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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Form 10-KSB



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(Mark One)

|x | Annual report under section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ------------------------------------------------------------------------------



for the fiscal year ended December 31, 2004.



| ̈ | Transition report under section 13 or 15(d) of the Securities and Exchange Act of 1934
|- | --------------------------------------------------------------------------------------



for the transition period



Commission file number 333-86993



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MainStreet BankShares, Inc.

(Name of small business issuer in its charter)



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|                                                                            |  |                                     
|--------------------------------------------------------------------------- |  | ------------------------------------
|Virginia                                                                    |  | 54-1956616                          
|(State or other jurisdiction of incorporation or organization)              |  | (I.R.S. Employer Identification No.)
|                                                                            | 
|Suite 30, Patrick Henry Mall 730 East Church Street, Martinsville, Virginia |  | 24112                               
|(Address of principal executive offices)                                    |  | (Zip Code)                          



Issuers
telephone number (276) 632-8054



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Securities registered under Section 12(b) of the Act:



|                 |  |                                     
|---------------- |  | ------------------------------------
|(Title of class) |  | Name of exchange on which registered
|None            



Securities
registered under Section 12 (g) of the Act:



|                           |  |                                     
|-------------------------- |  | ------------------------------------
|Common Stock, No Par Value |  | None                                
|(Title of class)           |  | Name of exchange on which registered



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



Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of 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.  x



State issuers revenues for its most recent fiscal year $5,106,452



State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of a specified date within the past 60 days. $13,955,832 based on $11.00 per share.



(Applicable only to corporate registrants) State the number of shares
outstanding of each of the issuers classes of common equity, as of the latest practicable date 1,573,569 shares outstanding as of February 28, 2005.



Documents incorporated by reference. Portions of the Corporations 2005 Proxy Statement have been incorporated by reference into Part III.



Transitional Small Business Disclosure
Format:  Yes ̈No  x



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##### Table of Contents

MainStreet BankShares, Inc.



Form 10-KSB



Index



|        |  |                                                                                                                 |  |      
|------- |  | --------------------------------------------------------------------------------------------------------------- |  | -----
|        |  | PART I                                                                                                          |  |      
|        |  |                                                                                                                
|Item 1  |  | Description of Business                                                                                         |  | 1-6  
|        |  |                                                                                                                
|Item 2  |  | Description of Property                                                                                         |  | 7    
|        |  |                                                                                                                
|Item 3  |  | Legal Proceedings                                                                                               |  | 7    
|        |  |                                                                                                                
|Item 4  |  | Submission of Matters to a Vote of Security Holders                                                             |  | 7    
|        |  |                                                                                                                
|        |  | PART II                                                                                                         |  |      
|        |  |                                                                                                                
|Item 5  |  | Market for Common Equity and Related Stockholder Matters                                                        |  | 8-9  
|        |  |                                                                                                                
|Item 6  |  | Managements Discussion and Analysis                                                                            |  | 9-17 
|        |  |                                                                                                                
|Item 7  |  | Financial Statements                                                                                            |  | 18-44
|        |  |                                                                                                                
|Item 8  |  | Changes In and Disagreements With Accountants on Accounting and Financial Disclosure                            |  | 45   
|        |  |                                                                                                                
|Item 8A |  | Controls and Procedures                                                                                         |  | 45   
|        |  |                                                                                                                
|Item 8B |  | Other Information                                                                                               |  | 45   
|        |  |                                                                                                                
|        |  | PART III                                                                                                        |  |      
|        |  |                                                                                                                
|Item 9  |  | Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act |  | 45-47
|        |  |                                                                                                                
|Item 10 |  | Executive Compensation                                                                                          |  | 47   
|        |  |                                                                                                                
|Item 11 |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                  |  | 47   
|        |  |                                                                                                                
|Item 12 |  | Certain Relationships and Related Transactions                                                                  |  | 47-48
|        |  |                                                                                                                
|Item 13 |  | Exhibits                                                                                                        |  | 48   
|        |  |                                                                                                                
|Item 14 |  | Principal Accountant Fees and Services                                                                          |  | 48   







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##### Table of Contents

PART I



Item 1. Description of Business



General



MainStreet BankShares, Inc.,
(the Corporation, MainStreet, or BankShares), was incorporated in the Commonwealth of Virginia on January 14, 1999 under the name of First Community National BanCorp., Inc. MainStreet was primarily formed to serve
as a bank holding company. MainStreet has had two registered stock offerings raising a total of $14,029,501 since its inception. MainStreet has two wholly owned subsidiaries, Smith River Community Bank, N.A. (Smith River Bank) and
Franklin Community Bank, N.A. (Franklin Bank). On January 28, 2004, Smith River Bank acquired a non-controlling 40% interest in MainStreet Title Agency, LLC, a Virginia limited liability company (MTA). MTA is a Virginia
licensed agent for the sale of title insurance. It does business only in Virginia.



MainStreet is authorized to engage in any lawful activity for a bank holding company. The holding company structure provides greater flexibility than a bank standing alone has to expand and diversify business activities through newly formed
subsidiaries or through acquisitions. MainStreets business is conducted through the two subsidiary banks and its indirect interest in MTA.



Smith River Community Bank, N.A.



Smith River Bank is a nationally chartered commercial bank and member of the Federal Reserve, whose deposits are insured by the Federal Deposit Insurance Corporation
(FDIC). Smith River Bank accepts deposits from the general public and makes commercial, consumer, and real estate loans. The main office is located at 730 East Church Street, Martinsville, Virginia. Smith River Bank also has branches at
380 Riverside Drive, Bassett, Virginia and at 105 Dobyns Road, Stuart, Virginia.



On January 13, 2005, MainStreet, Smith River Bank, and Argentum Capital Management, LLC, (Argentum), entered into an Agreement pursuant to which MainStreet will sell, and Argentum or investors retained by Argentum for this
purpose, will purchase, all of the outstanding shares of the common stock of Smith River Bank for $6,500,000. The transaction is expected to close on or before March 20, 2005, but may be terminated earlier by either MainStreet or Argentum under
certain circumstances, including by MainStreet if Argentum fails to raise sufficient outside investment by March 7, 2005. Consummation of the transaction is subject to a number of conditions, including the completion of the parties due
diligence and prior required regulatory approvals, if any. The parties already have completed substantial due diligence and believe that no prior regulatory approvals are required. As part of the transaction, MainStreet will agree to acquire
specified loans from Smith River Bank under certain conditions after the closing. In the event Smith River Bank determines it must charge off one of the specified loans, (after pursuing normal collection efforts), MainStreet will acquire all of
Banks right, title and interest in the charged off loan. MainStreets obligation to purchase such loans will not exceed the principal amount of the loan at the time of the purchase plus Smith River Banks out of pocket collection
expenses. The outstanding principal balance of such loans presently is $731,300. Also as part of the transaction, Smith River Bank will agree to outsource certain administrative and related activities to MainStreet for a period of 3 years following
the closing for an annual fee of $505,000.



Franklin Community Bank,
N.A.



Franklin Bank is a nationally chartered commercial bank and member
of the Federal Reserve and whose deposits are insured by the FDIC. Franklin Bank opened for business on September 16, 2002. Franklin Bank accepts deposits from the general public and makes commercial, consumer, and real estate loans. Franklin Bank
operates as a locally-owned and operated commercial bank emphasizing personal customer service and other advantages incident to banking with a locally owned community bank. It relies on local advertising and the personal contacts of its directors,
employees, and shareholders to attract customers and business to the Bank. Franklin Bank emphasizes a high degree of personalized client service in order to be able to serve each customer. Franklin Banks marketing approach emphasizes the
advantages of dealing with an independent, locally managed commercial bank to meet the particular needs of individuals, professionals and small to medium-sized businesses. The main office of Franklin Bank is located at 400 Old Franklin Turnpike,
Suite 100, Rocky Mount, Virginia. Franklin Bank has a branch located at 12930 Booker T. Washington Highway, Hardy, Virginia.



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Competition



Our banks experience competition in attracting and retaining business and personal checking and savings accounts, and making commercial, consumer, and real estate loans
and providing other services in their primary service area. The principal methods of competition in the banking industry for deposits are service, rates offered, convenience of location, and flexible office hours. The principal methods of
competition in the banking industry for loans are interest rates, loan origination fees, and the range of lending services offered. Competition in the service area comes from other commercial banks, savings institutions, brokerage firms, credit
unions, and mortgage banking firms. Our banks have been able to take advantage of the consolidation in the banking industry in their market area by providing personalized banking services that are desirable to large segments of customers which will
enable the bank to compete satisfactorily. We intend to continue to provide a high level of service with local decision-making focused solely on the markets. We believe these factors more than offset the advantages that larger banks in our markets
may have in offering a larger number of banking locations and broader range of services. As discussed, we have entered into an agreement to divest Smith River Bank. If this transaction closes as presently anticipated, Smith River Bank will be under
different ownership which may affect the way it does business.



Employees



The total number of full-time equivalent persons
employed by MainStreet and its wholly owned subsidiaries as of December 31, 2004 was 59. Of these employees, Smith River Bank employed 23 full-time equivalent persons. MainStreet believes its relationship with its employees is good and no employees
are represented by a labor union.





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##### Table of Contents

Selected Statistical Information of MainStreet BankShares, Inc.



The following statistical information is based on daily average balances.



Distribution of Assets, Liabilities, and Shareholders
Equity: Interest Rates and Interest Differentials



|                                           |  |                 |             |   |          |   |             |  |      |                 |  |   |            |   |            |   |           |  |      |  
|------------------------------------------ |  | --------------- | ----------- | - | -------- | - | ----------- |  | ---- | --------------- |  | - | ---------- | - | ---------- | - | --------- |  | ---- | -
|                                           |  | 2004            |             |   | 2003     |  
|                                           |  | Average Balance |             |   | Interest |   | Yield/ Rate |  |      | Average Balance |  |   | Interest   |   | Yield/Rate |  
|Loans, net of unearned                     |  | $               | 65,754,464  |   |          | $ | 3,915,011   |  | 5.95 | %               |  | $ | 24,237,869 |   |            | $ | 1,323,361 |  | 5.46 | %
|Securities available-for-sale              |  |                 | 2,891,174   |   |          |   | 95,996      |  | 3.32 |                 |  |   | 1,013,418  |   |            |   | 27,505    |  | 2.71 |  
|Restricted equity securities               |  |                 | 258,947     |   |          |   | 12,800      |  | 4.94 |                 |  |   | 175,813    |   |            |   | 10,270    |  | 5.84 |  
|Interest-bearing deposits in banks         |  |                 | 206,613     |   |          |   | 2,699       |  | 1.31 |                 |  |   | 1,169,160  |   |            |   | 16,911    |  | 1.45 |  
|Federal funds sold                         |  |                 | 5,348,167   |   |          |   | 75,983      |  | 1.42 |                 |  |   | 4,119,225  |   |            |   | 43,014    |  | 1.04 |  
|                                           |  |                 |             |   |          |   |             |  |      |                 |  |   |            |   |            |   |           |  |      |  
|Total Interest Earning Assets              |  |                 | 74,459,365  |   |          |   | 4,102,489   |  | 5.51 | %               |  |   | 30,715,485 |   |            |   | 1,421,061 |  | 4.63 | %
|Cash and due from banks                    |  |                 | 1,742,032   |   |          |   |             |  |      |                 |  |   | 935,899    |   |            |   |           |  |      |  
|Other assets                               |  |                 | 1,008,555   |   |          |   |             |  |      |                 |  |   | 449,454    |   |            |   |           |  |      |  
|Allowance for loan losses                  |  |                 | (788,128    | ) |          |   |             |  |      |                 |  |   | (300,044   | ) |            |   |           |  |      |  
|Assets held for sale                       |  |                 | 58,839,936  |   |          |   |             |  |      |                 |  |   | 49,903,907 |   |            |   |           |  |      |  
|                                           |  |                 |             |   |          |   |             |  |      |                 |  |   |            |   |            |   |           |  |      |  
|Total Assets                               |  | $               | 135,261,760 |   |          |   |             |  |      |                 |  | $ | 81,704,701 |   |            |   |           |  |      |  
|                                           |  |                 |             |   |          |   |             |  |      |                 |  |   |            |   |            |   |           |  |      |  
|Interest checking deposits                 |  | $               | 3,522,204   |   |          | $ | 54,857      |  | 1.56 | %               |  | $ | 2,054,833  |   |            | $ | 36,456    |  | 1.77 | %
|Money market deposits                      |  |                 | 10,964,014  |   |          |   | 207,025     |  | 1.89 |                 |  |   | 6,910,095  |   |            |   | 138,147   |  | 2.00 |  
|Savings deposits                           |  |                 | 14,520,815  |   |          |   | 287,211     |  | 1.98 |                 |  |   | 2,670,645  |   |            |   | 51,002    |  | 1.91 |  
|Time deposits $100,000 and over            |  |                 | 11,577,522  |   |          |   | 309,707     |  | 2.68 |                 |  |   | 3,594,676  |   |            |   | 89,671    |  | 2.49 |  
|Other time deposits                        |  |                 | 21,463,349  |   |          |   | 565,907     |  | 2.64 |                 |  |   | 7,072,083  |   |            |   | 183,493   |  | 2.59 |  
|Federal funds purchased                    |  |                 | 258,664     |   |          |   | 3,190       |  | 1.23 |                 |  |   | 203        |   |            |   | 4         |  | 1.97 |  
|                                           |  |                 |             |   |          |   |             |  |      |                 |  |   |            |   |            |   |           |  |      |  
|Total interest-bearing liabilities         |  |                 | 62,306,568  |   |          |   | 1,427,897   |  | 2.29 | %               |  |   | 22,302,535 |   |            |   | 498,773   |  | 2.24 | %
|Demand deposits                            |  |                 | 7,678,001   |   |          |   |             |  |      |                 |  |   | 3,275,086  |   |            |   |           |  |      |  
|Other liabilities                          |  |                 | 317,750     |   |          |   |             |  |      |                 |  |   | 105,156    |   |            |   |           |  |      |  
|Liabilities held for sale                  |  |                 | 54,453,763  |   |          |   |             |  |      |                 |  |   | 45,418,497 |   |            |   |           |  |      |  
|                                           |  |                 |             |   |          |   |             |  |      |                 |  |   |            |   |            |   |           |  |      |  
|Total Liabilities                          |  |                 | 124,756,082 |   |          |   |             |  |      |                 |  |   | 71,101,274 |   |            |   |           |  |      |  
|Shareholders Equity                       |  |                 | 10,505,678  |   |          |   |             |  |      |                 |  |   | 10,603,427 |   |            |   |           |  |      |  
|                                           |  |                 |             |   |          |   |             |  |      |                 |  |   |            |   |            |   |           |  |      |  
|Total Liabilities and Shareholders Equity |  | $               | 135,261,760 |   |          |   |             |  |      |                 |  | $ | 81,704,701 |   |            |   |           |  |      |  
|                                           |  |                 |             |   |          |   |             |  |      |                 |  |   |            |   |            |   |           |  |      |  
|Net Interest Earnings                      |  |                 |             |   |          | $ | 2,674,592   |  | 3.22 | %               |  |   |            |   |            | $ | 922,288   |  | 2.39 | %
|                                           |  |                 |             |   |          |   |             |  |      |                 |  |   |            |   |            |   |           |  |      |  
|Net Yield on Interest Earning Assets       |  |                 |             |   |          |   |             |  | 3.59 | %               |  |   |            |   |            |   |           |  | 3.00 | %
|                                           |  |                 |             |   |          |   |             |  |      |                 |  |   |            |   |            |   |           |  |      |  



