by operations: |  |      |             |   |      |   |             |      |  |   |             |  
|Depreciation and amortization                                           |  |      | 573,746     |   |      |   | 517,045     |      |  |   | 444,496     |  
|Provision for loan losses                                               |  |      | 450,000     |   |      |   | 725,000     |      |  |   | 625,000     |  
|Deferred income taxes                                                   |  |      | (122,372    | ) |      |   | (139,185    | )    |  |   | 110,530     |  
|Net realized (gains) losses on sales of assets                          |  |      | 30,621      |   |      |   | 22,323      |      |  |   | 68,931      |  
|Accretion of discount on securities, net of amortization of premiums    |  |      | (6,712      | ) |      |   | (8,449      | )    |  |   | (13,074     | )
|Changes in assets and liabilities:                                      |  |      |             |   |      |   |             |      |  |   |             |  
|Accrued income                                                          |  |      | (241,128    | ) |      |   | 7,959       |      |  |   | 44,220      |  
|Other assets                                                            |  |      | (547,606    | ) |      |   | 303,735     |      |  |   | (595,192    | )
|Accrued interest payable                                                |  |      | 153,745     |   |      |   | 25,753      |      |  |   | (117,855    | )
|Other liabilities                                                       |  |      | (263,144    | ) |      |   | 472,176     |      |  |   | 265,864     |  
|                                                                        |  |      |             |   |      |   |             |      |  |   |             |  
|Net cash provided by operating activities                               |  |      | 3,237,172   |   |      |   | 4,326,555   |      |  |   | 2,759,136   |  
|                                                                        |  |      |             |   |      |   |             |      |  |   |             |  
|Cash flows from investing activities                                    |  |      |             |   |      |   |             |      |  |   |             |  
|Net (increase) decrease in interest-bearing deposits with banks         |  |      | (96,948     | ) |      |   | 54,775      |      |  |   | (42,268     | )
|Net (increase) decrease in federal funds sold                           |  |      | (2,970,000  | ) |      |   | (3,782,000  | )    |  |   | 11,067,000  |  
|Purchases of investment securities  held to maturity                   |  |      | (200,000    | ) |      |   | (675,000    | )    |  |   | (1,300,000  | )
|Purchases of investment securities  available for sale                 |  |      | (6,292,426  | ) |      |   | (8,323,447  | )    |  |   | (19,519,437 | )
|Maturities of investment securities  held to maturity                  |  |      | 650,000     |   |      |   | 850,000     |      |  |   | 2,300,750   |  
|Maturities of investment securities  available for sale                |  |      | 760,000     |   |      |   | 11,150,500  |      |  |   | 28,536,800  |  
|Sale of investment securities  available for sale                      |  |      | 800,500     |   |      |   | 500,156     |      |  |   |            |  
|Net (increase) decrease in loans                                        |  |      | (14,918,653 | ) |      |   | (25,292,677 | )    |  |   | (30,780,182 | )
|Purchases of property and equipment, net                                |  |      | (473,972    | ) |      |   | (844,552    | )    |  |   | (1,129,944  | )
|Proceeds from sales of property and equipment                           |  |      | 1,600       |   |      |   |            |      |  |   |            |  
|Proceeds from sales of foreclosed assets                                |  |      | 88,500      |   |      |   | 80,000      |      |  |   | 152,000     |  
|                                                                        |  |      |             |   |      |   |             |      |  |   |             |  
|Net cash used in investing activities                                   |  |      | (22,651,399 | ) |      |   | (26,282,245 | )    |  |   | (10,715,281 | )
|                                                                        |  |      |             |   |      |   |             |      |  |   |             |  
|Cash flows from financing activities                                    |  |      |             |   |      |   |             |      |  |   |             |  
|Net increase in noninterest-bearing deposits                            |  |      | 3,575,150   |   |      |   | 3,417,204   |      |  |   | 2,550,948   |  
|Net increase in interest-bearing deposits                               |  |      | 19,620,455  |   |      |   | 15,827,404  |      |  |   | 6,990,454   |  
|Net increase (decrease) in federal funds purchased                      |  |      |            |   |      |   | (3,971,000  | )    |  |   | 3,971,000   |  
|Common stock issued                                                     |  |      | 156,157     |   |      |   | 35,601      |      |  |   | 33,978      |  
|Dividends paid                                                          |  |      | (741,401    | ) |      |   | (567,063    | )    |  |   | (467,534    | )
|                                                                        |  |      |             |   |      |   |             |      |  |   |             |  
|Net cash provided by financing activities                               |  |      | 22,610,361  |   |      |   | 14,742,146  |      |  |   | 13,078,846  |  
|                                                                        |  |      |             |   |      |   |             |      |  |   |             |  
|Net increase (decrease) in cash and cash equivalents                    |  |      | 3,196,134   |   |      |   | (7,213,544  | )    |  |   | 5,122,701   |  
|                                                                        |  |      |            
|Cash and due from banks, beginning                                      |  |      | 5,789,445   |   |      |   | 13,002,989  |      |  |   | 7,880,288   |  
|                                                                        |  |      |             |   |      |   |             |      |  |   |             |  
|Cash and due from banks, ending                                         |  | $    | 8,985,579   |   |      | $ | 5,789,445   |      |  | $ | 13,002,989  |  
|                                                                        |  |      |             |   |      |   |             |      |  |   |             |  
|Supplemental disclosure of cash flow information                        |  |      |             |   |      |   |             |      |  |   |             |  
|Interest paid                                                           |  | $    | 3,915,940   |   |      | $ | 3,313,835   |      |  | $ | 3,803,663   |  
|                                                                        |  |      |             |   |      |   |             |      |  |   |             |  
|Taxes paid                                                              |  | $    | 1,984,432   |   |      | $ | 527,000     |      |  | $ | 908,900     |  
|                                                                        |  |      |             |   |      |   |             |      |  |   |             |  
|Supplemental disclosure of noncash activities                           |  |      |             |   |      |   |             |      |  |   |             |  
|Other real estate acquired in settlement of loans                       |  | $    | 71,450      |   |      | $ |            |      |  | $ | 237,785     |  
|                                                                        |  |      |             |   |      |   |             |      |  |   |             |  

See Notes to Consolidated Financial Statements



---

Notes to Consolidated Financial Statements

Note 1. Organization and Summary of Significant Accounting Policies

Organization

Botetourt Bankshares, Inc. (the Company) is a Virginia bank holding company whose principal activity is the ownership and management of its wholly-owned subsidiary, Bank
of Botetourt (the Bank). The Bank is a Virginia state chartered bank subject to regulation by the Bureau of Financial Institutions and the Federal Deposit Insurance Corporation. The Bank provides full banking services through eight branch offices in
Botetourt, Roanoke and Rockbridge counties. The Bank has a wholly-owned subsidiary, Buchanan Service Corporation, which conducts its operations through a minority interest in an insurance company, majority interests in two title insurance companies
and as an agent for sale of life and disability insurance.

The accounting and reporting policies of the Company, the Bank and Buchanan Service Corporation
follow generally accepted accounting principles and general practices of the financial services industry. Following is a summary of the more significant policies.

Critical Accounting Policies

The notes to the Companys audited consolidated financial statements contain a summary of
significant accounting policies. Management believes the policies with respect to the methodology for the determination of the allowance for loan losses involves a high degree of complexity. Management must make difficult and subjective judgments
which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could cause reported results to differ materially. These critical policies and their application are periodically
reviewed with the Audit Committee and Board of Directors.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, the Bank, and Buchanan Service Corporation. All significant intercompany transactions and
balances have been eliminated in consolidation.

Business Segments

The Company reports its activities as a single business segment. In determining proper segment definition, the Company considers the materiality of a potential segment and components of the business about which
financial information is available and regularly evaluated, relative to resource allocation and performance assessment.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

Material estimates that are particularly susceptible to significant change relate to the determination of the
allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowances for loan and foreclosed real estate losses, management obtains
independent appraisals for significant properties.

Substantially all of the Companys loan portfolio consists of loans in its market area.
Accordingly, the ultimate collectibility of a substantial portion of the Companys loan portfolio and the recovery of a substantial portion of the carrying amount of foreclosed real estate are susceptible to changes in local market conditions.
The regional economy is diverse, but influenced to an extent by the manufacturing and agricultural segments.



---

Notes to Consolidated Financial Statements

Note 1. Organization and Summary of Significant Accounting Policies, continued

Use of Estimates, continued

While management uses available information to recognize loan and foreclosed real estate losses, future additions to the allowances may be
necessary based on changes in local economic conditions. In addition, regulatory agencies, as a part of their routine examination process, periodically review the Companys allowances for loan and foreclosed real estate losses. Such agencies
may require additions to the allowances based on their judgments about information available to them at the time of their examinations. As a result of these factors, it is possible that the allowances for loan and foreclosed real estate losses may
change materially in the near term.

Cash and Cash Equivalents

For the purpose of presentation in the consolidated statements of cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet caption cash and due from banks.

Interest-bearing Deposits with Banks

Interest-bearing deposits with banks maturing within one year are carried at cost.

Trading Securities

The Company does not hold securities for short-term resale and therefore does not maintain a trading securities portfolio.

Securities

Debt securities that management has the positive
intent and ability to hold to maturity are classified as held to maturity and recorded at amortized cost. Securities not classified as held to maturity or trading, including equity securities with readily determinable fair values, are
classified as available for sale and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income.

Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held to maturity and available for sale securities below
their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (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 the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated
recovery in fair value. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

Loans Receivable

Loans receivable that management has the intent and ability to hold for the foreseeable future, or until maturity
or pay-off, are reported at their outstanding principal amount adjusted for charge-offs and the allowance for loan losses. Loan origination fees and costs are not capitalized and recognized as an adjustment to the yield on the related loan as
management does not consider such deferrals to be material to the Companys financial position or results of operations.

Discounts and premiums on
any purchased residential real estate loans are amortized to income using the interest method over the remaining period contractual maturity, adjusted for anticipated prepayments. Discounts and premiums on any purchased consumer loans are recognized
over the expected lives of the loans using methods that approximate the interest method.



---

Notes to Consolidated Financial Statements

Note 1. Organization and Summary of Significant Accounting Policies, continued

Loans Receivable, continued

Interest is accrued and credited to income based on the principal amount outstanding. The accrual of interest on impaired loans is discontinued
when, in managements opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash
payments are received. When facts and circumstances indicate the borrower has regained the ability to meet required payments, the loan is returned to accrual status. Past due status of loans is determined based on contractual terms.

Allowance for Loan Losses

The allowance for
loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed.
Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based
upon managements periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrowers ability to repay, estimated value of any
underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as either doubtful, substandard or
special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The
general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect managements estimate of probable losses.
The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

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

Large groups of smaller balance homogeneous loans are
collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures.