Loan fees, net of costs, are included
in total interest income. The average balance of nonaccrual assets is included in the calculation of asset yields.



The following table sets forth for the period indicated a summary of the change in interest income and interest expense resulting from changes in volume and rates. The
change in interest attributable to both rate and volume changes has been allocated to rate and volume changes in proportion to the relationship of the absolute dollar amounts of the change in each.





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|                                          |  |                                                            |           |   |                                                            |   |         |                         |  |   |               |   |  |             |           |   |                         |   |         |   |  |   |           |  
|----------------------------------------- |  | ---------------------------------------------------------- | --------- | - | ---------------------------------------------------------- | - | ------- | ----------------------- |  | - | ------------- | - |  | ----------- | --------- | - | ----------------------- | - | ------- | - |  | - | --------- | -
|                                          |  | 2004 Compared to 2003 Increase (Decrease) Due to Change In |           |   | 2003 Compared to 2002 Increase (Decrease) Due to Change In |  
|                                          |  | AverageVolume                                              |           |   | AverageRate                                                |   |         | TotalIncrease(Decrease) |  |   | AverageVolume |   |  | AverageRate |           |   | TotalIncrease(Decrease) |  
|Interest Income:                          |  |                                                            |           |   |                                                            |   |         |                         |  |   |               |   |  |             |           |   |                         |   |         |   |  |   |           |  
|Loans, net of unearned                    |  | $                                                          | 2,461,598 |   |                                                            | $ | 130,052 |                         |  | $ | 2,591,650     |   |  | $           | 1,243,138 |   |                         | $ | 9,978   |   |  | $ | 1,253,116 |  
|Securities available-for-sale             |  |                                                            | 61,123    |   |                                                            |   | 7,368   |                         |  |   | 68,491        |   |  |             | 23,252    |   |                         |   | 2,749   |   |  |   | 26,001    |  
|Restricted equity securities              |  |                                                            | 4,293     |   |                                                            |   | (1,763  | )                       |  |   | 2,530         |   |  |             | 7,346     |   |                         |   | (95     | ) |  |   | 7,251     |  
|Interest-bearing deposits in banks        |  |                                                            | (12,716   | ) |                                                            |   | (1,496  | )                       |  |   | (14,212       | ) |  |             | 59,615    |   |                         |   | (95,427 | ) |  |   | (35,812   | )
|Federal funds sold                        |  |                                                            | 14,928    |   |                                                            |   | 18,041  |                         |  |   | 32,969        |   |  |             | 25,586    |   |                         |   | (7,651  | ) |  |   | 17,935    |  
|                                          |  |                                                            |           |   |                                                            |   |         |                         |  |   |               |   |  |             |           |   |                         |   |         |   |  |   |           |  
|Total Interest Income                     |  | $                                                          | 2,529,226 |   |                                                            | $ | 152,202 |                         |  | $ | 2,681,428     |   |  | $           | 1,358,937 |   |                         | $ | (90,446 | ) |  | $ | 1,268,491 |  
|Interest Expense:                         |  |                                                            |           |   |                                                            |   |         |                         |  |   |               |   |  |             |           |   |                         |   |         |   |  |   |           |  
|Interest checking deposits                |  | $                                                          | 23,318    |   |                                                            | $ | (4,917  | )                       |  | $ | 18,401        |   |  | $           | 33,035    |   |                         | $ | (1,986  | ) |  | $ | 31,049    |  
|Money market deposits                     |  |                                                            | 76,936    |   |                                                            |   | (8,058  | )                       |  |   | 68,878        |   |  |             | 132,235   |   |                         |   | (2,068  | ) |  |   | 130,167   |  
|Savings deposits                          |  |                                                            | 234,323   |   |                                                            |   | 1,886   |                         |  |   | 236,209       |   |  |             | 50,520    |   |                         |   | 151     |   |  |   | 50,671    |  
|Certificates of deposit $100,000 and over |  |                                                            | 213,092   |   |                                                            |   | 6,944   |                         |  |   | 220,036       |   |  |             | 78,044    |   |                         |   | (3,100  | ) |  |   | 74,944    |  
|Other time deposits                       |  |                                                            | 379,395   |   |                                                            |   | 3,019   |                         |  |   | 382,414       |   |  |             | 167,558   |   |                         |   | (3,512  | ) |  |   | 164,046   |  
|Federal funds purchased                   |  |                                                            | 3,188     |   |                                                            |   | (2      | )                       |  |   | 3,186         |   |  |             | 4         |   |                         |   |        |   |  |   | 4         |  
|Short-term borrowings                     |  |                                                            |          |   |                                                            |   |        |                         |  |   |              |   |  |             | (10,040   | ) |                         |   |        |   |  |   | (10,040   | )
|                                          |  |                                                            |           |   |                                                            |   |         |                         |  |   |               |   |  |             |           |   |                         |   |         |   |  |   |           |  
|Total Interest Expense                    |  | $                                                          | 930,252   |   |                                                            | $ | (1,128  | )                       |  | $ | 929,124       |   |  | $           | 451,356   |   |                         | $ | (10,515 | ) |  | $ | 440,841   |  
|                                          |  |                                                            |           |   |                                                            |   |         |                         |  |   |               |   |  |             |           |   |                         |   |         |   |  |   |           |  
|Net Interest Income                       |  | $                                                          | 1,598,974 |   |                                                            | $ | 153,330 |                         |  | $ | 1,752,304     |   |  | $           | 907,581   |   |                         | $ | (79,931 | ) |  | $ | 827,650   |  
|                                          |  |                                                            |           |   |                                                            |   |         |                         |  |   |               |   |  |             |           |   |                         |   |         |   |  |   |           |  



INVESTMENT PORTFOLIO



All securities at December 31, 2004 and December 31, 2003 were classified
as available-for-sale. The amortized cost and approximate market values and gross unrealized gains and losses of securities available for sale appear in Part II, Item 7, Note 2 of this report.



Proceeds from the sale of these securities are included in the cash flow statement. Gross
gains and losses along with pledged information appear in Part II, Item 7, Note 2 of this report.



The following table shows the maturities of securities available-for-sale as of December 31, 2004 and the weighted average yields of such securities. The weighted average yields are calculated on the basis of the cost
and effective yields weighted for the scheduled maturity of each security.



|                          |  |                         |           |       |                       |   |        |                        |           |  |                    |        |  |       |   |  |        |   |       |   |   |       |   |   |  |   |          
|------------------------- |  | ----------------------- | --------- | ----- | --------------------- | - | ------ | ---------------------- | --------- |  | ------------------ | ------ |  | ----- | - |  | ------ | - | ----- | - | - | ----- | - | - |  | - | ---------
|                          |  | Due in One Year or Less |           |       | Due After 1  5 Years |   |        | Due After 5 - 10 Years |           |  | Due After 10 Years |        |  |      
|                          |  | Amount                  |           | Yield |                       |   | Amount |                        | Yield     |  |                    | Amount |  | Yield |   |  | Amount |   | Yield |   |   | Total
|U. S. government agencies |  | $                       | 1,000,000 |       | 2.22                  | % |        | $                      | 2,304,813 |  | 3.49               | %      |  | $     |  |  |       | % |       | $ |  |       |  | % |  | $ | 3,304,813
|Corporate securities      |  |                         |          |       |                      |   |        |                        | 310,806   |  | 6.50               |        |  |       |  |  |       |   |       |   |  |       |  |   |  |   | 310,806  
|                          |  |                         |           |       |                       |   |        |                        |           |  |                    |        |  |       |   |  |        |   |       |   |   |       |   |   |  |   |          
|Total                     |  | $                       | 1,000,000 |       |                       |   |        | $                      | 2,615,619 |  |                    |        |  | $     |  |  |        |   |       | $ |  |       |   |   |  | $ | 3,615,619
|                          |  |                         |           |       |                       |   |        |                        |           |  |                    |        |  |       |   |  |        |   |       |   |   |       |   |   |  |   |          



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##### Table of Contents

LOAN PORTFOLIO



The amounts of loans outstanding at the indicated dates are shown in the following table according to loan type:



|                                                |  |              |            |   |              |   |            |              |  |   |            |  
|----------------------------------------------- |  | ------------ | ---------- | - | ------------ | - | ---------- | ------------ |  | - | ---------- | -
|                                                |  | December2004 |            |   | December2003 |   |            | December2002 | 
|Commercial, financial and agricultural          |  | $            | 45,157,571 |   |              | $ | 24,593,797 |              |  | $ | 7,541,252  |  
|Real estate-mortgage                            |  |              | 20,598,689 |   |              |   | 6,800,214  |              |  |   | 734,863    |  
|Consumer                                        |  |              | 24,014,637 |   |              |   | 10,112,506 |              |  |   | 1,746,488  |  
|                                                |  |              |            |   |              |   |            |              |  |   |            |  
|Gross Loans                                     |  |              | 89,770,897 |   |              |   | 41,506,517 |              |  |   | 10,022,603 |  
|Unearned income and deferred fees               |  |              | 180,898    |   |              |   | 77,850     |              |  |   | 29,627     |  
|                                                |  |              |            |   |              |   |            |              |  |   |            |  
|Loans, net of unearned income and deferred fees |  |              | 89,951,795 |   |              |   | 41,584,367 |              |  |   | 10,052,230 |  
|Less: Allowance for loan losses                 |  |              | (1,123,214 | ) |              |   | (540,601   | )            |  |   | (130,700   | )
|                                                |  |              |            |   |              |   |            |              |  |   |            |  
|Loans, net of unearned income                   |  | $            | 88,828,581 |   |              | $ | 41,043,766 |              |  | $ | 9,921,530  |  
|                                                |  |              |            |   |              |   |            |              |  |   |            |  



Virtually all of MainStreets
business activity is with customers located in its primary market area. Accordingly, operating results are closely correlated with the economic trends within the region and influenced by the significant industries in the region including furniture,
pre-built housing, real estate development, agriculture, and resort and leisure services. In addition, the ultimate collectibility of the loan portfolio is susceptible to changes in the market condition of the region. The commercial portfolio is
diversified, but does have three areas classified as concentrations of credit at December 31, 2004. The areas of concentrations of credits are in loans for real estate with an outstanding balance of $11,009,692; loans for construction of buildings
with an outstanding balance of $10,507,422; and loans for construction of heavy and civil engineering buildings with an outstanding balance of $4,850,326. At December 31, 2003 there were two areas classified as concentrations of credit which were
loans for real estate with an outstanding balance of $7,836,471 and loans for construction of buildings with an outstanding balance of $3,517,369.



MainStreet has established policies related to the credit process and for collateral in loan originations. Loans to purchase real and personal property are generally
collateralized by the related property with loan amounts established based on certain percentage limitations of the propertys total stated or appraised value. Credit approval is primarily a function of cash flow, collateral, and the evaluation
of the creditworthiness of the individual borrower or project based on pertinent financial information and the amount to be financed, and the borrowers repayment ability based on their cash flow stream.



The following table shows the amount of commercial, financial, and agricultural loans
outstanding at December 31, 2004 and their maturity distribution.



|                                          |  |                 |            |                                 |   |                  |  |       |           |  |   |           
|----------------------------------------- |  | --------------- | ---------- | ------------------------------- | - | ---------------- |  | ----- | --------- |  | - | ----------
|                                          |  | Within One Year |            | After One But Within Five Years |   | After Five Years |  | Total
|Commercial, financial and agricultural    |  | $               | 17,433,172 |                                 | $ | 22,350,323       |  | $     | 5,374,076 |  | $ | 45,157,571
|Interest rates are floating or adjustable |  |                 | 14,989,032 |                                 |   | 7,016,877        |  |       | 2,925,947 |  |   | 24,931,856
|Interest rates are fixed or predetermined |  |                 | 2,444,140  |                                 |   | 15,333,446       |  |       | 2,448,129 |  |   | 20,225,715



It is MainStreets policy to
discontinue the accrual of interest on loans once they become 90 days past due and are not well-collateralized, or earlier when it becomes doubtful that the full principal and interest will be collected. Once a loan is placed on nonaccrual status,
any interest that is collected will generally be recorded on a cash basis until the loan is satisfied in full or circumstances have changed to such an extent that the collection of both principal and interest is probable. There were no loans on
nonaccrual at December 31, 2004 and December 31, 2003, respectively. There were no loans past due 90 days or more at December 31, 2004 or December 31, 2003. Net charge-offs of average loans, net of unearned, for 2004 and 2003 were .57% and .00%,
respectively.



At December 31, 2004 and 2003, respectively, MainStreet had no
other real estate, which is property acquired through foreclosure. Other real estate is carried at its fair market value.





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##### Table of Contents

Summary of Loan Loss Experience



The following table shows MainStreets average loan balance for each period, changes in the allowance for loan losses by loan category,
and additions to the allowance which have been charged to operating expense.



|                                                                      |  |                  |            |                  |   |                   |  |   |          
|--------------------------------------------------------------------- |  | ---------------- | ---------- | ---------------- | - | ----------------- |  | - | ---------
|                                                                      |  | December 31,2004 |            | December 31,2003 |   | December 31, 2002
|Average amount of loans, net of unearned, outstanding during the year |  | $                | 65,754,464 |                  | $ | 24,237,869        |  | $ | 1,323,361
|Balance of allowance for loan losses at beginning of year             |  |                  | 540,601    |                  |   | 130,700           |  |   |         
|Loans charged off:                                                    |  |                  |            |                  |   |                   |  |   |          
|Commercial, financial and agricultural                                |  |                  | 361,093    |                  |   |                  |  |   |         
|Real estate-mortgage                                                  |  |                  |           |                  |   |                  |  |   |         
|Consumer                                                              |  |                  | 13,194     |                  |   |                  |  |   |         
|                                                                      |  |                  |            |                  |   |                   |  |   |          
|Total loans charged off:                                              |  |                  | 374,287    |                  |   |                  |  |   |         
|                                                                      |  |                  |            |                  |   |                   |  |   |          
|Recoveries of loans previously charged off:                           |  |                  |            |                  |   |                   |  |   |          
|Commercial, financial and agricultural                                |  |                  |           |                  |   |                  |  |   |         
|Real estate - mortgage                                                |  |                  |           |                  |   |                  |  |   |         
|Consumer                                                              |  |                  |           |                  |   |                  |  |   |         
|                                                                      |  |                  |            |                  |   |                   |  |   |          
|Total recoveries:                                                     |  |                  |           |                  |   |                  |  |   |         
|                                                                      |  |                  |            |                  |   |                   |  |   |          
|Net loans charged off:                                                |  |                  | 374,287    |                  |   |                  |  |   |         
|Additions to the allowance for loan losses                            |  |                  | 956,900    |                  |   | 409,901           |  |   | 130,700  
|                                                                      |  |                  |            |                  |   |                   |  |   |          
|Balance of allowance for loan losses at end of year                   |  | $                | 1,123,214  |                  | $ | 540,601           |  | $ | 130,700  
|                                                                      |  |                  |            |                  |   |                   |  |   |          



In analyzing the adequacy of the
allowance for loan losses, management reviewed risk ratings of loans, past due reports and nonaccrual loans. Management has also reviewed the allowance in comparison to experience-to-date along with regulatory and peer comparisons. MainStreet has
also taken into consideration concentrations of credit along with the economy of the area. The amount of the loan loss reserve by category and the percentage of each category to total loans is as follows:



|                                       |  |               |           |  |               |   |  |               |         |  |        |   |  |   |         |  |        |  
|-------------------------------------- |  | ------------- | --------- |  | ------------- | - |  | ------------- | ------- |  | ------ | - |  | - | ------- |  | ------ | -
|                                       |  | December 2004 |           |  | December 2003 |   |  | December 2002 |        
|Commercial, financial and agricultural |  | $             | 504,241   |  | 50.30         | % |  | $             | 219,562 |  | 59.25  | % |  | $ | 40,501  |  | 75.24  | %
|Real estate  mortgage                 |  |               | 143,799   |  | 22.95         |   |  |               | 49,994  |  | 16.38  |   |  |   | 5,796   |  | 7.33   |  
|Consumer                               |  |               | 160,803   |  | 26.75         |   |  |               | 74,144  |  | 24.37  |   |  |   | 71,493  |  | 17.43  |  
|Specific reserve                       |  |               |          |  |              |   |  |               |        |  |       |   |  |   |        |  |       |  
|Unallocated                            |  |               | 314,371   |  |              |   |  |               | 196,901 |  |       |   |  |   | 12,910  |  |       |  
|                                       |  |               |           |  |               |   |  |               |         |  |        |   |  |   |         |  |        |  
|Total                                  |  | $             | 1,123,214 |  | 100.00        | % |  | $             | 540,601 |  | 100.00 | % |  | $ | 130,700 |  | 100.00 | %
|                                       |  |               |           |  |               |   |  |               |         |  |        |   |  |   |         |  |        |  



DEPOSITS



Total deposits at December 31, 2004 and 2003 were $90,438,450 and $44,580,029, respectively.
See Managements Discussion and Analysis for the major classifications of deposits along with their percentage to total deposits. The average amount and rate of these deposits can be found in Part I, Item 1, in the distribution of Assets,
Liabilities, and Shareholders Equity: Interest Rate and Interest Differentials table found on page 3 of this document. The maturities of time deposits $100,000 and over and other time deposits are presented in Part II, Item 7, Note 6.



RETURN ON EQUITY AND ASSETS



Certain ratios for equity and assets as of December 31, 2004 and December 31, 2003 are
presented as follows:



|                                               |  |                  |   |  |                  |   
|---------------------------------------------- |  | ---------------- | - |  | ---------------- | --
|                                               |  | December 31,2004 |   |  | December 31,2003 |   
|Return on average shareholders equity         |  | 7.38             | % |  | (5.77            | )%
|Return on average assets                       |  | .57              |   |  | (.75             | ) 
|Dividend payout ratio                          |  |                 |   |  |                 |   
|Average shareholders equity to average assets |  | 7.77             |   |  | 12.98            |   





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##### Table of Contents

Item 2. Description of Property



At December 31,
2004 the Corporation had one lease agreement for its facility in Martinsville, Virginia. MainStreets executive office lease, which commenced on August 1, 2002, was for 2,000 square feet of space located in the Patrick Henry Shopping Mall at
Suite 12, 730 East Church Street in Martinsville, Virginia. On January 28, 2004, MainStreet signed a new lease for the executive offices and operations area for 3,000 square feet of area located in the Patrick Henry Shopping Mall, Suite 30. This new
lease, which commenced May 1, 2004, will expire April 30, 2009 and replaced the prior lease. The lease does not have a renewal option. MainStreet believes its leased headquarters and operations facilities are adequate for their present use.



Franklin Banks main office is located at 400 Old Franklin Turnpike,
Suite 100, Rocky Mount, Virginia, in a section of town known as the Rocky Mount Marketplace. The bank leases a two-story facility with approximately 8,200 square feet of which the Bank provides permanent financing to the owners. The lease is for a
15-year period and the expiration date of the lease is June 30, 2018. One of the owners is also a director of Franklin Bank and both owners are shareholders of BankShares. A branch of Franklin Bank opened on April 9, 2004 at 12930 Booker T.
Washington Highway, Hardy, Virginia. The bank also provides permanent financing to the owner of this facility, of which a director of the bank is a partner. The lease commenced on April 7, 2004 and will expire April 6, 2019. Management deems these
leases to be made at comparable market values. Both the main office and the branch have a drive-up ATM.



Neither MainStreet nor the banks own any real property.



At December 31, 2004, Smith River Bank had a lease for its main office in Martinsville, Virginia. This lease commenced on August 1, 2002, covering nearly 2,486 square feet and is located at 730 East Church Street and
Booker Road in Martinsville, Virginia. On January 7, 2004, the main office lease was amended to allow for expansion of the building adding approximately 1,500 square feet. The expansion was completed in the second quarter 2004. The amended lease
expires March 31, 2014. The lease does not have a renewal option. The main office has a walk-up ATM.



Smith River Bank also leases a 3,400 square foot branch facility located at 380 Riverside Drive, in Bassett, Virginia. The lease commenced on December 2, 2003 and will terminate December 1, 2006. The second branch of
Smith River Bank opened on August 6, 2001 at 105 Dobyns Road in Stuart, Virginia. A modular facility was purchased for the branch, but the property is being leased for a 10-year period which began August 1, 2001 with options to extend. Both branches
have drive-up ATMs.



MainStreet believes its banking facilities are well
located to serve their intended banking markets and are attractively furnished and well equipped for banking purposes.



Item 3. Legal Proceedings



MainStreet currently
is not involved in any litigation or similar adverse legal or regulatory matters.



Item 4. Submission of Matters To A Vote of Security Holders



None





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##### Table of Contents

PART II



Item 5. Market for Common Equity and Related Stockholder Matters



MainStreet has 10,000,000 authorized shares of common stock, no par value, and had 1,573,569 shares of its common stock outstanding at January 31, 2005. In addition, the initial organizers of MainStreet received
87,500 warrants in connection with the initial public offering. Each warrant provides the holder with the right to buy one share of stock at a price of $10.00 per share. As of December 31, 2004, 75,833 warrants are vested and unexercised and 11,667
warrants have been forfeited and can no longer be exercised. In addition, MainStreet has issued options to present and former employees to purchase 60,000 shares of common stock at a price equal to the fair market value of MainStreets common
stock as of the date of grant. As of December 31, 2004, 60,000 options had fully vested and none had been exercised.



The shareholders of MainStreet BankShares, Inc. approved the 2004 Key Employee Stock Option Plan at its Annual Meeting on April 15, 2004. The Plan permits the grant of
Non-qualified Stock Options and Incentive Stock Option to persons designated as Key Employees of BankShares and its subsidiaries. The Plan will remain in effect, subject to the right of the Board to terminate the Plan, until January 21,
2009, at which time it terminates except with respect to awards made prior to and outstanding on that date which remain valid in accordance with their terms. The maximum number of shares that may be issued under the Plan may not exceed 137,000. At
December 31, 2004, no awards had been granted under this Plan.



On September
20, 2004, MainStreet BankShares, Inc. commenced a private placement offering of its common stock to accredited and up to 35 non-accredited investors under Rule 506 of the Securities and Exchange Act of 1933. The offering was for a target issuance of
183,334 shares of common stock. The offering was set to terminate on October 31, 2004, but the Board of Directors of BankShares extended the offering to January 31, 2005. The offering terminated on January 31, 2005 and there were 200,789 shares of
common stock sold at a price of $9.00 per share in the private placement for a total of $1,807,101. No underwriters were involved in the offering. The proceeds from the offering were used to enhance the capital of MainStreet and the banks to support
growth, largely at Franklin Bank, and for working capital.



In connection with
the offering of MainStreets common stock to capitalize Franklin Bank in 2002, TCF Financial Corporation (TCF) purchased 135,945 shares of MainStreets common stock or 9.99%. This purchase equates to 8.64% of common stock
outstanding at February 28, 2005, excluding any warrants or options outstanding. TCF is a Delaware bank holding company headquartered at 200 East Lake Street, Wayzata, Minnesota, 55391. TCF is the national financial holding company of two federally
chartered banks, TCF National Bank headquartered in Minnesota and TCF National Bank Colorado. TCF has banking offices in Minnesota, Illinois, Michigan, Wisconsin, Colorado and Indiana. Other affiliates provide leasing and equipment finance, mortgage
banking, discount brokerage and investment and insurance sales.



MainStreet
does not anticipate that its common stock will be traded actively for some time. At some point in the future, it may investigate trading on the over-the-counter market or on an established exchange. Before it can do that it will have to find
licensed investment banking firms willing to make a market in the stock. There is no trading market in the common stock; therefore, the company has no information related to high/low bids of the common stock.



There are approximately 1,862 shareholders of common stock as of December 31, 2004.