Property and Equipment

Land is carried at cost. Buildings, furniture and equipment, and leasehold improvements are carried at cost,
less accumulated depreciation and amortization computed principally by the straight-line method over the following estimated useful lives:



|                           |  |      
|-------------------------- |  | -----
|                           |  | Years
|Buildings and improvements |  | 10-50
|Furniture and equipment    |  | 3-10 



---

Notes to Consolidated Financial Statements

Note 1. Organization and Summary of Significant Accounting Policies, continued

Foreclosed Assets

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value at the date of foreclosure,
establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and
changes in the valuation allowance are included in net expenses from foreclosed assets.

Intangible Assets

Intangible assets consist of computer software and a purchase premium which are being amortized over three and fifteen years, respectively, using the straight-line
method. At December 31, 2005 and 2004, accumulated amortization was $543,254 and $470,544, respectively. Related amortization expense was $91,179, $60,981 and $57,612 for the three-year period ended December 31, 2005. Intangible assets
were classified as other assets on the balance sheet.

Stock-based Compensation

The Company accounts for its stock-based compensation plans using the accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. The Company is not
required to adopt the fair value based recognition provisions prescribed under SFAS No. 123, Accounting for Stock-Based Compensation, but complies with the disclosure requirements set forth in the Statement, which include disclosing pro
forma net income as if the fair value based method of accounting had been applied.

Pension and Profit Sharing/Thrift Plan

A noncontributory defined benefit pension plan is provided for all employees who meet eligibility requirements. To be eligible, an employee must be 21 years of age and
have completed one year of service. Plan benefits are based on final average compensation and years of service. The funding policy is to contribute the maximum deductible for federal income tax purposes. The Company also provides a profit
sharing/thrift plan with substantially all employees participating.

Advertising and Public Relations Expense

The Company expenses advertising and public relations costs as they are incurred.

Transfers of Financial Assets

Transfers of financial assets
are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free
of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them
before their maturity.

Income Taxes

Provision
for income taxes is based on amounts reported in the statements of income (after exclusion of non-taxable income such as interest on state and municipal securities) and consists of taxes currently due plus deferred taxes on temporary differences in
the recognition of income and expense for tax and financial statement purposes. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax
assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred taxes assets and liabilities are adjusted through the provision for income taxes.



---

Notes to Consolidated Financial Statements

Note 1. Organization and Summary of Significant Accounting Policies, continued

Income Taxes, continued

Deferred income tax liability relating to unrealized appreciation (or the deferred tax asset in the case of unrealized depreciation) on investment
securities available for sale is recorded in other liabilities (assets). Such unrealized appreciation or depreciation is recorded as an adjustment to equity in the financial statements and not included in income determination until realized.
Accordingly, the resulting deferred income tax liability or asset is also recorded as an adjustment to equity.

Basic Earnings per Share

Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares
outstanding during the period, after giving retroactive effect to stock splits and stock dividends.

Diluted Earnings per Share

The computation of diluted earnings per share is similar to the computation of basic earnings per share except that the denominator is increased to include the number
of additional common shares that would have been outstanding if dilutive potential common shares had been issued. The numerator is adjusted for any changes in income or loss that would result from the assumed conversion of those potential common
shares.

Comprehensive Income

Annual
comprehensive income reflects the change in the Companys equity during the year arising from transactions and events other than investments by, and distributions to, stockholders. It consists of net income plus certain other changes in assets
and liabilities that are reported as separate components of stockholders equity rather than as income or expense.

Financial Instruments

Derivatives that are used as part of the asset/liability management process are linked to specific assets or liabilities and have high correlation
between the contract and the underlying item being hedged, both at inception and throughout the hedge period. In addition, forwards and option contracts must reduce an exposures risk, and for hedges of anticipatory transactions, the
significant terms and characteristics of the transaction must be identified and the transactions must be probable of occurring. All derivative financial instruments held or issued by the Company are held or issued for purposes other than trading.
There were no derivatives at December 31, 2005 or 2004.

In the ordinary course of business the Company has entered into off-balance-sheet financial
instruments consisting of commitments to extend credit and commercial and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received.

Fair Value of Financial Instruments

Statement of Financial
Accounting Standards No. 107, Disclosures about Fair Value of Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet. In cases where quoted market prices
are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that
regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Statement No. 107 excludes certain financial instruments
and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.



---

Notes to Consolidated Financial Statements

Note 1. Organization and Summary of Significant Accounting Policies, continued

Fair Value of Financial
Instruments, continued

The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial
instruments:

Cash and due from banks: The carrying amounts reported in the balance sheet for cash and due from banks approximate their fair values.

Interest-bearing deposits with banks: The carrying amounts of interestbearing deposits with banks approximate their fair values.

Available for sale and held to maturity securities: Fair values for securities, excluding restricted equity securities, are based on quoted market prices,
where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. The carrying values of restricted equity securities approximate fair values.

Loans receivable: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts. The
fair values for other loans are estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Loan fair value estimates include judgments regarding
future expected loss experience and risk characteristics. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values, where applicable. The carrying amount of accrued interest receivable
approximates its fair value.

Deposit liabilities: The fair values disclosed for demand and savings deposits are, by definition, equal to the amount
payable on demand at the reporting date. The fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated contractual
maturities on such time deposits. The carrying amount of accrued interest payable approximates fair value.

Short-term
borrowings: The carrying amounts of federal funds purchased approximate fair value.

Other liabilities: The
carrying amounts of other liabilities approximate fair value.

Reclassification

Certain reclassifications have been made to the prior years financial statements to place them on a comparable basis with the current year. Net income and stockholders equity previously reported were not
affected by these reclassifications.

Recent Accounting Pronouncements

On March 9, 2004, the SEC Staff issued Staff Accounting Bulletin No. 105, Application of Accounting Principles to Loan Commitments (SAB 105). SAB 105 clarifies existing accounting practices
relating to the valuation of issued loan commitments, including interest rate lock commitments (IRLC), subject to SFAS No. 149 and Derivative Implementation Group Issue C13, Scope Exceptions: When a Loan Commitment is included
in the Scope of Statement 133. Furthermore, SAB 105 disallows the inclusion of the values of a servicing component and other internally developed intangible assets in the initial and subsequent IRLC valuation. The provisions of SAB 105 were
effective for loan commitments entered into after March 31, 2004. The Company adopted the provisions of SAB 105 effective April 1, 2004. Since the provisions of SAB 105 affect only the timing of the recognition of mortgage banking income,
the adoption of SAB 105 did not have a material adverse effect on either the Companys consolidated financial position or consolidated results of operations.



---

Notes to Consolidated Financial Statements

Note 1. Organization and Summary of Significant Accounting Policies, continued

Recent Accounting
Pronouncements, continued

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123(R) (SFAS No. 123(R)),
Share-Based Payment, which is a revision of FASB Statement No. 123 Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25 Accounting for Stock Issued to Employees. SFAS No. 123(R)
requires companies to recognize in the income statement the grant-date fair value of stock options and other equity-based compensation issued to employees over the period during which an employee is required to provide service in exchange for the
award, which will often be the shorter of the vesting period or the period the employee will be retirement eligible. SFAS No. 123(R) sets accounting requirements for share-based compensation to employees, including employee-stock
purchase plans (ESPPs). Awards to most nonemployee directors will be accounted for as employee awards. This Statement was to be effective for public companies that do not file as small business issuers as of the beginning of interim or annual
reporting periods beginning after June 15, 2005. In April 2005, the Securities and Exchange Commission (SEC) issued Release No. 2005-57, which defers the effective date of SFAS No. 123(R) for many registrants. Registrants that do not
file as small business users must adopt SFAS No. 123(R) as of the beginning of their first annual period beginning after June 15, 2005. Accordingly, the Company adopted SFAS No. 123(R) on January 1, 2006, and believes it will not
have a material effect on the consolidated financial statements.

In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB 107), which
contains guidance on applying the requirements in SFAS No. 123(R). SAB 107 provides guidance on valuation techniques, development of assumptions used in valuing employee share options and related MD&A disclosures. SAB 107 is effective for
the period in which SFAS No. 123(R) is adopted. The Company adopted SAB 107 on January 1, 2006, and believes it will not have a material effect on the consolidated financial statements.

In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154 (SFAS No. 154), Accounting Changes and Error Corrections, which
replaces APB Opinion No. 20 Accounting Changes and FASB Statement No. 3 Reporting Accounting Changes in Interim Financial Statements. SFAS No. 154 changes the requirements for the accounting for and reporting
of a change in an accounting principle. SFAS No. 154 requires retrospective application for voluntary changes in an accounting principle unless it is impracticable to do so. SFAS No. 154 is effective for accounting changes made in fiscal
years beginning after December 15, 2005. The Company adopted SFAS No. 154 on January 1, 2006, and believes it will not have a material effect on the consolidated financial statements.

Note 2. Restrictions on Cash

To comply with banking regulations, the
Bank is required to maintain certain average cash reserve balances. The daily average cash reserve requirement was approximately $3,375,000 and $350,000 for the periods including December 31, 2005 and 2004, respectively.

Note 3. Investment Securities

Debt and equity securities have been
classified in the consolidated balance sheets according to managements intent. The carrying amount of securities and their approximate fair values at December 31 follow:



|                                  |  |                |            |                  |   |                   |  |            |         |  |   |           
|--------------------------------- |  | -------------- | ---------- | ---------------- | - | ----------------- |  | ---------- | ------- |  | - | ----------
|2005                              |  | Amortized Cost |            | Unrealized Gains |   | Unrealized Losses |  | Fair Value
|Available for sale:               |  |                |            |                  |   |                   |  |            |         |  |   |           
|U.S. Treasury securities          |  | $              | 6,243,312  |                  | $ | 7,441             |  | $          | 37,475  |  | $ | 6,213,278 
|U.S. Government agency securities |  |                | 12,782,075 |                  |   |                  |  |            | 318,402 |  |   | 12,463,673
|State and municipal securities    |  |                | 8,628,601  |                  |   | 88,682            |  |            | 87,199  |  |   | 8,630,084 
|Corporate securities              |  |                | 250,001    |                  |   | 446,877           |  |            | 63,750  |  |   | 633,128   
|                                  |  |                |            |                  |   |                   |  |            |         |  |   |           
|                                  |  | $              | 27,903,989 |                  | $ | 543,000           |  | $          | 506,826 |  | $ | 27,940,163
|                                  |  |                |            |                  |   |                   |  |            |         |  |   |           



---

Notes to Consolidated Financial Statements

Note 3. Investment Securities, continued



|                                  |  |                |            |                  |   |                   |  |            |         |  |   |           
|--------------------------------- |  | -------------- | ---------- | ---------------- | - | ----------------- |  | ---------- | ------- |  | - | ----------
|                                  |  | Amortized Cost |            | Unrealized Gains |   | Unrealized Losses |  | Fair Value
|Held to maturity:                 |  |                |            |                  |   |                   |  |            |         |  |   |           
|U.S. Government agency securities |  | $              | 1,050,000  |                  | $ |                  |  | $          | 26,319  |  | $ | 1,023,681 
|State and municipal securities    |  |                | 759,776    |                  |   | 4,603             |  |            | 358     |  |   | 764,021   
|                                  |  |                |            |                  |   |                   |  |            |         |  |   |           
|                                  |  | $              | 1,809,776  |                  | $ | 4,603             |  | $          | 26,677  |  | $ | 1,787,702 
|                                  |  |                |            |                  |   |                   |  |            |         |  |   |           
|                                  |  |                |            |                 
|2004                              |  | Amortized Cost |            | Unrealized Gains |   | Unrealized Losses |  | Fair Value
|Available for sale:               |  |                |            |                  |   |                   |  |            |         |  |   |           
|U.S. Treasury securities          |  | $              | 4,737,818  |                  | $ | 18,904            |  | $          | 20,731  |  | $ | 4,735,991 
|U.S. Government agency securities |  |                | 9,748,002  |                  |   | 18,925            |  |            | 100,269 |  |   | 9,666,658 
|State and municipal securities    |  |                | 8,456,745  |                  |   | 244,736           |  |            | 52,220  |  |   | 8,649,261 
|Corporate securities              |  |                | 250,001    |                  |   | 450,929           |  |            |        |  |   | 700,930   
|                                  |  |                |            |                  |   |                   |  |            |         |  |   |           
|                                  |  | $              | 23,192,566 |                  | $ | 733,494           |  | $          | 173,220 |  | $ | 23,752,840
|                                  |  |                |            |                  |   |                   |  |            |         |  |   |           
|Held to maturity:                 |  |                |            |                  |   |                   |  |            |         |  |   |           
|U.S. Government agency securities |  | $              | 1,050,000  |                  | $ | 346               |  | $          | 10,857  |  | $ | 1,039,489 
|State and municipal securities    |  |                | 1,209,662  |                  |   | 27,557            |  |            |        |  |   | 1,237,219 
|                                  |  |                |            |                  |   |                   |  |            |         |  |   |           
|                                  |  | $              | 2,259,662  |                  | $ | 27,903            |  | $          | 10,857  |  | $ | 2,276,708 
|                                  |  |                |            |                  |   |                   |  |            |         |  |   |           

Restricted equity securities, which are carried at cost, consist of investments in stock of the Federal Home Loan
Bank of Atlanta (FHLB), and The Community Bankers Bank which are upstream correspondents of the Bank. The FHLB requires financial institutions to make equity investments in the FHLB in order to borrow from it. The Bank is required to
hold that stock so long as it borrows from the FHLB. The Banks stock in The Community Bankers Bank is restricted in the fact that the stock may only be repurchased by that company.

Investment securities with amortized cost of approximately $2,300,000 and $1,800,000 at December 31, 2005 and 2004, respectively, were pledged as collateral on public deposits and for other purposes as required
or permitted by law.

Gross realized gains and losses for the years ended December 31 are as follows:



|                |  |      |       |   |      |   |      |  |   |      
|--------------- |  | ---- | ----- | - | ---- | - | ---- |  | - | -----
|                |  | 2005 |       |   | 2004 |   | 2003
|Realized gains  |  | $    | 7,948 |   |      | $ | 656  |  | $ | 1,750
|Realized losses |  |      | (750  | ) |      |   |     |  |   |     
|                |  |      |       |   |      |   |      |  |   |      
|                |  | $    | 7,198 |   |      | $ | 656  |  | $ | 1,750
|                |  |      |       |   |      |   |      |  |   |      

The scheduled maturities of securities available-for-sale and securities held-to-maturity at December 31,
2005, were as follows:



|                                       |                |                    |            |                  |                |            |            |   |           |  |   |          
|-------------------------------------- | -------------- | ------------------ | ---------- | ---------------- | -------------- | ---------- | ---------- | - | --------- |  | - | ---------
|                                       |                | Available for Sale |            | Held to Maturity
|                                       | Amortized Cost |                    | Fair Value |                  | Amortized Cost |            | Fair Value
|Due in one year or less                |                | $                  | 6,847,828  |                  |                | 6,793,229  |            | $ | 369,976   |  |   | 371,686  
|Due after one year through five years  |                |                    | 16,306,959 |                  |                | 15,989,713 |            |   | 1,339,800 |  |   | 1,316,374
|Due after five years through ten years |                |                    | 4,649,201  |                  |                | 4,612,843  |            |   | 100,000   |  |   | 99,642   
|Due after ten years                    |                |                    | 100,001    |                  |                | 544,378    |            |   |          |  |   |         
|                                       |                |                    |            |                  |                |            |            |   |           |  |   |          
|                                       |                | $                  | 27,903,989 |                  | $              | 27,940,163 |            | $ | 1,809,776 |  | $ | 1,787,702
|                                       |                |                    |            |                  |                |            |            |   |           |  |   |          



---

Notes to Consolidated Financial Statements

Note 3. Investment Securities, continued

The following tables detail unrealized losses and related fair values in
the Banks investment securities portfolio. This information is aggregated by the length of time that individual securities have been in a continuous unrealized loss position as of December 31.



|                                      |            |                     |                   |                   |            |         |                   |   |            |  |                   |         |  |   |            |  |   |        
|------------------------------------- | ---------- | ------------------- | ----------------- | ----------------- | ---------- | ------- | ----------------- | - | ---------- |  | ----------------- | ------- |  | - | ---------- |  | - | -------
|                                      |            | Less Than 12 Months |                   | 12 Months or More |            | Total  
|                                      | Fair Value |                     | Unrealized Losses |                   | Fair Value |         | Unrealized Losses |   | Fair Value |  | UnrealizedLosses 
|2005                                  |            |                     |                   |                   |            |         |                   |   |            |  |                   |         |  |   |            |  |   |        
|U.S. Treasury securities              |            | $                   | 2,481,939         |                   | $          | 14,089  |                   | $ | 2,475,576  |  | $                 | 23,386  |  | $ | 4,957,515  |  | $ | 37,475 
|U.S. Government agency securities     |            |                     | 7,042,557         |                   |            | 91,098  |                   |   | 6,444,797  |  |                   | 253,623 |  |   | 13,487,354 |  |   | 344,721
|State and municipal securities        |            |                     | 2,013,748         |                   |            | 38,283  |                   |   | 1,322,623  |  |                   | 49,274  |  |   | 3,336,371  |  |   | 87,557 
|Corporate securities                  |            |                     | 186,250           |                   |            | 63,750  |                   |   |           |  |                   |        |  |   | 186,250    |  |   | 63,750 
|                                      |            |                     |                   |                   |            |         |                   |   |            |  |                   |         |  |   |            |  |   |        
|Total temporarily impaired securities |            | $                   | 11,724,494        |                   | $          | 207,220 |                   | $ | 10,242,996 |  | $                 | 326,283 |  | $ | 21,967,490 |  | $ | 533,503
|                                      |            |                     |                   |                   |            |         |                   |   |            |  |                   |         |  |   |            |  |   |        
|                                      |            |                     |                  
|                                      |            | Less Than 12 Months |                   | 12 Months or More |            | Total  
|                                      | Fair Value |                     | Unrealized Losses |                   | Fair Value |         | Unrealized Losses |   | Fair Value |  | Unrealized Losses
|2004                                  |            |                     |                   |                   |            |         |                   |   |            |  |                   |         |  |   |            |  |   |        
|U.S. Treasury securities              |            | $                   | 3,475,603         |                   | $          | 20,731  |                   | $ |           |  | $                 |        |  | $ | 3,475,603  |  | $ | 20,731 
|U.S. Government agency securities     |            |                     | 5,640,931         |                   |            | 58,074  |                   |   | 2,445,945  |  |                   | 53,052  |  |   | 8,086,876  |  |   | 111,126
|State and municipal securities        |            |                     | 1,444,840         |                   |            | 52,220  |                   |   |           |  |                   |        |  |   | 1,444,840  |  |   | 52,220 
|Corporate securities                  |            |                     |                  |                   |            |        |                   |   |           |  |                   |        |  |   |           |  |   |       
|                                      |            |                     |                   |                   |            |         |                   |   |            |  |                   |         |  |   |            |  |   |        
|Total temporarily impaired securities |            | $                   | 10,561,374        |                   | $          | 131,025 |                   | $ | 2,445,945  |  | $                 | 53,052  |  | $ | 13,007,319 |  | $ | 184,077
|                                      |            |                     |                   |                   |            |         |                   |   |            |  |                   |         |  |   |            |  |   |        

Management considers the nature of the investment, the underlying causes of the decline in market value, the
severity and duration of the decline in market value and other evidence, on a security by security basis, in determining if the decline in market value is other than temporary. Management believes all unrealized losses presented in the table above
to be temporary in nature.

Note 4. Loans Receivable

The major components of loans in the consolidated balance sheets at December 31 are as follows (in thousands):



|                                  |  |      |         |   |      |   |         |  
|--------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                  |  | 2005 |         |   | 2004 |  
|Commercial                        |  | $    | 19,975  |   |      | $ | 17,721  |  
|Real estate:                      |  |      |         |   |      |   |         |  
|Construction and land development |  |      | 16,412  |   |      |   | 23,194  |  
|Residential, 1-4 families         |  |      | 56,320  |   |      |   | 43,931  |  
|Residential, 5 or more families   |  |      | 130     |   |      |   | 132     |  
|Farmland                          |  |      | 10,439  |   |      |   | 8,748   |  
|Nonfarm, nonresidential           |  |      | 65,541  |   |      |   | 61,011  |  
|Agricultural                      |  |      | 545     |   |      |   | 792     |  
|Consumer                          |  |      | 14,034  |   |      |   | 13,732  |  
|Leases                            |  |      | 5       |   |      |   | 40      |  
|Other                             |  |      | 2,223   |   |      |   | 1,786   |  
|                                  |  |      |         |   |      |   |         |  
|                                  |  |      | 185,624 |   |      |   | 171,087 |  
|                                  |  |     
|Unearned income                   |  |      |        |   |      |   |        |  
|                                  |  |      |         |   |      |   |         |  
|Total loans                       |  |      | 185,624 |   |      |   | 171,087 |  
|                                  |  |     
|Allowance for loan losses         |  |      | (2,271  | ) |      |   | (2,132  | )
|                                  |  |      |         |   |      |   |         |  
|Loans, net                        |  | $    | 183,353 |   |      | $ | 168,955 |  
|                                  |  |      |         |   |      |   |         |  



---



Notes to Consolidated Financial Statements

Note 4. Loans Receivable, continued

Loans receivable include $92,000 and $187,000 in overdraft demand deposit
accounts at December 31, 2005 and 2004, respectively.