In order to preserve capital to facilitate growth and expansion, MainStreet
does not anticipate paying cash dividends in the immediate future. The only source of funds for dividends would be dividends paid to MainStreet by Franklin Bank or Smith River Bank. MainStreet presently contemplates that it will divest all of its
interest in Smith River Bank to Argentum or assigns during the first quarter of 2005. Franklin Bank does not anticipate paying any dividends to MainStreet in the foreseeable future because of the need to facilitate growth and expansion. Franklin
Bank is also limited in the amount of dividend payments by the Office of the Comptroller of the Currency, (OCC), its primary regulator. The OCC limits annual dividends to a maximum of retained profits of the current year plus the two
prior years, without prior OCC approval.





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##### Table of Contents

The information required on the description of equity compensation plans is as follows:



|                                                           |  |                                                                                         |  |                                                                           |       |                                                                                                                                       |        
|---------------------------------------------------------- |  | --------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------- | ----- | ------------------------------------------------------------------------------------------------------------------------------------- | -------
|Plan Category                                              |  | Number of SecuritiesTo be Issued UponExercise ofOutstanding Options,Warrants and Rights |  | Weighted-AverageExercise Price of Outstanding Options,Warrants and Rights |       | Number of SecuritiesRemaining AvailableFor Future IssuanceUnder EquityCompensation
Plans(Excluding SecuritiesReflected in Column (a))
|                                                           |  | (a)                                                                                     |  | (b)                                                                       |       | (c)                                                                                                                                  
|Equity compensation plans Approved by security holders     |  | 30,000                                                                                  |  | $                                                                         | 10.00 |                                                                                                                                       | 137,000
|Equity compensation plans Not approved by security holders |  | 30,000                                                                                  |  |                                                                           | 10.50 |                                                                                                                                       |       
|                                                           |  |                                                                                         |  |                                                                           |       |                                                                                                                                       |        
|Total                                                      |  | 60,000                                                                                  |  | $                                                                         | 10.25 |                                                                                                                                       | 137,000
|                                                           |  |                                                                                         |  |                                                                           |       |                                                                                                                                       |        



Refer to Part II, Item 7, Note 12 for
a detailed discussion of the stock options and warrants that are outstanding.



Item 6. Managements Discussion and Analysis



The following discussion is intended to assist in understanding and evaluating the financial condition and results of operations of MainStreet BankShares, Inc. on a consolidated basis. This discussion and analysis should be read in
conjunction with BankShares consolidated financial statements and related notes included in Item 7 of this report on Form 10-KSB.



Forward-Looking Statements



This report contains forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those reflected in
such forward-looking statements which are representative only on the date hereof. Readers of this report should not rely solely on the forward-looking statements and should consider all uncertainties and risks discussed throughout this report.
MainStreet takes no obligation to update any forward-looking statements contained herein. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following
possibilities: (1) competitive pressures among depository and other financial institutions may increase significantly; (2) changes in the interest rate environment may reduce margins; (3) general economic conditions, either nationally or regionally,
may be less favorable than expected that could result in a deterioration of credit quality or a reduced demand for credit; and (4) legislative or regulatory changes including changes in accounting standards, may adversely affect the business.



General



MainStreet was incorporated on January 14, 1999 in Virginia as First Community National BanCorp., Inc. On July 8, 1999, MainStreet changed
its name to Smith River Bankshares, Inc. On March 6, 2001, MainStreet changed its name to MainStreet BankShares, Inc. MainStreet was formed for the primary reason of becoming a bank holding company. Upon the formation of Smith River Bank, MainStreet
bought all the stock of Smith River Bank from the proceeds of the initial public offering. Smith River Bank opened for business on July 24, 2000. MainStreet organized and capitalized Franklin Bank from the proceeds of a secondary public offering of
its common stock which was completed on December 31, 2002. Franklin Bank opened for business on September 16, 2002. MainStreet downstreamed 3,810 shares of its common stock (value $40,005) to its subsidiary bank, Smith River Bank, which the bank, in
turn, used as consideration to acquire a 40% ownership interest in MainStreet Title Agency, LLC, (MSTA), from its sole owner on January 28, 2004.



Due to the significant loan growth at Franklin Bank and provisions to the allowance for loan losses in June 2004, principally as the result of a larger problem credit
relationship, certain capital ratios fell below the regulatory well-capitalized level for financial institutions. Therefore, MainStreet implemented a two-part capital restoration plan. On September 20, 2004, MainStreet commenced a private placement
offering of its common stock to accredited investors and up to 35 non-accredited





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##### Table of Contents

investors under Rule 506 of the Securities and Exchange Act of 1934. The offering was for a target issuance of 183,334
shares of common stock. As of December 31, 2004, there were 156,038 shares of common stock sold at a price of $9.00 per share in the private placement for a total of $1,404,342. Offering costs in the amount of $77,941 had been netted against the
proceeds of the sale. The offering terminated on January 31, 2005 with a total sale of common stock of $1,807,101, or 200,789 shares. There were no brokerage or underwriting commissions payable in the private placement. The additional capital raised
by this offering will be used principally to aid in maintaining all regulatory capital ratios at the adequately capitalized level.



On January 13, 2005, MainStreet, Smith River Bank and Argentum entered into an Agreement pursuant to which MainStreet will sell, and Argentum, or investors obtained by
Argentum for this purpose, will purchase, all of the outstanding shares of the common stock of Smith River Bank for $6,500,000. Argentum is a limited liability company engaged in investment banking and headquartered in Durham, North Carolina. The
transaction is expected to close on or before March 20, 2005, but may be terminated earlier by either party under certain circumstances, including by MainStreet if Argentum fails to raise sufficient outside investment by March 7, 2005. Consummation
of the transaction is subject to a number of conditions, including the completion of the parties due diligence and prior required regulatory approvals, if any. The parties have completed substantial due diligence and believe that no prior
regulatory approvals are required, but there is no assurance that Argentum will be able to find sufficient outside investors and consummate the transaction. As part of the transaction, MainStreet will agree to acquire specified loans from Smith
River Bank. In the event Smith River Bank determines it must charge off one of the specified loans, (after pursuing normal collection efforts), MainStreet will acquire all of Banks right, title and interest in the charged off loan.
MainStreets obligation to purchase such loans will not exceed the principal amount of the loan at the time of the purchase plus Smith River Banks out of pocket collection expenses. The outstanding principal balance of such loans
presently is $731,300. Also as part of the transaction, Smith River Bank will agree to outsource certain administrative and related activities to MainStreet for a period of 3 years following the closing for an annual fee of $505,000. Upon the
successful completion of the transaction MainStreet will downstream a portion of the proceeds to Franklin Bank. MainStreet and Franklin Bank will be well-capitalized upon consummation. If this transaction should not be successful, it is anticipated
that MainStreet would implement an additional private placement offering to obtain the capital needed to restore all capital levels to the well-capitalized level; but we cannot be certain that such an offering will be successful. If it is not, it is
likely that the banking regulators will require MainStreet to limit, or stop completely, growth at Smith River Bank and Franklin Bank and implement alternative efforts to obtain the regulatory well capitalized level of capital adequacy including
reducing the assets supported by the capital. Due to this pending transaction, the assets and liabilities of Smith River Bank are shown as held for sale in the consolidated balance sheet. The income (loss) of Smith River Bank is shown as income
(loss) from discontinuing operations in the consolidated income statement.



Critical Accounting Policies



MainStreets financial
statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). The financial information contained within our statements is, to a significant extent, based on measures of the financial effects of
transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. We use historical loss
factors, peer comparisons, regulatory factors and the trend in the economy as factors in determining the inherent loss that may be present in our loan portfolio. Actual losses could differ significantly from the historical factors that we use in
estimating risk.



The allowance for loan losses is an estimate of the losses
that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting: (i) SFAS No. 5, Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and
estimable and (ii) SFAS No. 114, Accounting by Creditors for Impairment of a Loan, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are
observable in the secondary market and the loan balance. The allowance for loan losses is maintained at a level, which, in managements judgment, is adequate to absorb credit losses inherent in the loan portfolio. The amount of the allowance is
based on managements evaluation of the collectibility of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, economic conditions, and other risks
inherent in the portfolio. Management reviews the past due reports and risk ratings and discusses individually the loans on these reports with the responsible loan officers. Management uses these tools and provides a quarterly analysis of the
allowance based on peer analysis, regulatory reserve analysis and an analysis based on the experience in each category of commercial, real estate or consumer loans. The regulatory analysis is generally utilized to allocate the reserve to each of the
different loan categories. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows. This allowance, then, is designated as a specific reserve. The remainder of the allowance is
then unallocated. Although management uses available information to recognize losses on loans, because of uncertainties associated with local economic conditions, collateral values, and future cash flows on





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##### Table of Contents

impaired loans, it is reasonably possible that a material change could occur in the allowance for loan losses in the near
term. However, the amount of the change that is reasonably possible cannot be estimated. The allowance is increased by a provision for loan losses, which is charged to expense, and reduced by charge-offs, net of recoveries. Changes in the allowance
relating to impaired loans are charged or credited to the provision for loan losses. Past due status is determined based on contractual terms.



Overview



Total assets at December 31, 2004 and 2003 were $158,342,609 and $105,580,035, respectively, an increase of $52,762,574, or 49.97%. Of this amount, assets from continuing operations were $98,860,491 and $50,633,515 at
December 31, 2004 and 2003, respectively, an increase of $48,226,976, or 95.25%. As can be seen, the majority of the growth in assets from year-to-year was attributable to continuing operations. Total shareholders equity at December 31, 2004
and 2003 was $12,283,579 and $10,220,463, respectively.



MainStreets net
income (loss) for the twelve months ending December 31, 2004 and 2003 was $775,198 and $(611,772), respectively. This equates to an increase of $1,386,970 over the 2003 year-to-date loss. The 2004 income includes a change in the valuation reserve of
the deferred tax asset which added $477,359 to net income as an income tax benefit. Income from continuing operations in 2004 was $579,063 which included the change in the valuation reserve of the deferred tax asset. The 2003 net loss included a
nonrecurring expense of $223,136 in severance payments. If this one-time payout had not occurred, the net loss for 2003 would have been $(388,636), which translates into a positive variance over 2002 of $425,255, or 52.25%.



Franklin Bank opened on September 16, 2002 and ended December 31, 2004 with $98.3 million in
total assets. Franklin Bank operates in a vibrant market which has a strong economy that provides a distinct advantage to MainStreet. Franklin Bank showed net income for calendar year 2004 in the amount of $531,959. In June 2004 Franklin experienced
a commercial loan charge-off in the amount of $334,500, which was a participation loan from Smith River Bank. Franklin was not expected to reach profitability until the third complete year of operations. Franklins net interest margin was 3.60%
and 3.07% for the twelve-month periods ended December 31, 2004 and 2003, respectively. The increase in net interest margin is due to a substantial increase in interest income, contributed by both increases in volumes and rates, combined with
controlled interest rates on deposit accounts. The Federal Reserve raised short-term interest rates five times in 2004 ending the year at 2.25% which correspondingly ended the prime rate at 5.25%. Young financial institutions such as Franklin Bank
must price new loans competitively and consequently do not have older, higher yielding loans in their portfolio and competition is fierce in their market. Therefore, these things do compress the net interest margin somewhat. Growth has been
substantial for Franklin Bank which has also precipitated the need for additional capital as mentioned previously. It is currently anticipated that Franklins growth will continue in 2005.



Smith River Bank ended the year with $59.5 million in total assets. Smith River Bank has been
profitable for 25 out of the last 28 months, earning $196,135 for calendar year 2004. In June 2004 and December 2003, Smith River Bank experienced commercial loan charge-offs totaling $311,500 and $144,757, respectively. It is anticipated that Smith
River Bank will continue to be profitable in 2005. Smith Rivers net interest margin was 3.67% and 3.30% for the twelve-month periods ended December 31, 2004 and 2003, respectively. The increase in net interest margin is due to a modest
increase in interest income, contributed by an increase in rates, combined with controlled interest rates on deposit accounts.



Results of Operation



Net interest income is the difference between total interest income and total interest expense. The amount of net interest income is determined by the volume of interest-earning assets, the level of interest rates
earned on those assets and the cost of supporting funds. The difference between rates earned on interest-earning assets and the cost of supporting funds is measured as the net interest margin. MainStreets principal source of income is from the
net interest margin. The distribution of assets, liabilities, and equity along with the related interest income and interest expense is presented on page 3 of this document. The change in interest income and interest expense attributable to rate
and/or volume can be found on page 4 of this Form 10-KSB.



For 2004, net
interest income totaled $2.7 million compared to $.9 million for 2003. The total average interest-earning assets were $74.5 million and $30.7 million for the years ending December 31, 2004 and 2003, respectively, an increase of $43.8 million, or
142.67%. The total average interest-bearing liabilities were $62.3 million and $22.3 million for the years ending December 31, 2004 and 2003, respectively, an increase of $40.0 million or 179.37%. Volumes have continued to increase from year to
year. The general level of interest rates remained low during 2003, but increased during 2004. During 2004, the



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Federal Reserve raised short-term interest rates five times, a total increase of 1.25%, and ended the year at a rate of
2.25%. Increased interest rates, coupled with controlled interest rates on deposits, contributed significantly to the increase in the net interest margin during 2004. The net interest margin for MainStreet at December 31, 2004 and 2003 was 3.59% and
3.00%, respectively, an increase of 59 basis points. Interest rate declines, coupled with the need to price loans and deposits competitively in the market, compressed the net interest margin in 2001, 2002, and throughout 2003. The Federal Reserve
cut short-term interest rates eleven different times during 2001, a total of 4.75%, in response to a weakening economy. The Federal Reserve again lowered the federal funds rate 50 basis points in the fourth quarter of 2002 to 1.25% and again in the
second quarter of 2003 by 25 basis points to 1.00%. The prime rate, which is the basis for pricing many commercial and consumer loans, follows the short-term interest rate established by the Federal Reserve.