Note 5. Allowance for Loan Losses

Changes in the allowance for loan losses are as follows:



|                                  |  |      |           |   |      |   |           |      |  |   |           |  
|--------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                  |  | 2005 |           |   | 2004 |   |           | 2003 | 
|Balance, beginning                |  | $    | 2,131,534 |   |      | $ | 1,688,812 |      |  | $ | 1,413,997 |  
|                                  |  |      |          
|Provision charged to expense      |  |      | 450,000   |   |      |   | 725,000   |      |  |   | 625,000   |  
|Recoveries of amounts charged off |  |      | 50,951    |   |      |   | 57,447    |      |  |   | 276,166   |  
|Amounts charged off               |  |      | (361,411  | ) |      |   | (339,725  | )    |  |   | (626,351  | )
|                                  |  |      |           |   |      |   |           |      |  |   |           |  
|Balance, ending                   |  | $    | 2,271,074 |   |      | $ | 2,131,534 |      |  | $ | 1,688,812 |  
|                                  |  |      |           |   |      |   |           |      |  |   |           |  

The following is a summary of information pertaining to impaired and
nonperforming loans at December 31:



|                                                    |  |      |           |      |   |          
|--------------------------------------------------- |  | ---- | --------- | ---- | - | ---------
|                                                    |  | 2005 |           | 2004
|Impaired loans without a valuation allowance        |  | $    |          |      | $ | 11,036   
|Impaired loans with a valuation allowance           |  |      | 778,211   |      |   | 476,709  
|                                                    |  |      |           |      |   |          
|Total impaired loans                                |  | $    | 778,211   |      | $ | 487,745  
|                                                    |  |      |           |      |   |          
|Valuation allowance related to impaired loans       |  | $    | 49,191    |      | $ | 113,460  
|                                                    |  |      |           |      |   |          
|                                                    |  |     
|                                                    |  | 2005 |           | 2004
|Nonaccrual loans                                    |  | $    | 308,372   |      | $ | 487,745  
|Loans past due more than ninety days still accruing |  |      | 1,685,402 |      |   | 1,127,684
|                                                    |  |      |           |      |   |          
|                                                    |  | $    | 1,993,774 |      | $ | 1,615,429
|                                                    |  |      |           |      |   |          



|                                                        |  |      |         |      |   |         |  |   |        
|------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|                                                        |  | 2005 |         | 2004 |   | 2003   
|Average investment in impaired loans                    |  | $    | 471,153 |      | $ | 407,982 |  | $ | 531,425
|                                                        |  |      |         |      |   |         |  |   |        
|Interest income recognized for the year                 |  | $    | 21,304  |      | $ | 8,259   |  | $ | 1,112  
|                                                        |  |      |         |      |   |         |  |   |        
|Interest income recognized on a cash basis for the year |  | $    |        |      | $ | 259     |  | $ | 326    
|                                                        |  |      |         |      |   |         |  |   |        

The Company is not committed to lend additional funds to debtors whose loans have
been modified.

Note 6. Property and Equipment

Components of property and equipment and total accumulated depreciation at December 31 are as follows:



|                              |  |      |           |      |   |          
|----------------------------- |  | ---- | --------- | ---- | - | ---------
|                              |  | 2005 |           | 2004
|Land                          |  | $    | 1,121,389 |      | $ | 1,121,389
|Buildings and improvements    |  |      | 4,900,382 |      |   | 4,740,083
|Furniture and equipment       |  |      | 2,557,833 |      |   | 2,355,211
|                              |  |      |           |      |   |          
|                              |  |      | 8,579,604 |      |   | 8,216,683
|Less accumulated depreciation |  |      | 2,795,320 |      |   | 2,421,511
|                              |  |      |           |      |   |          
|                              |  | $    | 5,784,284 |      | $ | 5,795,172
|                              |  |      |           |      |   |          



---

Notes to Consolidated Financial Statements

Note 6. Property and Equipment, continued

Depreciation expense for 2005, 2004, and 2003 was $555,091, $498,391, and
$425,841 respectively.

The Bank began leasing out a portion of a branch facility to a third party in June 2003. The lease expires May 2006 and calls for
annual lease payments of $22,370. Rental income received related to this facility in 2005, 2004, and 2003 was $28,887, $29,587, and $19,387 respectively. The excess amount above the lease payment is cleaning services paid to the Bank for the portion
of the cleaning services rendered.

The Bank also leases storage space in its Loan Administration Center. The month-to-month lease was executed by a third
party in November 2004 and calls for monthly payments of $100 while in effect.

The Bank leases office space to Mountain Valley Title Insurance Agency, LLC
in the amount of $6,000 annually and paid quarterly and to Rockbridge Title Services, LLC in the amount of $6,000 annually and paid quarterly. These terms began in July 2005. Both of these companies are related party interests.

The Bank leases a parking lot adjacent to one of its branch banking facilities under an operating lease which will expire April 4, 2006. The lease calls for a total
annual payment of $100. The bank also has an equipment lease contract which expires in 2007. Annual payments for the equipment lease are $2,592.

The Bank
also leases three locations for automated teller machines. Two leases have expired and are currently under new lease negotiations while the third lease expires on February 12, 2006. Lease payments vary by location and by the number and type of
transactions processed.

Aggregate rental expense for 2005, 2004 and 2003 was $3,114, $6,881 and $22,765 respectively. Future minimum commitments under
noncancellable leases are as follows:



|           |  |   |       
|---------- |  | - | ------
|2006       |  | $ | 2,592 
|2007       |  |   | 648   
|Thereafter |  |   |      
|           |  |   |       
|           |  |   | $3,240
|           |  |   |       

Note 7. Deposits

The aggregate amount of time deposits in denominations of $100,000 or more at December 31, 2005 and 2004 was $33,826,201 and $24,449,542 respectively.

At December 31, 2005, the scheduled maturities of time deposits are as follows:



|           |  |   |            
|---------- |  | - | -----------
|2006       |  | $ | 66,394,201 
|2007       |  |   | 16,633,434 
|2008       |  |   | 4,986,722  
|2009       |  |   | 10,431,332 
|2010       |  |   | 22,661,303 
|Thereafter |  |   |           
|           |  |   |            
|           |  | $ | 121,106,992
|           |  |   |            

Note 8. Short-Term Debt

The Company has established various credit facilities to provide additional liquidity if and as needed. At December 31, 2005, these included unsecured lines of credit of approximately $17,000,000 and a secured
line of credit of approximately $10,000,000 with correspondent banks.



---

Notes to Consolidated Financial Statements

Note 9. Fair Values of Financial Instruments

The estimated fair values of the Companys financial instruments
are as follows (dollars in thousands):



|                                                           |                |                   |            |                   |                |         |            |   |         |  |   |        
|---------------------------------------------------------- | -------------- | ----------------- | ---------- | ----------------- | -------------- | ------- | ---------- | - | ------- |  | - | -------
|                                                           |                | December 31, 2005 |            | December 31, 2004
|                                                           | CarryingAmount |                   | Fair Value |                   | CarryingAmount |         | Fair Value
|Financial assets                                           |                |                   |            |                   |                |         |            |   |         |  |   |        
|Cash and cash equivalents                                  |                | $                 | 8,986      |                   | $              | 8,986   |            | $ | 5,789   |  | $ | 5,789  
|Interest-bearing deposits with banks                       |                |                   | 292        |                   |                | 292     |            |   | 195     |  |   | 195    
|Federal funds sold                                         |                |                   | 6,752      |                   |                | 6,752   |            |   | 3,782   |  |   | 3,782  
|Securities, available for sale                             |                |                   | 27,940     |                   |                | 27,940  |            |   | 23,753  |  |   | 23,753 
|Securities, held to maturity                               |                |                   | 1,810      |                   |                | 1,788   |            |   | 2,260   |  |   | 2,277  
|Restricted equity securities                               |                |                   | 474        |                   |                | 474     |            |   | 440     |  |   | 440    
|Loans, net of allowance for loan losses                    |                |                   | 183,353    |                   |                | 172,337 |            |   | 168,955 |  |   | 161,883
|Financial liabilities                                      |                |                   |            |                   |                |         |            |   |         |  |   |        
|Deposits                                                   |                |                   | 215,843    |                   |                | 212,983 |            |   | 192,647 |  |   | 189,817
|Federal funds purchased                                    |                |                   |           |                   |                |        |            |   |        |  |   |       
|Off-balance-sheet assets (liabilities)                     |                |                   |            |                   |                |         |            |   |         |  |   |        
|Commitments to extend credit and standby letters of credit |                |                   |           |                   |                |        |            |   |        |  |   |       

Note 10. Earnings Per Share

The following table details the computation of basic and diluted earnings per share for each year ended December 31.



|                                                    |  |      |           |      |   |           |  |   |          
|--------------------------------------------------- |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|                                                    |  | 2005 |           | 2004 |   | 2003     
|Net income available to common shareholders         |  | $    | 3,210,022 |      | $ | 2,400,198 |  | $ | 1,926,216
|                                                    |  |      |           |      |   |           |  |   |          
|Weighted average common shares outstanding          |  |      | 1,235,657 |      |   | 1,232,645 |  |   | 1,230,520
|Effect of dilutive securities, options              |  |      | 1,310     |      |   | 711       |  |   | 360      
|                                                    |  |      |           |      |   |           |  |   |          
|Weighted average common shares outstanding, diluted |  |      | 1,236,967 |      |   | 1,233,356 |  |   | 1,230,880
|                                                    |  |      |           |      |   |           |  |   |          
|Basic earnings per share                            |  | $    | 2.60      |      | $ | 1.95      |  | $ | 1.57     
|                                                    |  |      |           |      |   |           |  |   |          
|Diluted earnings per share                          |  | $    | 2.60      |      | $ | 1.95      |  | $ | 1.56     
|                                                    |  |      |           |      |   |           |  |   |          

Note 11. Benefit Plans

Employee Stock Discount Plan

In 1999, the Company adopted an Employee Stock Discount Plan available to all employees who work at
least twenty hours per week, more than five months in a calendar year, and who have been employed by the Company for at least one year. The plan provides for elective payroll deductions not to exceed 5% of the employees annual compensation to
be set aside to purchase shares of common stock. Stock purchased by employees under this plan shall be at a cost of 85% of the fair market value of the common stock at the date of the purchase. Up to 15,000 shares have been reserved for this plan.
At December 31, 2005, all 15,000 shares had been sold under the provisions of this plan.

Director Stock Purchase Plan

The Company adopted a Director Stock Purchase Plan in 1999 available to all non-employee directors. The plan provides for a director to elect to receive up to 50% of
director fees in shares of common stock. Stock issued under this plan shall be at the market value of the stock on the date of issuance. Up to 5,000 shares have been reserved for this plan. At December 31, 2005, 4,621 shares had been sold under
the provisions of this plan.



---

Notes to Consolidated Financial Statements

Note 11. Benefit Plans, continued

Stock Option Plan

The Company adopted the 1999 Incentive Stock Option Plan (Incentive Plan) for certain employees which reserves up to 10,000 shares. Under the terms of the plan, option
exercise price shall be set by the Board of Directors at the date of grant, but shall not be less than 100% of the fair market value of the stock on the date of the grant. Options granted under the plan expire no more than 10 years from date of
grant and may not be exercised for six months after the date of grant.



|                           |  |                     |   |  |                         |  
|-------------------------- |  | ------------------- | - |  | ----------------------- | -
|                           |  | Available For Grant |   |  | Granted and Outstanding |  
|Balance, December 31, 2002 |  | 4,900               |   |  | 4,800                   |  
|                           |  |                    
|Granted                    |  | (4,200              | ) |  | 4,200                   |  
|Exercised                  |  |                    |   |  |                        |  
|Forfeited                  |  | 600                 |   |  | (600                    | )
|                           |  |                     |   |  |                         |  
|Balance, December 31, 2003 |  | 1,300               |   |  | 8,400                   |  
|                           |  |                    
|Granted                    |  |                    |   |  |                        |  
|Exercised                  |  |                    |   |  |                        |  
|Forfeited                  |  |                    |   |  |                        |  
|                           |  |                     |   |  |                         |  
|Balance, December 31, 2004 |  | 1,300               |   |  | 8,400                   |  
|                           |  |                    
|Granted                    |  | (1,300              | ) |  | 1,300                   |  
|Exercised                  |  |                    |   |  | (200                    | )
|Forfeited                  |  |                    |   |  |                        |  
|                           |  |                     |   |  |                         |  
|Balance, December 31, 2005 |  |                    |   |  | 9,500                   |  
|                           |  |                     |   |  |                         |  



---

Notes to Consolidated Financial Statements

Note 11. Benefit Plans, continued

Additional information relating to the Incentive Plan is detailed below:



|                                                                               |  |      |           |   |      |   |           |  |   |           |  
|------------------------------------------------------------------------------ |  | ---- | --------- | - | ---- | - | --------- |  | - | --------- | -
|                                                                               |  | 2005 |           |   | 2004 |   | 2003      | 
|Outstanding options at December 31, 2005:                                      |  |      |           |   |      |   |           |  |   |           |  
|Exercise price, beginning of the year(1)                                       |  | $    | 21.62     |   |      | $ | 21.62     |  | $ | 20.31     |  
|Exercise price, end of year(1)                                                 |  | $    | 22.07     |   |      | $ | 21.62     |  | $ | 21.62     |  
|Range of exercise prices                                                       |  |      |           |   |      |   |           |  |   |           |  
|From                                                                           |  | $    | 18.00     |   |      | $ | 18.00     |  | $ | 18.00     |  
|To                                                                             |  | $    | 25.00     |   |      | $ | 23.00     |  | $ | 23.00     |  
|Remaining contractual life in months(1)                                        |  |      | 71        |   |      |   | 83        |  |   | 95        |  
|                                                                               |  |      |          
|Exercisable options outstanding at December 31, 2005:                          |  |      |           |   |      |   |           |  |   |           |  
|Number                                                                         |  |      | 9,500     |   |      |   | 8,400     |  |   | 8,400     |  
|Exercise price(1)                                                              |  | $    | 22.07     |   |      | $ | 21.62     |  | $ | 21.62     |  
|                                                                               |  |      |          
|Weighted average exercise price of options:                                    |  |      |           |   |      |   |           |  |   |           |  
|Granted during the year                                                        |  | $    | 25.00     |   |      | $ |          |  | $ | 23.00     |  
|Exercised during the year                                                      |  | $    | 22.00     |   |      | $ |          |  | $ |          |  
|Forfeited during the year                                                      |  | $    |          |   |      | $ |          |  | $ | 20.83     |  
|Expired during the year                                                        |  | $    |          |   |      | $ |          |  | $ |          |  
|                                                                               |  |      |          
|Significant assumptions used in determining fair value of options granted:     |  |      |           |   |      |   |           |  |   |           |  
|Risk-free interest rate                                                        |  |      | 4.29      | % |      |   | n/a       |  |   | 3.25      | %
|Expected life in years                                                         |  |      | 10        |   |      |   | n/a       |  |   | 10        |  
|Expected dividends                                                             |  |      | 2.35      | % |      |   | n/a       |  |   | 1.67      | %
|Expected volatility                                                            |  |      | 0.14      | % |      |   | n/a       |  |   | 0.06      | %
|                                                                               |  |      |          
|Grant-date fair value:                                                         |  |      |           |   |      |   |           |  |   |           |  
|Options granted during the year                                                |  | $    | 4,459     |   |      | $ |          |  | $ | 11,760    |  
|                                                                               |  |      |          
|Results of operations:                                                         |  |      |           |   |      |   |           |  |   |           |  
|Compensation cost recognized in income for all stock-based compensation awards |  | $    |          |   |      | $ |          |  | $ |          |  
|                                                                               |  |      |           |   |      |   |           |  |   |           |  
|Pro forma net income(2)                                                        |  | $    | 3,205,563 |   |      | $ | 2,386,338 |  | $ | 1,926,216 |  
|                                                                               |  |      |           |   |      |   |           |  |   |           |  
|Pro forma basic earnings per common share(2)                                   |  | $    | 2.59      |   |      | $ | 1.94      |  | $ | 1.57      |  
|                                                                               |  |      |           |   |      |   |           |  |   |           |  
|Pro forma diluted earnings per common share(2)                                 |  | $    | 2.59      |   |      | $ | 1.93      |  | $ | 1.56      |  
|                                                                               |  |      |           |   |      |   |           |  |   |           |  

---

|(1) | Weighted average
|--- | ----------------

|(2) | As if the fair value based method prescribed by SFAS No. 123 had been applied
|--- | -----------------------------------------------------------------------------



---

Notes to Consolidated Financial Statements

Note 11. Benefit Plans, continued

Defined Benefit Pension Plan

The Bank has a qualified noncontributory, Defined Benefit Pension Plan which covers substantially all of its employees. The benefits are primarily based on years of
service and earnings.

The following is a summary of the plans funded status as of December 31:



|                                                             |  |      |           |   |      |   |           |  
|------------------------------------------------------------ |  | ---- | --------- | - | ---- | - | --------- | -
|                                                             |  | 2005 |           |   | 2004 |  
|Change in benefit obligation                                 |  |      |           |   |      |   |           |  
|Benefit obligation at beginning of year                      |  | $    | 2,686,644 |   |      | $ | 2,250,097 |  
|Service cost                                                 |  |      | 238,929   |   |      |   | 204,329   |  
|Interest cost                                                |  |      | 161,038   |   |      |   | 146,083   |  
|Actuarial (gain) loss                                        |  |      | 481,191   |   |      |   | 130,113   |  
|Benefits paid                                                |  |      | (99,398   | ) |      |   | (43,978   | )
|                                                             |  |      |           |   |      |   |           |  
|Benefit obligation at end of year                            |  | $    | 3,468,404 |   |      | $ | 2,686,644 |  
|                                                             |  |      |           |   |      |   |           |  
|Change in plan assets                                        |  |      |           |   |      |   |           |  
|Fair value of plan assets at beginning of year               |  | $    | 2,177,143 |   |      | $ | 1,862,249 |  
|Actual return on plan assets                                 |  |      | 332,628   |   |      |   | 204,139   |  
|Employer contribution                                        |  |      | 187,572   |   |      |   | 154,733   |  
|Benefits paid                                                |  |      | (99,398   | ) |      |   | (43,978   | )
|                                                             |  |      |           |   |      |   |           |  
|Fair value of plan assets at end of year                     |  | $    | 2,597,945 |   |      | $ | 2,177,143 |  
|                                                             |  |      |           |   |      |   |           |  
|Change in prepaid (accrued) benefit cost                     |  |      |           |   |      |   |           |  
|Prepaid (accrued) benefit cost, beginning                    |  | $    | 239,766   |   |      | $ | 341,070   |  
|Contributions                                                |  |      | 187,572   |   |      |   | 154,733   |  
|Pension cost                                                 |  |      | (253,744  | ) |      |   | (256,037  | )
|                                                             |  |      |           |   |      |   |           |  
|Prepaid (accrued) benefit cost, ending                       |  | $    | 173,594   |   |      | $ | 239,766   |  
|                                                             |  |      |           |   |      |   |           |  
|Funded status                                                |  | $    | (870,459  | ) |      | $ | (509,501  | )
|Unrecognized transitional net assets                         |  |      | (1,915    | ) |      |   | (2,872    | )
|Unrecognized prior service costs                             |  |      | 9,174     |   |      |   | 10,704    |  
|Unrecognized net actuarial loss                              |  |      | 1,036,794 |   |      |   | 741,435   |  
|                                                             |  |      |           |   |      |   |           |  
|Prepaid (accrued) benefit cost                               |  | $    | 173,594   |   |      | $ | 239,766   |  
|                                                             |  |      |           |   |      |   |           |  
|Weighted-average assumptions to determine benefit obligation |  |      |           |   |      |   |           |  
|Discount rate                                                |  |      | 5.8       | % |      |   | 6.0       | %
|Expected return on plan assets                               |  |      | 8.5       | % |      |   | 8.5       | %
|Rate of compensation increase                                |  |      | 5.0       | % |      |   | 5.0       | %



|                                        |  |      |          |   |      |   |          |      |  |   |         |  
|--------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | ---- |  | - | ------- | -
|                                        |  | 2005 |          |   | 2004 |   |          | 2003 | 
|Components of net periodic benefit cost |  |      |          |   |      |   |          |      |  |   |         |  
|Service cost                            |  | $    | 238,929  |   |      | $ | 204,329  |      |  | $ | 167,375 |  
|Interest cost                           |  |      | 161,038  |   |      |   | 146,083  |      |  |   | 127,403 |  
|Expected return on plan assets          |  |      | (171,679 | ) |      |   | (121,027 | )    |  |   | (88,925 | )
|Amortization                            |  |      | 573      |   |      |   | 573      |      |  |   | 573     |  
|Recognized net actuarial (gain) loss    |  |      | 24,883   |   |      |   | 26,079   |      |  |   | 31,430  |  
|                                        |  |      |          |   |      |   |          |      |  |   |         |  
|Net periodic benefit cost               |  | $    | 253,744  |   |      | $ | 256,037  |      |  | $ | 237,856 |  
|                                        |  |      |          |   |      |   |          |      |  |   |         |  



---

Notes to Consolidated Financial Statements

Note 11. Benefit Plans, continued

Weighted-average assumptions for net periodic benefit cost at
September 30



|                                                 |  |      |   |  |      |  
|------------------------------------------------ |  | ---- | - |  | ---- | -
|                                                 |  | 2005 |   |  | 2004 |  
|Discount rate                                    |  | 6.0  | % |  | 6.5  | %
|Expected long-term rate of return on plan assets |  | 8.5  | % |  | 8.5  | %
|Annual salary increase                           |  | 5.0  | % |  | 5.0  | %

The accumulated benefit obligation for the defined benefit pension plan was $1,818,178 and $1,520,169 at
December 31, 2005 and 2004.

Contributions are expected to be approximately $197,997 in 2006.

Estimated future benefit payments, which reflect expected future service, as appropriate, are as follows:



|                  |  |   |        
|----------------- |  | - | -------
|10/1/05  9/30/06 |  | $ | 7,359  
|10/1/06  9/30/07 |  |   | 12,332 
|10/1/07  9/30/08 |  |   | 12,325 
|10/1/08  9/30/09 |  |   | 20,228 
|10/1/09  9/30/10 |  |   | 20,294 
|10/1/10  9/30/15 |  |   | 546,326

Long Term Rate of Return

The plan sponsor selects the expected long-term rate-of-return-on-assets assumption in consultation with their investment advisors and actuary, and with concurrence from their auditors. This rate is intended to
reflect the average rate of earnings expected to be earned on the funds invested or to be invested to provide plan benefits. Historical performance is reviewed  especially with respect to real rates of return (net of inflation)  for the
major asset classes held or anticipated to be held by the trust, and for the trust itself. Undue weight is not given to recent experience  that may not continue over the measurement period  with higher significance placed on current
forecasts of future long-term economic conditions.