Provision for Loan Losses



A provision for loan losses is charged to earnings for the purpose of establishing an
allowance for loan losses that is maintained at a level, which, in managements judgment, is adequate to absorb credit losses inherent in the loan portfolio. The amount of the allowance is based on managements evaluation of the
collectibility of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, economic conditions, and other risks inherent in the portfolio. Management reviews
past due reports and risk ratings and discusses individually the loans on these reports with the responsible loan officers. Management uses these tools and provides a quarterly analysis of the allowance based on peer analysis, regulatory reserve
analysis and an analysis based on the experience in each category of commercial, real estate or consumer loans. As the allowance is maintained losses are, in turn, charged to this allowance rather than being reported as a direct expense.



For the year-to-date periods ending December 31, 2004 and 2003, the provision for loan
losses was $956,900 and $409,901, respectively. During the second quarter of 2004 MainStreet recorded a total of $230,000 in loan provisions to cover $334,500 in commercial loan charge-offs, almost all of which was a participation loan at Franklin
Bank from Smith River Bank. Strong period over period loan growth at Franklin Bank also contributed to the increase in the loan provision during 2004. The allowance for loan losses, or the reserve, was $1,123,214 and $540,601 at December 31, 2004
and 2003, respectively. This allowance equated to 1.25% and 1.30% of loans, net of unearned income at December 31, 2004 and 2003, respectively. Net charge-offs were $374,287 and $0.00 for 2004 and 2003, respectively, or .57% and .00%, respectively,
of average loans, net of unearned income. The amount of charge-offs can fluctuate substantially based on the financial condition of the borrowers, business conditions in the borrowers markets, collateral values and other factors which are not
capable of precise projection at any point in time. No assurance can be given that unforeseen adverse economic conditions or other circumstances will not result in increased provisions in the future. A summary of the loan loss experience and an
allocation of the allowance can be found on page 6 of this Form 10-KSB.



Noninterest Income



Noninterest income for the years ending
December 31, 2004 and December 31, 2003 was $1,003,963 and $1,069,244, respectively, a decrease of $65,281, or 6.11%. Mortgage brokerage income decreased $65,749 due to a slight softening in the market and the increase in rates. Our banks partnered
with three different organizations in which the banks originate mortgage loans, which for the most part, then close in the companies names. The banks receive fee income from the transactions. Other fee income and miscellaneous income was
$642,107 for 2004 and $724,297 for 2003, a decline of $82,190. Fees paid to MainStreet from Smith River Bank for servicing included in this category declined $107,276 in 2004 compared to 2003. Offsetting this decline were increases in credit life
insurance commissions, ATM income, debit card income and safe deposit box rental income. Service charges on deposit accounts were $122,416 in 2004 compared to $39,758 in 2003, an increase of $82,658, primarily due to increases in business accounts
and NSF charges. Contributing to these increases in service charges was the addition of a second branch, Westlake Branch, of Franklin Bank. This branch opened on April 9, 2004.



Because of the compressed net interest margin during 2001 thru 2004, noninterest income has assumed greater significance to MainStreet. The
mortgage brokerage income has provided a good base for noninterest income, although dependent on the continued health of the real estate market. Franklin Bank implemented a free checking product during 2004 which has brought additional business into
the bank with opportunities for cross-selling.



Noninterest Expense



Total noninterest expense for the years ending December 31, 2004 and December
31, 2003 was $2,619,951 and $2,065,849,



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respectively, an increase of $554,102, or 26.82%. The 2004 results contain nine months of operations of the new Westlake
branch of Franklin Bank, which opened on April 9, 2004. The 2003 noninterest expense included a one-time severance payment of $223,136. Excluding this severance payment, noninterest expense increased $777,238 in 2004 over 2003 levels.



The following chart shows the remainder of noninterest expenses by category for the years
ending December 31, 2004 and 2003, the dollar change and the percentage change.



|                               |  |          |           |          |   |               |  |   |                   |   |  |        |  
|------------------------------ |  | -------- | --------- | -------- | - | ------------- |  | - | ----------------- | - |  | ------ | -
|Expense                        |  | 12-31-04 |           | 12-31-03 |   | Dollar Change |  |   | Percentage Change |  
|Salaries and employee benefits |  | $        | 1,291,072 |          | $ | 866,043       |  | $ | 425,029           |   |  | 49.08  | %
|Occupancy and equipment        |  |          | 451,310   |          |   | 191,046       |  |   | 260,264           |   |  | 136.23 |  
|Professional fees              |  |          | 202,592   |          |   | 210,889       |  |   | (8,297            | ) |  | (3.93  | )
|Advertising and promotion      |  |          | 67,810    |          |   | 50,878        |  |   | 16,932            |   |  | 33.28  |  
|Outside processing             |  |          | 194,303   |          |   | 125,021       |  |   | 69,282            |   |  | 55.42  |  
|Franchise tax                  |  |          | 61,005    |          |   | 43,404        |  |   | 17,601            |   |  | 40.55  |  
|Other expenses                 |  |          | 351,859   |          |   | 355,432       |  |   | (3,573            | ) |  | (1.01  | )



As can be seen by the chart, the
largest component of noninterest expense is salaries and employee benefits followed by occupancy and equipment costs. MainStreet employees are its most valuable resource and asset. Occupancy and equipment costs include rent, utilities, janitorial
service, repairs and maintenance, real estate taxes, service maintenance contracts and depreciation expense. Professional fees include fees for audit, legal, and other. Outside processing primarily includes data processing, payroll processing, check
clearings, and insurance. Other expenses include OCC assessments, FDIC assessments, travel expense, meals and entertainment, subscriptions and dues, seminars and education, and contributions. As previously mentioned, the increase in noninterest
expense is attributable to the opening of the Westlake branch of Franklin Bank on April 9, 2004 and direct growth and expansion.



Income Taxes



MainStreet is subject to both federal and state income taxes. Franklin Bank and Smith River Bank, however, are subject to federal income taxes but not state income taxes. A bank in Virginia is required to pay a
franchise tax that is based on the capital of the entity. MainStreet recorded a tax benefit of $477,359 and $0.00 for the year-ended December 31, 2004 and December 31, 2003, respectively. A net loss had accumulated before BankShares had become
profitable and a 100% allowance had been allocated against that tax deferred asset. Due to the recording of the tax deferred asset in 2004, a tax benefit was recorded.



BALANCE SHEET



Investment Portfolio



MainStreets investment portfolio is used for several purposes as follows:



| | 1) | To maintain sufficient liquidity to cover deposit fluctuations and loan demand.
| | -- | -------------------------------------------------------------------------------



| | 2) | To fulfill pledging collateral requirements.
| | -- | --------------------------------------------



| | 3) | To help balance the overall interest rate risk position of the balance sheet.
| | -- | -----------------------------------------------------------------------------



| | 4) | To make a reasonable return on investments.
| | -- | -------------------------------------------



Funds not utilized for capital expenditures or lending are invested in overnight federal funds, securities of the U.S. Government and its agencies, mortgage-backed
securities, municipal bonds, and certain other debt and equity securities. Currently, the Corporation has invested in U.S. Agencies, Federal Reserve Bank Stock, Federal Home Loan Bank Stock and corporate securities. MainStreets policy is not
to invest in derivatives or other high-risk instruments at this time. The entire securities portfolio was categorized as available-for-sale at December 31, 2004 and December 31, 2003 and is carried at estimated fair value. Unrealized market
valuation gains and losses on securities classified as available-for-sale are recorded as a separate component of shareholders equity. Please refer to Footnote #2 in this Form 10-KSB for a breakdown of the investment portfolio, repricing data,
and pledge information.



Loan Portfolio



MainStreet has established a credit policy detailing the credit process and collateral in
loan originations. Loans to purchase



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##### Table of Contents

real estate and personal property are generally collateralized by the related property with loan amounts established
based on certain percentage limitations of the propertys total stated or appraised value. Credit approval is primarily a function of the credit worthiness of the individual borrower or project based on pertinent financial information, the
amount to be financed, and collateral. At December 31, 2004 and 2003 the breakdown of gross loans in the loan portfolio was as follows:



|                        |  |      |            |  |        |   |  |   |            |  |        |  
|----------------------- |  | ---- | ---------- |  | ------ | - |  | - | ---------- |  | ------ | -
|                        |  | 2004 |            |  | 2003   |  
|Commercial              |  | $    | 45,157,571 |  | 50.30  | % |  | $ | 24,593,797 |  | 59.25  | %
|Residential real estate |  |      | 20,598,689 |  | 22.95  |   |  |   | 6,800,214  |  | 16.38  |  
|Consumer                |  |      | 24,014,637 |  | 26.75  |   |  |   | 10,112,506 |  | 24.37  |  
|                        |  |      |            |  |        |   |  |   |            |  |        |  
|Total                   |  | $    | 89,770,897 |  | 100.00 | % |  | $ | 41,506,517 |  | 100.00 | %
|                        |  |      |            |  |        |   |  |   |            |  |        |  



As can be seen by the loan portfolio
dollars, MainStreet experienced substantial loan growth in 2004 compared to 2003 with an increase of $48,264,380, or 116.28%. Although continued loan growth for Franklin Bank is expected, it is unlikely that this level of loan growth will continue.
Commercial loans continue to be the primary source of lending. However, commercial loans decreased as a percentage of total gross loans from year end 2003 to 2004. Residential real estate loans and consumer retail loans each increased as a
percentage of total gross loans. Consumer retail loans increased primarily due to home equity loans.



The commercial portfolio is diversified, but does have three areas classified as concentrations of credit at December 31, 2004. The areas of concentrations of credits are in loans for real estate with an outstanding
balance of $11,009,692; loans for construction of heavy and civil engineering buildings with an outstanding balance of $10,507,422; and loans for construction of buildings with an outstanding balance of $4,850,326. At December 31, 2003, there were
two areas classified as concentrations of credit. The areas of concentrations of credits in these loans were in loans for real estate with an outstanding balance of $7,836,471 and loans for construction of buildings with an outstanding balance of
$3,517,369.



Nonaccrual loans and loans past due 90 days or more are considered
by MainStreet to be nonperforming loans. MainStreets policy is to discontinue the accrual of interest on loans once they become 90 days past due and are not well-collateralized, or earlier when it becomes doubtful that the full principal and
interest will be collected. Once a loan is placed on nonaccrual status, any interest that is collected will generally be recorded on a cash basis until the loan is satisfied in full or circumstances have changed to such an extent that the collection
of both principal and interest is probable. There were no nonaccrual loans at December 31, 2004 and 2003, respectively. There were no loans past due 90 days or more at December 31, 2004 or 2003.



Deposits



Deposits are the largest source of funds used to support asset growth of MainStreet. The ratio of loans, net of unearned to deposits was
99.46% and 93.28% as of December 31, 2004 and 2003, respectively. The ratio of total time deposits to total deposits was 48.53% and 38.81% at December 31, 2004 and 2003, respectively. Total deposits at December 31, 2004 and 2003 were $90,438,450 and
$44,580,029, respectively. The deposit mix was as follows:



|                                |  |      |            |  |        |   |  |   |            |  |        |  
|------------------------------- |  | ---- | ---------- |  | ------ | - |  | - | ---------- |  | ------ | -
|                                |  | 2004 |            |  | 2003   |  
|Demand deposits                 |  | $    | 8,983,120  |  | 9.93   | % |  | $ | 5,290,148  |  | 11.86  | %
|Interest checking deposits      |  |      | 4,544,443  |  | 5.02   |   |  |   | 2,544,082  |  | 5.71   |  
|Money market deposits           |  |      | 12,023,169 |  | 13.30  |   |  |   | 10,513,952 |  | 23.59  |  
|Savings deposits                |  |      | 21,002,367 |  | 23.22  |   |  |   | 8,931,931  |  | 20.04  |  
|Time deposits $100,000 and over |  |      | 15,533,446 |  | 17.18  |   |  |   | 5,475,546  |  | 12.28  |  
|Other time deposits             |  |      | 28,351,905 |  | 31.35  |   |  |   | 11,824,370 |  | 26.52  |  
|                                |  |      |            |  |        |   |  |   |            |  |        |  
|Total                           |  | $    | 90,438,450 |  | 100.00 | % |  | $ | 44,580,029 |  | 100.00 | %
|                                |  |      |            |  |        |   |  |   |            |  |        |  



Total deposits increased $45,858,421,
or 102.87% at year-end 2004 compared to year-end 2003. The chart reflects that the largest increases as a percentage of total deposits were in savings deposits, time deposits $100,000 and over, and other time deposits. Demand deposits, interest
checking deposits, and money market deposits decreased in 2004 in comparison to the prior year. The levels and mix of deposits are influenced by such factors as customer service, interest rates paid, service charges, and the convenience of banking
locations. Competition is fierce from other depository institutions in our market. Management attempts to identify and implement the pricing and marketing strategies that will help control the overall cost of deposits and to maintain a stable
deposit mix. The overall yield on interest bearing deposits was 2.30% and 2.24% for 2004 and 2003, respectively. This increase of 6 basis points is reflective of the competition in the overall market and the commitment to control funding costs
during 2004 even with the short-term interest rate increases.