Because assets are held in a qualified trust, anticipated returns are not reduced for taxes. Further
 solely for this purpose  the plan is assumed to continue in force and not terminate during the period during which assets are invested. However, consideration is given to the potential impact of current and future investment policy,
cash flow into and out of the trust, and expenses (both investment and non-investment) typically paid from plan assets (to the extent such expenses are not explicitly estimated within periodic cost).

Asset Allocation

The pension
plans weighted-average asset allocations at September 30, 2005 and 2004, by asset category are as follows:

|                            |  |      |   |  |      |  
|--------------------------- |  | ---- | - |  | ---- | -
|                            |  | 2005 |   |  | 2004 |  
|Asset Category              |  |      |   |  |      |  
|Mutual funds  fixed income |  | 19   | % |  | 20   | %
|Mutual funds  equity       |  | 81   | % |  | 80   | %
|Other                       |  | 0    | % |  | 0    | %
|                            |  |      |   |  |      |  
|Total                       |  | 100  | % |  | 100  | %
|                            |  |      |   |  |      |  



---

Notes to Consolidated Financial Statements

Note 11. Benefit Plans, continued

Management believes the trust fund is sufficiently diversified to maintain a
reasonable level of risk without imprudently sacrificing return, with a targeted asset allocation of 25% fixed income and 75% equities. The Investment Manager selects investment fund managers with demonstrated experience and expertise, and funds
with demonstrated historical performance, for the implementation of the Plans investment strategy. The Investment Manager will consider both actively and passively managed investment strategies and will allocate funds across the asset classes
to develop an efficient investment structure.

It is the responsibility of the Trustee to administer the investments of the Trust within reasonable costs,
being careful to avoid sacrificing quality. These costs include, but are not limited to, management and custodial fees, consulting fees, transaction costs and other administration costs chargeable to the Trust.

Deferred Compensation Plan

Funded deferred compensation plans
have been adopted for certain members of the Board of Directors and Executive employees. The corresponding assets and liabilities accounts at December 31, 2005 were valued at $82,240 for the Director Plan and $158,447 for the Executive Plan.

Profit Sharing/Thrift Plan

The Company
provides a profit sharing/thrift plan for its employees to which profit sharing contributions are made at the discretion of the Board of Directors. The plan also allows for employee contributions of up to 12% of eligible compensation. The Company
will match up to 50% of the first 6% contributed by the employee. The employer contribution vests on a graduated schedule over seven years. Contributions to the plan, including the matching portion, amounted to $124,991, $108,575, and $94,367 in
2005, 2004, and 2003, respectively.

Note 12. Income Taxes

Current and Deferred Income Tax Components

The components of income tax expense (all Federal) are
as follows:



|         |  |      |           |   |      |   |           |      |  |   |        
|-------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | -------
|         |  | 2005 |           |   | 2004 |   |           | 2003
|Current  |  | $    | 1,566,950 |   |      | $ | 1,174,901 |      |  | $ | 683,497
|Deferred |  |      | (122,372  | ) |      |   | (139,185  | )    |  |   | 110,530
|         |  |      |           |   |      |   |           |      |  |   |        
|         |  | $    | 1,444,578 |   |      | $ | 1,035,716 |      |  | $ | 794,027
|         |  |      |           |   |      |   |           |      |  |   |        

Rate Reconciliation

A reconciliation of income tax expense computed at the statutory federal income tax rate to income tax expense included in the statements of income follows:



|                              |  |      |           |   |      |   |           |      |  |   |          |  
|----------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | -------- | -
|                              |  | 2005 |           |   | 2004 |   |           | 2003 | 
|Tax at statutory federal rate |  | $    | 1,582,564 |   |      | $ | 1,168,211 |      |  | $ | 924,883  |  
|Tax exempt interest income    |  |      | (129,743  | ) |      |   | (138,693  | )    |  |   | (137,694 | )
|Other                         |  |      | (8,243    | ) |      |   | 6,198     |      |  |   | 6,838    |  
|                              |  |      |           |   |      |   |           |      |  |   |          |  
|                              |  | $    | 1,444,578 |   |      | $ | 1,035,716 |      |  | $ | 794,027  |  
|                              |  |      |           |   |      |   |           |      |  |   |          |  



---

Notes to Consolidated Financial Statements

Note 12. Income Taxes, continued

Deferred Income Tax Analysis

The significant components of net deferred tax assets (all Federal) at December 31 are summarized as follows:



|                                                             |  |      |          |   |      |   |          |  
|------------------------------------------------------------ |  | ---- | -------- | - | ---- | - | -------- | -
|                                                             |  | 2005 |          |   | 2004 |  
|Deferred tax assets                                          |  |      |          |   |      |   |          |  
|Allowance for loan losses                                    |  | $    | 598,117  |   |      | $ | 543,892  |  
|Deferred compensation                                        |  |      | 81,834   |   |      |   | 59,040   |  
|Other                                                        |  |      | 24,774   |   |      |   | 13,620   |  
|                                                             |  |      |          |   |      |   |          |  
|Deferred tax assets                                          |  |      | 704,725  |   |      |   | 616,552  |  
|                                                             |  |      |          |   |      |   |          |  
|Deferred tax liabilities                                     |  |      |          |   |      |   |          |  
|Net unrealized appreciation on securities available for sale |  |      | (12,299  | ) |      |   | (190,493 | )
|Depreciation                                                 |  |      | (276,090 | ) |      |   | (291,233 | )
|Accretion of discount on investment securities               |  |      | (3,391   | ) |      |   | (3,407   | )
|Accrued pension costs                                        |  |      | (65,761  | ) |      |   | (88,260  | )
|Other                                                        |  |      | (3,459   | ) |      |   |         |  
|                                                             |  |      |          |   |      |   |          |  
|Deferred tax liabilities                                     |  |      | (361,000 | ) |      |   | (573,393 | )
|                                                             |  |      |          |   |      |   |          |  
|Net deferred tax asset (liability)                           |  | $    | 343,725  |   |      | $ | 43,159   |  
|                                                             |  |      |          |   |      |   |          |  

Note 13. Commitments and Contingencies

Litigation

In the normal course of business the Company is involved in various legal proceedings. After
consultation with legal counsel, management believes that any liability resulting from such proceedings will not be material to the consolidated financial statements.

Financial Instruments with Off-Balance-Sheet Risk

The Company is party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees,
credit risk in excess of the amount recognized in the consolidated balance sheets.

The Company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 Company uses the same credit policies in making
commitments and conditional obligations as for on-balance-sheet instruments. A summary of commitments at December 31 is as follows:



|                             |  |      |            |      |   |           
|---------------------------- |  | ---- | ---------- | ---- | - | ----------
|                             |  | 2005 |            | 2004
|Commitments to extend credit |  | $    | 35,576,000 |      | $ | 31,252,000
|Standby letters of credit    |  |      | 2,467,000  |      |   | 1,818,000 
|                             |  |      |            |      |   |           
|                             |  | $    | 38,043,000 |      | $ | 33,070,000
|                             |  |      |            |      |   |           

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. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. 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 Company evaluates each customers creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based
on managements credit evaluation of the party. Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate and income-producing commercial properties.



---

Notes to Consolidated Financial Statements

Note 13. Commitments and Contingencies, continued

Financial Instruments with Off-Balance-Sheet Risk, continued

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those
guarantees 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 loan facilities to customers. Collateral held varies as
specified above and is required in instances which the Company deems necessary.

Concentrations of Credit Risk

Substantially all of the Companys loans, commitments to extend credit, and standby letters of credit have been granted to customers in the Companys market
area and such customers are generally depositors of the Bank. Investments in state and municipal securities involve governmental entities within and outside the Companys market area. The concentrations of credit by type of loan are set forth
in the Loans Receivable note. The distribution of commitments to extend credit approximates the distribution of loans outstanding. Standby letters of credit are granted primarily to commercial borrowers. The Company, as a matter of policy, does not
extend credit to any single borrower or group of related borrowers in excess of approximately $2,500,000. Although the Company has a reasonably diversified loan portfolio, a substantial portion of its debtors ability to honor their contracts
is dependent upon economic conditions in and around Botetourt, Roanoke and Rockbridge counties. The Company has a loan concentration relating to construction and land development, lumber and timber, and hotel and motels. Total loans and loan
commitments to these industrial groups amounted to approximately $36,000,000, $7,000,000, and $8,000,000 respectively at December 31, 2005.

The
Company from time to time has cash and cash equivalents on deposit with financial institutions which exceed federally-insured limits.

Note 14.
Regulatory Restrictions

Dividends

The
Companys dividend payments are made from dividends received from the Bank. The Bank, as a Virginia banking corporation, may pay dividends only out of its retained earnings. However, regulatory authorities may limit payment of dividends by any
bank when it is determined that such a limitation is in the public interest and is necessary to ensure financial soundness of the Bank.

Capital
Requirements

The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by federal
banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory (and possibly additional discretionary) actions by regulators that, if undertaken, could have a direct material effect on the Companys and the
Banks financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other
factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets, as those terms are defined in the regulations. Management believes, as of December 31, 2005, that the Company
and the Bank met all capital adequacy requirements to which they are subject.



---

Notes to Consolidated Financial Statements

Note 14. Regulatory Restrictions, continued

Capital Requirements, continued

As of December 31, 2005, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the following table. There are no conditions or
events since the notification that management believes have changed the Banks category.

The Company and Banks actual capital amounts and
ratios are also presented in the table (in thousands).



|                                        |  |        |        |       |                                     |   |        |                                                                      |        |  |     |        |  |       |        |  |      |  
|--------------------------------------- |  | ------ | ------ | ----- | ----------------------------------- | - | ------ | -------------------------------------------------------------------- | ------ |  | --- | ------ |  | ----- | ------ |  | ---- | -
|                                        |  | Actual |        |       | Minimum For CapitalAdequacyPurposes |   |        | Minimum To Be WellCapitalizedUnder PromptCorrective ActionProvisions |       
|                                        |  | Amount |        | Ratio |                                     |   | Amount |                                                                      | Ratio  |  |     | Amount |  | Ratio |       
|December 31, 2005:                      |  |        |        |       |                                     |   |        |                                                                      |        |  |     |        |  |       |        |  |      |  
|Total Capital(to Risk-Weighted Assets)  |  |        |        |       |                                     |   |        |                                                                      |        |  |     |        |  |       |        |  |      |  
|Consolidated                            |  | $      | 23,942 |       | 13.2                                | % |        | $                                                                    | 14,542 |  | 8.0 | %      |  | $     | 18,178 |  | 10.0 | %
|Bank of Botetourt                       |  | $      | 22,541 |       | 12.4                                | % |        | $                                                                    | 14,526 |  | 8.0 | %      |  | $     | 18,158 |  | 10.0 | %
|Tier I Capital(to Risk-Weighted Assets) |  |        |        |       |                                     |   |        |                                                                      |        |  |     |        |  |       |        |  |      |  
|Consolidated                            |  | $      | 21,671 |       | 11.9                                | % |        | $                                                                    | 7,271  |  | 4.0 | %      |  | $     | 10,907 |  | 6.0  | %
|Bank of Botetourt                       |  | $      | 20,270 |       | 11.2                                | % |        | $                                                                    | 7,263  |  | 4.0 | %      |  | $     | 10,895 |  | 6.0  | %
|Tier I Capital(to Average Assets)       |  |        |        |       |                                     |   |        |                                                                      |        |  |     |        |  |       |        |  |      |  
|Consolidated                            |  | $      | 21,671 |       | 9.7                                 | % |        | $                                                                    | 9,429  |  | 4.0 | %      |  | $     | 11,786 |  | 5.0  | %
|Bank of Botetourt                       |  | $      | 20,270 |       | 9.1                                 | % |        | $                                                                    | 9,375  |  | 4.0 | %      |  | $     | 11,719 |  | 5.0  | %
|                                        |  |        |        |       |                                     |  
|December 31, 2004:                      |  |        |        |       |                                     |   |        |                                                                      |        |  |     |        |  |       |        |  |      |  
|Total Capital(to Risk-Weighted Assets)  |  |        |        |       |                                     |   |        |                                                                      |        |  |     |        |  |       |        |  |      |  
|Consolidated                            |  | $      | 21,150 |       | 12.5                                | % |        | $                                                                    | 13,582 |  | 8.0 | %      |  | $     | 16,978 |  | 10.0 | %
|Bank of Botetourt                       |  | $      | 19,759 |       | 11.7                                | % |        | $                                                                    | 13,559 |  | 8.0 | %      |  | $     | 16,949 |  | 10.0 | %
|Tier I Capital(to Risk-Weighted Assets) |  |        |        |       |                                     |   |        |                                                                      |        |  |     |        |  |       |        |  |      |  
|Consolidated                            |  | $      | 19,028 |       | 11.2                                | % |        | $                                                                    | 6,791  |  | 4.0 | %      |  | $     | 10,187 |  | 6.0  | %
|Bank of Botetourt                       |  | $      | 17,640 |       | 10.4                                | % |        | $                                                                    | 6,780  |  | 4.0 | %      |  | $     | 10,169 |  | 6.0  | %
|Tier I Capital(to Average Assets)       |  |        |        |       |                                     |   |        |                                                                      |        |  |     |        |  |       |        |  |      |  
|Consolidated                            |  | $      | 19,028 |       | 9.2                                 | % |        | $                                                                    | 8,265  |  | 4.0 | %      |  | $     | 10,332 |  | 5.0  | %
|Bank of Botetourt                       |  | $      | 17,640 |       | 8.6                                 | % |        | $                                                                    | 8,211  |  | 4.0 | %      |  | $     | 10,264 |  | 5.0  | %



---

Notes to Consolidated Financial Statements

Note 14. Regulatory Restrictions, continued

Intercompany Transactions

The Banks legal lending limit on loans to the Company are governed by Federal Reserve Act 23A, and differ from legal lending limits on loans to external customers.
Generally, a bank may lend up to 10% of its capital and surplus to its Parent, if the loan is secured. If collateral is in the form of stocks, bonds, debentures or similar obligations, it must have a market value when the loan is made of at least
20% more than the amount of the loan, and if obligations of a state or political subdivision or agency thereof, it must have a market value of at least 10% more than the amount of the loan. If such loans are secured by obligations of the United
States or agencies thereof, or by notes, drafts, bills of exchange or bankers acceptances eligible for rediscount or purchase by a Federal Reserve Bank, requirements for collateral in excess of the loan amount do not apply. Under this
definition, the legal lending limit for the Bank on loans to the Company was approximately $2,170,000 at December 31, 2005. No 23A transactions were deemed to exist between the Company and the Bank at December 31, 2005.

Note 15. Transactions with Related Parties

The Company has entered
into transactions with its directors, significant shareholders and their affiliates (related parties). Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and
collateral, as those prevailing at the same time for comparable transactions with other customers, and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features.

Aggregate loan transactions with related parties were as follows:



|                   |  |      |            |   |      |   |            |  
|------------------ |  | ---- | ---------- | - | ---- | - | ---------- | -
|                   |  | 2005 |            |   | 2004 |  
|Balance, beginning |  | $    | 1,039,702  |   |      | $ | 1,075,959  |  
|                   |  |     
|New loans          |  |      | 7,492,825  |   |      |   | 5,933,266  |  
|Repayments         |  |      | (6,265,298 | ) |      |   | (5,969,523 | )
|                   |  |      |            |   |      |   |            |  
|Balance, ending    |  | $    | 2,267,229  |   |      | $ | 1,039,702  |  
|                   |  |      |            |   |      |   |            |  



---

Notes to Consolidated Financial Statements

Note 16. Parent Company Financial Information

Condensed financial information of
Botetourt Bankshares, Inc. is presented as follows:

Balance Sheets

December 31, 2005 and 2004



|                                              |  |      |            |      |   |           
|--------------------------------------------- |  | ---- | ---------- | ---- | - | ----------
|                                              |  | 2005 |            | 2004
|Assets                                        |  |      |            |      |   |           
|Cash and due from banks                       |  | $    | 40,019     |      | $ | 25,400    
|Securities held to maturity                   |  |      | 1,350,000  |      |   | 1,350,000 
|Investment in affiliate bank at equity        |  |      | 20,333,753 |      |   | 18,068,806
|Other assets                                  |  |      | 12,363     |      |   | 12,781    
|                                              |  |      |            |      |   |           
|Total assets                                  |  | $    | 21,736,135 |      | $ | 19,456,987
|                                              |  |      |            |      |   |           
|Liabilities                                   |  |      |            |      |   |           
|Income tax payable                            |  | $    | 1,090      |      | $ | 814       
|                                              |  |      |            |      |   |           
|Total liabilities                             |  |      | 1,090      |      |   | 814       
|                                              |  |      |            |      |   |           
|Stockholders equity                          |  |      |            |      |   |           
|Common stock                                  |  |      | 1,240,121  |      |   | 1,232,745 
|Surplus                                       |  |      | 1,510,751  |      |   | 1,361,970 
|Retained earnings                             |  |      | 18,960,299 |      |   | 16,491,678
|Accumulated other comprehensive income (loss) |  |      | 23,874     |      |   | 369,780   
|                                              |  |      |            |      |   |           
|Total stockholders equity                    |  |      | 21,735,045 |      |   | 19,456,173
|                                              |  |      |            |      |   |           
|Total liabilities and stockholders equity    |  | $    | 21,736,135 |      | $ | 19,456,987
|                                              |  |      |            |      |   |           

Statements of Income

For the years ended December 31, 2005, 2004 and 2003



|                                                                    |  |      |           |   |      |   |           |      |  |   |          
|------------------------------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | ---------
|                                                                    |  | 2005 |           |   | 2004 |   |           | 2003
|Income                                                              |  |      |           |   |      |   |           |      |  |   |          
|Dividends from affiliate bank                                       |  | $    | 741,401   |   |      | $ | 742,063   |      |  | $ | 467,534  
|Interest on taxable securities                                      |  |      | 34,024    |   |      |   | 31,718    |      |  |   | 34,488   
|Interest on tax exempt securities                                   |  |      | 12,400    |   |      |   | 12,400    |      |  |   | 12,008   
|                                                                    |  |      |           |   |      |   |           |      |  |   |          
|                                                                    |  |      | 787,825   |   |      |   | 786,181   |      |  |   | 514,030  
|                                                                    |  |      |           |   |      |   |           |      |  |   |          
|Expenses                                                            |  |      |           |   |      |   |           |      |  |   |          
|Operating expenses                                                  |  |      | 31,409    |   |      |   | 29,807    |      |  |   | 37,231   
|                                                                    |  |      |           |   |      |   |           |      |  |   |          
|Income before taxes and equity in undistributed income of affiliate |  |      | 756,416   |   |      |   | 756,374   |      |  |   | 476,799  
|Income tax                                                          |  |      | (1,090    | ) |      |   | (870      | )    |  |   | 1,097    
|                                                                    |  |      |           |   |      |   |           |      |  |   |          
|Income before equity in undistributed income of affiliate           |  |      | 755,326   |   |      |   | 755,504   |      |  |   | 477,896  
|Equity in undistributed income of affiliate                         |  |      | 2,454,696 |   |      |   | 1,644,694 |      |  |   | 1,448,320
|                                                                    |  |      |           |   |      |   |           |      |  |   |          
|Net income                                                          |  | $    | 3,210,022 |   |      | $ | 2,400,198 |      |  | $ | 1,926,216
|                                                                    |  |      |           |   |      |   |           |      |  |   |          



---

Notes to Consolidated Financial Statements

Note 16. Parent Company Financial Information, continued

Statements of Cash Flows

For the years ended December 31, 2005, 2004 and 2003



|                                                                                 |  |      |            |   |      |   |            |      |  |   |            |  
|-------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                                 |  | 2005 |            |   | 2004 |   |            | 2003 | 
|Cash flows from operating activities                                             |  |      |            |   |      |   |            |      |  |   |            |  
|Net income                                                                       |  | $    | 3,210,022  |   |      | $ | 2,400,198  |      |  | $ | 1,926,216  |  
|Adjustments to reconcile net income to netcash provided by operating activities: |  |      |            |   |      |   |            |      |  |   |            |  
|Equity in undistributed income of affiliate                                      |  |      | (2,454,696 | ) |      |   | (1,644,694 | )    |  |   | (1,448,320 | )
|Net increase (decrease) in other liabilities                                     |  |      | 276        |   |      |   | 814        |      |  |   | (4,831     | )
|Net (increase) decrease in other assets                                          |  |      | 418        |   |      |   | (1,595     | )    |  |   | 3,305      |  
|                                                                                 |  |      |            |   |      |   |            |      |  |   |            |  
|Net cash provided by operating activities                                        |  |      | 756,020    |   |      |   | 754,723    |      |  |   | 476,370    |  
|                                                                                 |  |      |            |   |      |   |            |      |  |   |            |  
|Cash flows from investing activities                                             |  |      |            |   |      |   |            |      |  |   |            |  
|Purchases of investment securities                                               |  |      | (200,000   | ) |      |   | (675,000   | )    |  |   | (1,300,000 | )
|Maturities of investment securities                                              |  |      | 200,000    |   |      |   | 475,000    |      |  |   | 1,300,000  |  
|Increase in investment in Bank                                                   |  |      | (156,157   | ) |      |   | (35,601    | )    |  |   | (49,434    | )
|                                                                                 |  |      |            |   |      |   |            |      |  |   |            |  
|Net cash used in investing activities                                            |  |      | (156,157   | ) |      |   | (235,601   | )    |  |   | (49,434    | )
|                                                                                 |  |      |            |   |      |   |            |      |  |   |            |  
|Cash flows from financing activities                                             |  |      |            |   |      |   |            |      |  |   |            |  
|Dividends paid                                                                   |  |      | (741,401   | ) |      |   | (567,063   | )    |  |   | (467,534   | )
|Common stock issued                                                              |  |      | 156,157    |   |      |   | 35,601     |      |  |   | 49,434     |  
|                                                                                 |  |      |            |   |      |   |            |      |  |   |            |  
|Net cash used by financing activities                                            |  |      | (585,244   | ) |      |   | (531,462   | )    |  |   | (418,100   | )
|                                                                                 |  |      |            |   |      |   |            |      |  |   |            |  
|Net increase (decrease) in cash and due from banks                               |  |      | 14,619     |   |      |   | (12,340    | )    |  |   | 8,836      |  
|Cash and cash equivalents, beginning                                             |  |      | 25,400     |   |      |   | 37,740     |      |  |   | 28,904     |  
|                                                                                 |  |      |            |   |      |   |            |      |  |   |            |  
|Cash and cash equivalents, ending                                                |  | $    | 40,019     |   |      | $ | 25,400     |      |  | $ | 37,740     |  
|                                                                                 |  |      |            |   |      |   |            |      |  |   |            |  



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Stockholder Information

Annual Meeting

The annual meeting of stockholders will be held at 2:30 p.m. on Wednesday, May 17, 2006, at
the Buchanan Theatre, Main Street, Buchanan, Virginia.