14



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##### Table of Contents

Shareholders Equity



Total shareholders equity was $12,283,579 and $10,220,463 at December 31, 2004 and 2003, respectively. The initial stock offering was
completed during the third quarter of 2000 with gross proceeds of $6,893,680. Offering expenses of $185,518 were netted against equity. The secondary stock offering was completed December 31, 2002 with gross proceeds of $7,135,821. Offering expenses
of $260,880 were netted against equity. As of December 31, 2004 total proceeds from the issuance of common stock in the private placement offering were $1,404,342. Offering costs in the amount of $77,941 have been netted against equity. The offering
terminated on January 31, 2005 with total proceeds received of $1,807,101.



The
maintenance of appropriate levels of capital is a priority and is continually monitored. MainStreet, Smith River Bank and Franklin Bank are subject to various regulatory capital requirements administered by the federal and state banking agencies.
Quantitative measures established by regulations to ensure capital adequacy require MainStreet and the Banks to maintain minimum capital ratios. Failure to meet minimum capital ratios can initiate certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a material effect on the consolidated financial statements. Also, declining capital can impact the ability of the banks to grow other assets. See Note No. 13 to the financial
statements for capital ratios.



The substantial and unexpected growth of
Franklin Bank combined with an increased loan provision to cover a commercial loan charge-off during the second quarter of 2004, has resulted in the decline of MainStreets Tier II Risk-Based capital ratio below the minimum for a
well-capitalized institution as of December 31, 2004. In addition, the Tier II Risk-Based capital ratio at Franklin Bank is below the minimum for a well-capitalized bank as of December 31, 2004. The actual Tier I leverage ratio for Franklin Bank is
below the well-capitalized ratio of 8% for a de novo bank as of December 31, 2004. As a result of falling below the well-capitalized levels, MainStreet has developed and begun implementation of a plan to restore its consolidated capital, as well as
Franklin Banks capital back to the well-capitalized level. Part of the plan includes the private placement offering which terminated on January 31, 2005, which has allowed the capital ratios of MainStreet and Franklin Bank to be maintained at
or above the adequately capitalized level. However, the private placement offering will not restore Franklin Banks leverage ratio to the well-capitalized level required for a de novo bank. Therefore, the plan includes the divestiture of Smith
River Bank. Part of the proceeds from the divestiture, if successful, will be downstreamed to Franklin Bank to restore all capital ratios to the well-capitalized level and the remainder will be maintained at the holding company for working capital
and strategic purposes. Unless and until the plan is successfully implemented, the growth of Smith River Bank and Franklin Bank may have to be curtailed to prevent further erosion in their respective capital positions. If the plan is not successful,
there are likely to be regulatory restrictions on the Banks growth which will adversely affect MainStreets earnings. In addition, Federal Deposit Insurance Corporation premiums have increased as a result of Franklin Banks Tier II
capital ratio falling below the minimum requirements for a well-capitalized level during 2004.



Asset Liability Management



Asset
liability management functions to maximize profitability within established guidelines for liquidity, capital adequacy, and interest rate risk. It also helps to ensure that there is adequate liquidity to meet loan demand or deposit outflows and
interest rate fluctuations. Liquidity is the ability to meet maturing obligations and commitments, withstand deposit fluctuations, fund operations, and provide for loan requests. MainStreets material off balance sheet obligations are loan
commitments which were $34,773,854 at December 31, 2004. MainStreet has a liquidity contingency plan that gives guidance on the maintenance of appropriate liquidity and what action is required under various liquidity scenarios. MainStreets
liquidity is provided by cash and due from banks, interest-bearing deposits, federal funds sold, securities available-for-sale, and loan repayments. MainStreet also has overnight borrowing lines available with their correspondent bank, the ability
to borrow from the Federal Reserve Banks discount window, and the ability to borrow long-term from the Federal Home Loan Bank. MainStreets ratio of liquid assets to total liabilities (exclusive of assets and liabilities held for sale) at
December 31, 2004 and December 31, 2003 was 6.78% and 16.11%, respectively. In 2005, MainStreet anticipates adding additional liquidity sources. The proposed sale of Smith River Bank for cash will immediately add an additional $6.5 million in
liquidity. Deposits provide the basic core for liquidity.



Interest rate
sensitivity is measured by the difference, or gap, between interest sensitive earning assets and interest sensitive interest bearing liabilities and the resultant change in net interest income due to market rate fluctuations, and the effect of 13
interest rate movements on the market. Management utilizes these techniques for management of interest rate risk in order to minimize change in net interest income with interest rate changes. The following table shows the sensitivity of
MainStreets



15



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##### Table of Contents

balance sheet at December 31, 2004, but is not necessarily indicative of the position on other dates.



|                                                             |  |                     |            |    |                                    |   |             |                    |  |   |                           |    |  |       |            |   |  |   |            |  
|------------------------------------------------------------ |  | ------------------- | ---------- | -- | ---------------------------------- | - | ----------- | ------------------ |  | - | ------------------------- | -- |  | ----- | ---------- | - |  | - | ---------- | -
|                                                             |  | Three Monthsor Less |            |    | Greater than ThreeTo Twelve Months |   |             | CumulativeOne Year |  |   | Greater thanTwelve Months |    |  | Total |           
|Rate Sensitive Assets:                                       |  |                     |            |    |                                    |   |             |                    |  |   |                           |    |  |       |            |   |  |   |            |  
|Time Balances                                                |  | $                   | 265,215    |    |                                    | $ |            |                    |  | $ | 265,215                   |    |  | $     |           |   |  | $ | 265,215    |  
|Federal Funds Sold                                           |  |                     | 2,292,000  |    |                                    |   |            |                    |  |   | 2,292,000                 |    |  |       |           |   |  |   | 2,292,000  |  
|Investments                                                  |  |                     | 1,000,000  |    |                                    |   |            |                    |  |   | 1,000,000                 |    |  |       | 2,615,619  |   |  |   | 3,615,619  |  
|Restricted Equity Securities                                 |  |                     |           |    |                                    |   |            |                    |  |   |                          |    |  |       | 251,800    |   |  |   | 251,800    |  
|Gross Loans                                                  |  |                     |            |    |                                    |   |             |                    |  |   |                           |    |  |       |            |   |  |   |            |  
|Commercial  Secured by Real Estate                          |  |                     | 16,116,807 |    |                                    |   | 1,898,159   |                    |  |   | 18,014,966                |    |  |       | 17,724,996 |   |  |   | 35,739,962 |  
|Retail  Secured by Real Estate                              |  |                     | 29,649,529 |    |                                    |   | 2,286,049   |                    |  |   | 31,935,578                |    |  |       | 12,077,824 |   |  |   | 44,013,402 |  
|Commercial  Other                                           |  |                     | 3,936,412  |    |                                    |   | 137,315     |                    |  |   | 4,073,727                 |    |  |       | 3,432,071  |   |  |   | 7,505,798  |  
|Other Retail Loans                                           |  |                     | 1,405,906  |    |                                    |   | 211,094     |                    |  |   | 1,617,000                 |    |  |       | 894,735    |   |  |   | 2,511,735  |  
|                                                             |  |                     |            |    |                                    |   |             |                    |  |   |                           |    |  |       |            |   |  |   |            |  
|Total Rate Sensitive Assets                                  |  | $                   | 54,665,869 |    |                                    | $ | 4,532,617   |                    |  | $ | 59,198,486                |    |  | $     | 36,997,045 |   |  | $ | 96,195,531 |  
|                                                             |  |                     |            |    |                                   
|Rate Sensitive Liabilities:                                  |  |                     |            |    |                                    |   |             |                    |  |   |                           |    |  |       |            |   |  |   |            |  
|Interest Checking                                            |  | $                   | 4,544,443  |    |                                    | $ |            |                    |  | $ | 4,544,443                 |    |  | $     |           |   |  |   | 4,544,443  |  
|Money Markets                                                |  |                     | 12,023,169 |    |                                    |   |            |                    |  |   | 12,023,169                |    |  |       |           |   |  |   | 12,023,169 |  
|Savings                                                      |  |                     | 21,002,367 |    |                                    |   |            |                    |  |   | 21,002,367                |    |  |       |           |   |  |   | 21,002,367 |  
|Time Deposits $100,000 and over                              |  |                     | 7,950,585  |    |                                    |   | 6,549,597   |                    |  |   | 14,500,182                |    |  |       | 1,033,264  |   |  |   | 15,533,446 |  
|Other Time Deposits                                          |  |                     | 12,950,390 |    |                                    |   | 11,638,520  |                    |  |   | 24,588,910                |    |  |       | 3,762,995  |   |  |   | 28,351,905 |  
|                                                             |  |                     |            |    |                                    |   |             |                    |  |   |                           |    |  |       |            |   |  |   |            |  
|Total Rate Sensitive Liabilities                             |  | $                   | 58,470,954 |    |                                    | $ | 18,188,117  |                    |  | $ | 76,659,071                |    |  | $     | 4,796,259  |   |  | $ | 81,455,330 |  
|Interest Rate Sensitivity Gap                                |  | $                   | (3,805,085 | )  |                                    | $ | (13,655,500 | )                  |  | $ | (17,460,585               | )  |  | $     | 32,200,786 |   |  | $ | 14,740,201 |  
|                                                             |  |                     |            |    |                                   
|Cumulative interest sensitivity gap                          |  | $                   | (3,805,085 | )  |                                    | $ | (17,460,585 | )                  |  | $ |                          |    |  | $     | 14,740,201 |   |  |   |           |  
|Ratio of sensitivity gap to rate sensitive assets            |  |                     | (3.95      | )% |                                    |   | (14.20      | )%                 |  |   | (18.15                    | )% |  |       | 33.47      | % |  |   | 15.32      | %
|Cumulative ratio of sensitivity gap to rate sensitive assets |  |                     | (3.95      | )% |                                    |   | (18.15      | )%                 |  |   |                          |    |  |       | 15.32      | % |  |   |           |  



Contractual Obligations,
Commitments, Contingent Liabilities, Off-Balance Sheet Arrangements, and Related Party Transactions



MainStreet provides certain services for its subsidiary banks. These services include accounting, investments, treasury management, compliance, audit, deposit and loan operations, and data processing. In exchange for
these services, the bank pays an affiliate fee to the holding company. Upon the consummation of the pending sale of Smith River Bank, MainStreet will continue to provide certain services to Smith River Bank for an annual fee of $505,000 for a
three-year period. MainStreet does not own any real property and has a modest amount of fixed assets. The affiliate fee paid by Franklin Bank and the servicing fee paid by Smith River also provides for MainStreets cash requirements since most
of the expenses are directly related to the banks. Dividends from the Banks would also be a source of cash for MainStreet. However, Smith River Bank, if and when divested, will no longer be a source of potential dividends and Franklin Bank, in light
of its projected growth and capital needs, is unlikely to be able to provided dividends to MainStreet in the foreseeable future. Under the applicable federal laws, the Comptroller of the Currency restricts the total dividend payments of any calendar
year, without prior approval, to the net profits of that year as defined, combined with retained net profits for the two preceding years. MainStreet, therefore, will not pay dividends until it is deemed appropriate by management. No dividends to
date have been paid by MainStreet.



16



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##### Table of Contents

A summary of MainStreets significant contractual obligations and commitments is presented in the following table,
with a reference to the footnote disclosure in Item 7 detailing the dollar amount by maturity.



|                                                     |  |                                                                         
|---------------------------------------------------- |  | ------------------------------------------------------------------------
|                                                     |  | Footnote Disclosure in Item 7 Notes to Consolidated Financial Statements
|Contractual Cash ObligationsOperating Leases         |  | Footnote #11                                                            
|                                                     | 
|Other CommitmentsCommitments to extend credit        |  | Footnote #15                                                            
|                                                     | 
|Related Party TransactionsRelated Party Transactions |  | Footnote #4                                                             



Impact of Inflation



Most of the MainStreets assets are monetary in nature and therefore are sensitive
to interest rate fluctuations. MainStreet does not have significant fixed assets or inventories. Fluctuations in interest rates and actions of the Board of Governors of the Federal Reserve System (FRB) have a great effect on
MainStreets profitability. Management will seek to manage the relationship between interest-sensitive assets and liabilities.



Recent Accounting Developments



Revision to FASB Statement No. 123, Accounting for Stock-Based Compensation will be effective for MainStreet for reporting periods after December 15, 2005 and
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. It will require a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value
of the award. Adoption of FASB Statement No. 123 would have no impact on current financials ending December 31, 2004.



17



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##### Table of Contents

Item 7. Financial Statements



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the
Board of Directors

MainStreet BankShares, Inc. and Subsidiaries

Martinsville, VA



We have audited the accompanying consolidated
balance sheet of MainStreet BankShares, Inc. and Subsidiaries as of December 31, 2004, and the related consolidated statements of income, retained earnings, and cash flows for the year then ended. These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of MainStreet BankShares, Inc. and Subsidiaries as of December 31, 2003, were
audited by other auditors whose report dated February 9, 2004 expressed an unqualified opinion on those statements.