Requests for Information

Requests for information should be directed to Mr. H. Watts Steger, III at Botetourt Bankshares, Inc., Post Office Box 339, Buchanan, Virginia, 24066; telephone
(540) 591-5000.



|                             |  |                           
|---------------------------- |  | --------------------------
|Independent
Auditors         |  | Stock Transfer Agent      
|Larrowe & Company, PLC       |  | Botetourt Bankshares, Inc.
|Certified Public Accountants |  | Post Office Box 339       
|Post Office Box 760          |  | Buchanan, Virginia 24066  
|Galax, Virginia 24333        |  |                           

Federal Deposit Insurance Corporation

The Bank is a member of the FDIC. This statement has not been reviewed, or confirmed for accuracy or relevance by the Federal Deposit Insurance Corporation.



|                       |  |                   |  |                         
|---------------------- |  | ----------------- |  | ------------------------
|                       |  | Banking Offices   |  |                         
|                       |  |                  
|                       |  | Buchanan Office   |  |                         
|                       |  | 19747 Main Street |  |                         
|                       |  | (540) 254-1721    |  |                         
|Daleville Office       |  |                   |  | Peters Creek Office     
|670 Roanoke Road       |  |                   |  | 3130 Peters Creek Road  
|(540) 992-4777         |  |                   |  | (540) 777-2010          
|                       |  |                  
|Eagle Rock Office      |  |                   |  | Fairfield Office        
|58 Railroad Avenue     |  |                   |  | 5905 North Lee Highway  
|(540) 884-2265         |  |                   |  | (540) 377-5270          
|                       |  |                  
|Troutville Office      |  |                   |  | Investment Securities   
|5462 Lee Highway       |  |                   |  | 5462 Lee Highway        
|(540) 966-3850         |  |                   |  | (540) 473-1224          
|                       |  |                  
|Bonsack Office         |  |                   |  | Mortgage Centers        
|3801 Challenger Avenue |  |                   |  | Daleville (540) 966-5626
|(540) 777-2265         |  |                   |  | Lexington (540) 463-5626
|                       |  |                  
|Lexington Office       |  |                   |  | Operations Center       
|65 East Midland Trail  |  |                   |  | 19800 Main Street       
|(540) 463-7224         |  |                   |  | (540) 473-1173          

www.bankofbotetourt.com

info@bankofbotetourt.com



---

Item 8. Changes in and Disagreements with Accountants

Not applicable.

Item 8A. Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of our disclosure
controls and procedures in accordance with Rule 13a-15 of the Securities Exchange Act of 1934 (the Exchange Act). Based on the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the
period covered by this report, our disclosure controls and procedures were effective in enabling us to record, process, summarize and report effectively and in a timely manner the information required to be disclosed in reports we file under the
Exchange Act.

No change in our internal controls over financial reporting, or in other factors that could affect those controls, occurred
during our fourth quarter of 2005 that has affected materially, or is reasonably likely to affect materially, our internal control over financial reporting. We are aware of not significant deficiencies or material weaknesses of internal controls
that would require corrective action. However, we review our internal controls regularly, including accounting controls, and may make changes from time to time aimed at enhancing our internal controls and ensuring our systems evolve with our
business.

PART III

Item 9. Directors,
Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act

The information as of
March 31, 2006 regarding the names, ages, principal occupations and business experience for the past five years for each of the Companys Directors and executive officers is provided in the Companys proxy materials for the 2006
annual meeting of shareholders, which will be filed pursuant to Schedule 14A and is incorporated herein by reference. Directors serve on the Board for one-year terms, and executive officers are all elected for terms of one year. However, if the
proposal, Item 1, submitted to the shareholders in the proxy materials for this years annual meeting of shareholders is approved, and the Companys articles of incorporation are amended as described, directors will be elected to
three year terms and the Board will be divided into three equal classes.

Report of the Audit Committee

The Audit Committee of the Board of Directors of the Company is currently comprised of three directors, Messers. Moore, Patterson, and Williamson, all of
whom satisfy all of the following criteria: (i) meet the independence requirements set forth in the NASDs definition of independent director, (ii) have not accepted directly or indirectly any consulting, advisory, or
other compensatory fee from the Company or any



---

of its subsidiaries, except for Board fees (iii) are not affiliated persons of the Company or any of its
subsidiaries, and (iv) are competent to read and understand financial statements. The Board of Directors has determined that Mr. John B. Williamson, III, president of RGC Resources, Inc., a reporting company, qualifies as an
audit committee financial expert within the meaning of Item 401 of Regulation SB of the Securities Exchange Act. Mr. Williamson is independent of management based on the independence requirements set forth in the NASDs
definition of independent director. For more information regarding the Audit Committee and the Audit Committee Charter, as well as information relating to activities of the Companys outside auditor and fees paid to that auditor,
please see the Companys proxy statement for its annual meeting of shareholders in 2006, which will be filed pursuant to schedule 14A, which is incorporated by reference to this filing.

Code of Ethics

The Corporation has adopted a Codes of
Business Conduct and Ethics that apply to its directors, executives and employees. Copies of these codes were provided as Exhibits 99.2, 99.3, and 99.4 in the Form 10-KSB filed March, 25, 2004.

Item 10. Executive Compensation

For more
information regarding the compensation paid in 2005, 2004, and 2003 to the Company and Banks Executive Officers, please see the Companys proxy statement for its annual meeting of shareholders in 2006, which will be filed pursuant to
schedule 14A, which is incorporated by reference to this filing.

Item 11. Security Ownership of Certain Beneficial Owners and Management

Security Ownership of Management

Information as of March 31, 2006 regarding the number of shares of Common Stock beneficially owned by each director, by the executive officer and by all directors and executive officers as a group, as well as the number of shares held
by each holder of five percent or more of the outstanding common stock of the Company, is provided in the Companys proxy materials for the 2006 annual meeting of shareholders, which will be filed pursuant to Schedule 14A and is incorporated
herein by reference to this filing.

Item 12. Certain Relationships and Related Transactions

Transactions with Management

Some of the directors and
officers of the Company are at present, as in the past, customers of the Company, and the Company has had and expects to have in the future banking transactions in the ordinary course of its business with directors, officers,



---

principal shareholders and their associates, on substantially the same terms, including interest rates and collateral on
loans, as those prevailing at the same time for comparable transactions with others. These transactions do not involve more than the normal risk of collectibility or present other unfavorable features. The aggregate outstanding balance of loans to
directors, executive officers and their associates, as a group, at December 31, 2005 is provided in the Companys proxy materials for the 2006 annual meeting of shareholders, which will be filed pursuant to Schedule 14A and is incorporated
by reference to this filing.

There are no legal proceedings to which any director, officer, principal shareholder or associate is a party
that would be material and adverse to the Company.

Item 13. Exhibits and Reports on Form 8-K



| | (a) | Exhibits
| | --- | --------



| | 3(i). | Restated Articles of Incorporation filed on the Form 10-SB 12G/A on June 22, 2004.
| | ----- | ----------------------------------------------------------------------------------



| | 3(ii). | Bylaws filed on the Form 10-SB 12G on April 30, 2002.
| | ------ | -----------------------------------------------------



| | 10.4 | Change In Control Agreement filed on the Form 10-SB 12G on April 30, 2002.
| | ---- | --------------------------------------------------------------------------



| | 12. | Annual Report to Shareholders (Included as Item 7)
| | --- | --------------------------------------------------



| | 31.1 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13 a-14(a)
| | ---- | ------------------------------------------------------------------------------------------------



| | 32 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350
| | -- | -------------------------------------------------------------------------------------------------------



| | 99.2 | Code of Ethics/Conflict of Interest Policy For Board of Directors Relating To Bank Bribery Act Of 1985 (18 U.S.C. #215) As Amended In 1986 on Form 10-KSB on March 25, 2004.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 99.3 | Code of Ethics & Professional Conduct Relating To Bank Bribery Act Of 1985 (18 U.S.C. #215) As Amended In 1986 on Form 10-KSB on March 25, 2004.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------



| | 99.4 | Code of Ethics for Chief Executive Officer and Senior Financial Officers Relating To Bank Bribery Act Of 1985 (18 U.S.C. #215) As Amended In 1986 on Form 10-KSB on March 25,
2004.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

| | (b) | Reports on Form 8-K
| | --- | -------------------

On December 29, 2005 the Company
filed a Current Report on Form 8-K under Item 8.01 explaining that the Companys public float had been recalculated to eliminate stock held by affiliates, reducing the Companys public float to $22,897,035 and allowing the Company to
continue filing as a small business filer for the 2006 calendar year.

On October 21, 2005 the Company filed a Current Report on Form
8-K under Item 2.02 announcing the financial results of operations and financial condition for period ended September 30, 2005 along with Item 9.01 financial statement exhibits.

Item 14. Principal Accountant Fees and Services

Information regarding services provided by our independent accountants is included in the Report of the Audit Committee, which is referenced in Item 9 and is provided in the Companys proxy materials for the 2006 annual meeting of
shareholders, which will be filed pursuant to Schedule 14A and is incorporated by reference to this filing.

SIGNATURES

In accordance with Section 13 or 15 (d) of the Securities Exchange Act of 1934, we have caused this Report to be signed on our behalf by the
undersigned, thereunto duly authorized.

BOTETOURT BANKSHARES, INC.



|                     |  |        |  |                                           
|-------------------- |  | ------ |  | ------------------------------------------
|Date: March 23, 2006 |  | By:    |  | /s/ H. Watts Steger, III                  
|                     |  | Name:  |  | H. Watts Steger, III                      
|                     |  | Title: |  | Chairman and Chief Executive Officer      
|                     |  |       
|                     |  | By:    |  | /s/ Michelle A. Alexander                 
|                     |  | Name:  |  | Michelle A. Alexander                     
|                     |  | Title: |  | Vice President and Chief Financial Officer