We conducted our audit in accordance with the 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 the 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 audit provides 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 MainStreet BankShares, Inc. and Subsidiaries as of December 31, 2004, and the results of its operations and its cash flows for the year then ended in conformity with U.S. generally
accepted accounting principles.



Brown Edwards &
Company, L.L.P.



Bluefield, WV

January 21, 2005



18



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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



The Board of Directors

MainStreet BankShares, Inc.



We have audited
the accompanying consolidated balance sheet of MainStreet BankShares, Inc. and subsidiaries as of December 31, 2003, and the related consolidated statements of loss, changes in shareholders equity and cash flows for the year then ended. 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 audit.



We conducted our audit in accordance with the 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated 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 audit provides 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 MainStreet BankShares, Inc. and subsidiaries as of December 31, 2003, and the
results of their operations and their cash flows for the year then ended in conformity with U.S. generally accepted accounting principles.



McLeod & Company



Roanoke, Virginia

February 9, 2004



19



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##### Table of Contents

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets



|                                                                                                                                                         |  |                  |             |   |                  |   |             |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ----------- | - | ---------------- | - | ----------- | -
|                                                                                                                                                         |  | December 31,2004 |             |   | December 31,2003 |  
|ASSETS                                                                                                                                                   |  |                  |             |   |                  |   |             |  
|Cash and due from banks                                                                                                                                  |  | $                | 1,862,473   |   |                  | $ | 1,472,270   |  
|Interest-bearing deposits in other banks                                                                                                                 |  |                  | 265,215     |   |                  |   | 1,148,298   |  
|Federal funds sold                                                                                                                                       |  |                  | 2,292,000   |   |                  |   | 1,434,000   |  
|Securities available-for-sale                                                                                                                            |  |                  | 3,615,619   |   |                  |   | 4,624,348   |  
|Restricted equity securities                                                                                                                             |  |                  | 251,800     |   |                  |   | 182,900     |  
|                                                                                                                                                         |  |                 
|Loans:                                                                                                                                                   |  |                  |             |   |                  |   |             |  
|Commercial loans                                                                                                                                         |  |                  | 45,157,571  |   |                  |   | 24,593,797  |  
|Residential real estate loans                                                                                                                            |  |                  | 20,598,689  |   |                  |   | 6,800,214   |  
|Consumer loans                                                                                                                                           |  |                  | 24,014,637  |   |                  |   | 10,112,506  |  
|                                                                                                                                                         |  |                  |             |   |                  |   |             |  
|Total Gross Loans                                                                                                                                        |  |                  | 89,770,897  |   |                  |   | 41,506,517  |  
|Unearned deferred fees and costs, net                                                                                                                    |  |                  | 180,898     |   |                  |   | 77,850      |  
|                                                                                                                                                         |  |                  |             |   |                  |   |             |  
|Loans, net of unearned deferred fees and costs, net                                                                                                      |  |                  | 89,951,795  |   |                  |   | 41,584,367  |  
|Less: Allowance for loan losses                                                                                                                          |  |                  | (1,123,214  | ) |                  |   | (540,601    | )
|                                                                                                                                                         |  |                  |             |   |                  |   |             |  
|Net Loans                                                                                                                                                |  |                  | 88,828,581  |   |                  |   | 41,043,766  |  
|Furniture, fixtures and equipment, net                                                                                                                   |  |                  | 706,305     |   |                  |   | 501,137     |  
|Accrued interest receivable                                                                                                                              |  |                  | 320,690     |   |                  |   | 139,138     |  
|Other assets                                                                                                                                             |  |                  | 717,808     |   |                  |   | 87,658      |  
|Assets held for sale                                                                                                                                     |  |                  | 59,482,118  |   |                  |   | 54,946,520  |  
|                                                                                                                                                         |  |                  |             |   |                  |   |             |  
|Total Assets                                                                                                                                             |  | $                | 158,342,609 |   |                  | $ | 105,580,035 |  
|                                                                                                                                                         |  |                  |             |   |                  |   |             |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                     |  |                  |             |   |                  |   |             |  
|Deposits:                                                                                                                                                |  |                  |             |   |                  |   |             |  
|Non-interest bearing demand deposits                                                                                                                     |  | $                | 8,983,120   |   |                  | $ | 5,290,148   |  
|Interest checking deposits                                                                                                                               |  |                  | 4,544,443   |   |                  |   | 2,544,082   |  
|Money market deposits                                                                                                                                    |  |                  | 12,023,169  |   |                  |   | 10,513,952  |  
|Savings deposits                                                                                                                                         |  |                  | 21,002,367  |   |                  |   | 8,931,931   |  
|Time deposits $100,000 and over                                                                                                                          |  |                  | 15,533,446  |   |                  |   | 5,475,546   |  
|Other time deposits                                                                                                                                      |  |                  | 28,351,905  |   |                  |   | 11,824,370  |  
|                                                                                                                                                         |  |                  |             |   |                  |   |             |  
|Total Deposits                                                                                                                                           |  |                  | 90,438,450  |   |                  |   | 44,580,029  |  
|                                                                                                                                                         |  |                 
|Accrued interest payable and other liabilities                                                                                                           |  |                  | 615,965     |   |                  |   | 148,287     |  
|Liabilities held for sale                                                                                                                                |  |                  | 55,004,615  |   |                  |   | 50,631,256  |  
|                                                                                                                                                         |  |                  |             |   |                  |   |             |  
|Total Liabilities                                                                                                                                        |  |                  | 146,059,030 |   |                  |   | 95,359,572  |  
|                                                                                                                                                         |  |                  |             |   |                  |   |             |  
|                                                                                                                                                         |  |                 
|Shareholders Equity :                                                                                                                                   |  |                  |             |   |                  |   |             |  
|Preferred stock, no par value, authorized 10,000,000 shares; none issued                                                                                 |  |                  |            |   |                  |   |            |  
|Common stock, no par value, authorized 10,000,000 shares; issued and outstanding 1,528,818 shares and 1,368,970 shares in 2004 and in 2003,
respectively |  |                  | 14,949,509  |   |                  |   | 13,583,103  |  
|Accumulated deficit                                                                                                                                      |  |                  | (2,707,015  | ) |                  |   | (3,482,213  | )
|Accumulated other comprehensive income                                                                                                                   |  |                  | 41,085      |   |                  |   | 119,573     |  
|                                                                                                                                                         |  |                  |             |   |                  |   |             |  
|Total Shareholders Equity                                                                                                                               |  |                  | 12,283,579  |   |                  |   | 10,220,463  |  
|                                                                                                                                                         |  |                  |             |   |                  |   |             |  
|Total Liabilities and Shareholders Equity                                                                                                               |  | $                | 158,342,609 |   |                  | $ | 105,580,035 |  
|                                                                                                                                                         |  |                  |             |   |                  |   |             |  



See accompanying notes to consolidated
financial statements.



20



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##### Table of Contents

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Income (Loss)



|                                                               |  |                             |           |   |                             |   |           |  
|-------------------------------------------------------------- |  | --------------------------- | --------- | - | --------------------------- | - | --------- | -
|                                                               |  | Year EndedDecember 31, 2004 |           |   | Year EndedDecember 31, 2003 |  
|Interest Income:                                               |  |                             |           |   |                             |   |           |  
|Interest and fees on loans                                     |  | $                           | 3,915,011 |   |                             | $ | 1,323,361 |  
|Interest on interest-bearing deposits                          |  |                             | 2,699     |   |                             |   | 16,911    |  
|Interest on federal funds sold                                 |  |                             | 75,983    |   |                             |   | 43,014    |  
|Interest on securities available-for-sale                      |  |                             | 95,996    |   |                             |   | 27,505    |  
|Dividends on restricted equity securities                      |  |                             | 12,800    |   |                             |   | 10,270    |  
|                                                               |  |                             |           |   |                             |   |           |  
|Total Interest Income                                          |  |                             | 4,102,489 |   |                             |   | 1,421,061 |  
|                                                               |  |                             |           |   |                             |   |           |  
|Interest Expense:                                              |  |                             |           |   |                             |   |           |  
|Interest on time deposits $100,000 and over                    |  |                             | 309,707   |   |                             |   | 89,671    |  
|Interest on other deposits                                     |  |                             | 1,115,000 |   |                             |   | 409,098   |  
|Interest on short-term borrowings                              |  |                             | 3,190     |   |                             |   | 4         |  
|                                                               |  |                             |           |   |                             |   |           |  
|Total Interest Expense                                         |  |                             | 1,427,897 |   |                             |   | 498,773   |  
|                                                               |  |                             |           |   |                             |   |           |  
|Net Interest Income                                            |  |                             | 2,674,592 |   |                             |   | 922,288   |  
|Provision for loan losses                                      |  |                             | 956,900   |   |                             |   | 409,901   |  
|                                                               |  |                             |           |   |                             |   |           |  
|Net Interest Income After Provision for Loan Losses            |  |                             | 1,717,692 |   |                             |   | 512,387   |  
|                                                               |  |                             |           |   |                             |   |           |  
|Noninterest Income:                                            |  |                             |           |   |                             |   |           |  
|Service charges on deposit accounts                            |  |                             | 122,416   |   |                             |   | 39,758    |  
|Mortgage brokerage income                                      |  |                             | 239,440   |   |                             |   | 305,189   |  
|Other fee income and miscellaneous income                      |  |                             | 642,107   |   |                             |   | 724,297   |  
|                                                               |  |                             |           |   |                             |   |           |  
|Total Noninterest Income                                       |  |                             | 1,003,963 |   |                             |   | 1,069,244 |  
|                                                               |  |                             |           |   |                             |   |           |  
|Noninterest Expense:                                           |  |                             |           |   |                             |   |           |  
|Salaries and employee benefits                                 |  |                             | 1,291,072 |   |                             |   | 866,043   |  
|Severance payments                                             |  |                             |          |   |                             |   | 223,136   |  
|Occupancy and equipment expense                                |  |                             | 451,310   |   |                             |   | 191,046   |  
|Professional fees                                              |  |                             | 202,592   |   |                             |   | 210,889   |  
|Advertising and promotion                                      |  |                             | 67,810    |   |                             |   | 50,878    |  
|Outside processing                                             |  |                             | 194,303   |   |                             |   | 125,021   |  
|Franchise tax                                                  |  |                             | 61,005    |   |                             |   | 43,404    |  
|Other expenses                                                 |  |                             | 351,859   |   |                             |   | 355,432   |  
|                                                               |  |                             |           |   |                             |   |           |  
|Total Noninterest Expense                                      |  |                             | 2,619,951 |   |                             |   | 2,065,849 |  
|                                                               |  |                             |           |   |                             |   |           |  
|Net Income (Loss) From Continuing Operations Before Tax        |  | $                           | 101,704   |   |                             | $ | (484,218  | )
|Income Tax Benefit                                             |  |                             | (477,359  | ) |                             |   |          |  
|                                                               |  |                             |           |   |                             |   |           |  
|Net Income (Loss) From Continuing Operations                   |  |                             | 579,063   |   |                             |   | (484,218  | )
|Net Income (Loss) From Discontinuing Operations, net of $0 tax |  |                             | 196,135   |   |                             |   | (127,554  | )
|                                                               |  |                             |           |   |                             |   |           |  
|Net Income (Loss)                                              |  | $                           | 775,198   |   |                             | $ | (611,772  | )
|                                                               |  |                             |           |   |                             |   |           |  
|Basic Net Income (Loss) Per Share From Continuing Operations   |  | $                           | .41       |   |                             | $ | (.36      | )
|                                                               |  |                             |           |   |                             |   |           |  
|Basic Net Income (Loss) Per Share                              |  | $                           | .55       |   |                             | $ | (.45      | )
|                                                               |  |                             |           |   |                             |   |           |  
|Diluted Net Income (Loss) Per Share From Continuing Operations |  | $                           | .41       |   |                             | $ | (.35      | )
|                                                               |  |                             |           |   |                             |   |           |  
|Diluted Net Income (Loss) Per Share                            |  | $                           | .55       |   |                             | $ | (.45      | )
|                                                               |  |                             |           |   |                             |   |           |  



See accompanying notes to consolidated
financial statements.



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##### Table of Contents

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES



Consolidated Statements of Changes in Shareholders Equity



|                                                                                             |  |                        |  |             |            |   |                    |   |            |                                     |  |   |                                   |   |  |   |            |  
|-------------------------------------------------------------------------------------------- |  | ---------------------- |  | ----------- | ---------- | - | ------------------ | - | ---------- | ----------------------------------- |  | - | --------------------------------- | - |  | - | ---------- | -
|                                                                                             |  | Number Of CommonShares |  | CommonStock |            |   | AccumulatedDeficit |   |            | AccumulatedOtherComprehensiveIncome |  |   | TotalShareholdersEquity(Deficit) |  
|Balance at December 31, 2002                                                                 |  | 1,368,970              |  | $           | 13,583,103 |   |                    | $ | (2,870,441 | )                                   |  | $ | 133,690                           |   |  | $ | 10,846,352 |  
|Comprehensive Loss                                                                           |  |                        |  |             |            |   |                    |   |            |                                     |  |   |                                   |   |  |   |            |  
|Net loss                                                                                     |  |                       |  |             |           |   |                    |   | (611,772   | )                                   |  |   |                                  |   |  |   | (611,772   | )
|Other comprehensive income:                                                                  |  |                        |  |             |            |   |                    |   |            |                                     |  |   |                                   |   |  |   |            |  
|Change in unrealized gains on available-for-sale securities                                  |  |                       |  |             |           |   |                    |   |           |                                     |  |   | (14,117                           | ) |  |   | (14,117    | )
|                                                                                             |  |                        |  |             |            |   |                    |   |            |                                     |  |   |                                   |   |  |   |            |  
|Total Comprehensive Loss                                                                     |  |                       |  |             |           |   |                    |   | (611,772   | )                                   |  |   | (14,117                           | ) |  |   | (625,889   | )
|Balance at December 31, 2003                                                                 |  | 1,368,970              |  | $           | 13,583,103 |   |                    | $ | (3,482,213 | )                                   |  | $ | 119,573                           |   |  | $ | 10,220,463 |  
|Comprehensive Income                                                                         |  |                        |  |             |            |   |                    |   |            |                                     |  |   |                                   |   |  |   |            |  
|Net income                                                                                   |  |                       |  |             |           |   |                    |   | 775,198    |                                     |  |   |                                  |   |  |   | 775,198    |  
|Other comprehensive income:                                                                  |  |                        |  |             |            |   |                    |   |            |                                     |  |   |                                   |   |  |   |            |  
|Change in unrealized gains on available-for-sale securities, net of deferred taxes of $2,785 |  |                       |  |             |           |   |                    |   |           |                                     |  |   | (78,488                           | ) |  |   | (78,488    | )
|                                                                                             |  |                        |  |             |            |   |                    |   |            |                                     |  |   |                                   |   |  |   |            |  
|Total Comprehensive Income                                                                   |  |                       |  |             |           |   |                    |   | 775,198    |                                     |  |   | (78,488                           | ) |  |   | 696,710    |  
|                                                                                             |  |                        |  |             |            |   |                    |   |            |                                     |  |   |                                   |   |  |   |            |  
|Issuance of common stock                                                                     |  | 159,848                |  |             | 1,444,347  |   |                    |   |           |                                     |  |   |                                  |   |  |   | 1,444,347  |  
|Deferred stock issuance costs                                                                |  |                       |  |             | (77,941    | ) |                    |   |           |                                     |  |   |                                  |   |  |   | (77,941    | )
|                                                                                             |  |                        |  |             |            |   |                    |   |            |                                     |  |   |                                   |   |  |   |            |  
|Balance at December 31, 2004                                                                 |  | 1,528,818              |  | $           | 14,949,509 |   |                    | $ | (2,707,015 | )                                   |  | $ | 41,085                            |   |  | $ | 12,283,579 |  
|                                                                                             |  |                        |  |             |            |   |                    |   |            |                                     |  |   |                                   |   |  |   |            |  



See accompanying notes to consolidated
financial statements.



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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES



Consolidated Statements of Cash Flows



|                                                                    |  |                             |             |   |                             |   |             |  
|------------------------------------------------------------------- |  | --------------------------- | ----------- | - | --------------------------- | - | ----------- | -
|                                                                    |  | Year EndedDecember 31, 2004 |             |   | Year EndedDecember 31, 2003 |  
|Cash Flows From Operating Activities:                               |  |                             |             |   |                             |   |             |  
|                                                                    |  |                            
|Net income (loss) from continuing operations                        |  | $                           | 579,063     |   |                             | $ | (484,218    | )
|Net income (loss) from discontinuing operations                     |  |                             | 196,135     |   |                             |   | (127,554    | )
|Provision for loan losses                                           |  |                             | 956,900     |   |                             |   | 409,901     |  
|Depreciation and amortization                                       |  |                             | 114,478     |   |                             |   | 43,227      |  
|Amortization of discounts and premiums, net                         |  |                             | 3,084       |   |                             |   | 2,876       |  
|Increase in accrued interest receivable                             |  |                             | (181,552    | ) |                             |   | (109,636    | )
|Increase in other assets                                            |  |                             | (632,935    | ) |                             |   | (44,390     | )
|Increase in accrued interest payable and other liabilities          |  |                             | 467,678     |   |                             |   | 19,507      |  
|                                                                    |  |                             |             |   |                             |   |             |  
|Net cash provided by (used in) operating activities                 |  |                             | 1,502,851   |   |                             |   | (290,287    | )
|                                                                    |  |                             |             |   |                             |   |             |  
|Cash Flows From Investing Activities:                               |  |                             |             |   |                             |   |             |  
|                                                                    |  |                            
|Decrease in interest-bearing deposits in other banks                |  |                             | 883,083     |   |                             |   | 54,861      |  
|(Increase) decrease in federal funds sold                           |  |                             | (858,000    | ) |                             |   | 1,127,000   |  
|Purchases of furniture, fixtures, and equipment                     |  |                             | (319,646    | ) |                             |   | (426,666    | )
|Purchases of securities available-for-sale                          |  |                             | (13,296,157 | ) |                             |   | (12,917,294 | )
|Purchases of restricted equity securities                           |  |                             | (101,900    | ) |                             |   | (29,800     | )
|Proceeds from calls and maturities of securities available-for-sale |  |                             | 14,300,000  |   |                             |   | 10,300,000  |  
|Proceeds from sales of restricted equity securities                 |  |                             | 33,000      |   |                             |   | 19,400      |  
|Loan originations and principal collections, net                    |  |                             | (48,741,715 | ) |                             |   | (31,532,137 | )
|Increase in assets held for sale                                    |  |                             | (4,609,499  | ) |                             |   | (5,640,556  | )
|Increase in liabilities held for sale                               |  |                             | 4,373,359   |   |                             |   | 5,768,109   |  
|                                                                    |  |                             |             |   |                             |   |             |  
|Net cash used in investing activities                               |  |                             | (48,337,475 | ) |                             |   | (33,277,083 | )
|                                                                    |  |                             |             |   |                             |   |             |  
|Cash Flows From Financing Activities:                               |  |                             |             |   |                             |   |             |  
|                                                                    |  |                            
|Increase in time deposits $100,000 and over                         |  |                             | 10,057,900  |   |                             |   | 3,465,505   |  
|Increase in other time deposits                                     |  |                             | 16,527,535  |   |                             |   | 8,515,947   |  
|Increase in other deposits                                          |  |                             | 19,272,986  |   |                             |   | 22,468,294  |  
|Proceeds from issuance of common stock                              |  |                             | 1,444,347   |   |                             |   |            |  
|Costs of stock issuance                                             |  |                             | (77,941     | ) |                             |   |            |  
|                                                                    |  |                             |             |   |                             |   |             |  
|Net cash provided by financing activities                           |  |                             | 47,224,827  |   |                             |   | 34,449,746  |  
|                                                                    |  |                             |             |   |                             |   |             |  
|Net increase in cash and cash equivalents                           |  |                             | 390,203     |   |                             |   | 882,376     |  
|                                                                    |  |                            
|Cash and cash equivalents at beginning of year                      |  | $                           | 1,472,270   |   |                             | $ | 589,894     |  
|                                                                    |  |                             |             |   |                             |   |             |  
|Cash and cash equivalents at end of year                            |  | $                           | 1,862,473   |   |                             | $ | 1,472,270   |  
|                                                                    |  |                             |             |   |                             |   |             |  
|Supplemental disclosure of cash flow information:                   |  |                             |             |   |                             |   |             |  
|Cash paid during the year for interest                              |  | $                           | 1,036,146   |   |                             | $ | 461,955     |  
|                                                                    |  |                             |             |   |                             |   |             |  



See accompanying notes to consolidated
financial statements.





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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements



December 31, 2004 and 2003



Note 1  Summary of Accounting Policies



(a) General



MainStreet BankShares, Inc. (the Corporation, MainStreet, or BankShares), incorporated as a Virginia
corporation effective January 14, 1999, was a development stage enterprise until July 24, 2000. The Corporation was primarily organized to serve as a bank holding company for Smith River Community Bank, N.A. (Smith River Bank). Smith
River Bank opened for business on July 24, 2000 and began its operations as a full service commercial bank. Prior to the organization of the Corporation, the Corporations directors, who were also the Organizers, formed FCNB LLC, a limited
liability company, to organize the Corporation and the Bank and provide for financing of organizational, offering, and other pre-opening costs.



The Corporation raised $6,893,680 through a sale of its common stock and units. The Corporation filed a registration statement on Form SB-2 to register the stock, which
was declared effective by the Securities and Exchange Commission on November 4, 1999. Proceeds from the sale of the stock were primarily used to acquire all of the stock of Smith River Bank on July 24, 2000.



MainStreet BankShares, Inc. filed a registration statement on Form SB-2 with the Securities
and Exchange Commission that became effective on August 24, 2001. The registration statement was for a secondary offering to offer a minimum of 510,850 shares and a maximum of 801,807 shares of common stock to the public at $10.50 per share. The
registration statement also offered 60,574 shares of common stock at $10.50 per share to the organizing directors of Franklin Community Bank, N.A. (Franklin Bank). The primary reason for the secondary offering was to organize and
capitalize Franklin Bank to be an additional wholly owned subsidiary of MainStreet. Franklin Bank was organized as a nationally chartered commercial bank and member of the Federal Reserve Bank. Franklin Bank opened for business on September 16,
2002. Franklin Bank operates much like Smith River Bank as a locally owned and operated commercial bank emphasizing personal customer service and other advantages incident to banking with a locally owned community bank. The secondary stock offering
was terminated December 31, 2002 having sold 679,602 shares with total proceeds of $7,135,821. All pre-opening and organizational costs were funded by the Corporation, which also utilized a line of credit. The total amount of expense related to the
pre-opening and organizational costs for Franklin Bank for the year ended December 31, 2002 was $212,299. Total deferred costs associated with the offering that were netted against common stock were $260,880, of which $145,408 was accumulated in
2002.



On September 20, 2004, MainStreet BankShares, Inc. commenced a private
placement offering of its common stock to accredited and up to 35 non-accredited investors under Rule 506 of The Securities Exchange Act of 1934. The offering was for a target issuance of 183,334 shares of common stock. The offering was set to
terminate on October 31, 2004, but the Board of Directors of BankShares extended the offering until January 31, 2005. There were no brokerage or underwriting commissions payable in the private placement. As of December 31, 2004, there were 156,038
shares of common stock sold at a price of $9.00 per share in the private placement for a total of $1,404,342.



On January 13, 2005, MainStreet BankShares, Inc., Smith River Community Bank, National Association (a wholly-owned bank subsidiary of MainStreet), and Argentum Capital Management, LLC entered into an Agreement
pursuant to which MainStreet will sell, and Argentum or its assigns will purchase, all of the outstanding shares of the common stock of Smith River Bank for $6,500,000. The transaction is expected to close on or before March 20, 2005, but may
terminate earlier by either MainStreet or Argentum under certain circumstances, including by MainStreet if Argentum fails to raise sufficient funds by March 7, 2005. Consummation of the transaction is subject to a number of conditions, including the
completion of the parties due diligence and prior required regulatory approvals, if any. The parties have completed substantial due diligence and believe that no prior regulatory approvals are required. As part of the transaction, MainSteet
will agree to acquire specified loans from Smith River Bank under certain conditions after the closing. In the event Smith River Bank determines it must charge off one of the specified loans, (after pursuing normal collection efforts), MainStreet
will acquire all of Banks right, title and interest in the charged off loan. MainStreets obligation to purchase such loans will not exceed the principal amount of the loans at the time of purchase plus Smith River Banks out of
pocket collection expenses. The





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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements



December 31, 2004 and 2003



outstanding principal balance of such loans at December 31, 2004 was $855,000. Also as part
of the transaction, Smith River Bank will agree to outsource certain administrative and related activities to MainStreet for a period of 3 years following the closing for an annual fee of $505,000.



The Corporation reports its activities as a single business segment. In determining the
appropriateness of segment definition, the Corporation considered components of the business about which financial information is available and will evaluate it regularly relative to resource allocation and performance assessment.



(b) Principles of Consolidation



The consolidated financial statements include the accounts of MainStreet and its
wholly-owned subsidiary, Franklin Bank. The assets of Smith River Bank are shown as held for sale and income is included as income from discontinuing operations. All significant intercompany accounts and transactions associated with Franklin Bank
have been eliminated. The intercompany accounts with Smith River Bank have not been eliminated in order to provide realistic financial information for continuing and discontinuing operations. Due from accounts in the amount of $105,772 and $76,398
for 2004 and 2003, respectively have not been eliminated. Interest-bearing deposit accounts in the amount of $223,652 and $1,142,645 for 2004 and 2003, respectively, have not been eliminated. The affiliate fee paid to MainStreet from Smith River
Bank for 2004 and 2003 in the amount of $603,769 and $711,044, respectively, has not been eliminated.



(c) Cash Equivalents



For purposes of
reporting cash flows, cash and cash equivalents include cash and due from banks.



(d) Securities



BankShares classifies and accounts for its
investments in accordance with Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities. Securities are classified at purchase date under the specific identification method.
Amortization and accretion of premiums and discounts are included in income over the contractual life of the securities. The cost of securities sold is determined on the specific identification method.



(e) Loans



Loans are stated at the unpaid principal balances. Interest on loans is computed by methods which generally result in level rates of return
on principal amounts outstanding. It is the Corporations policy to discontinue the accrual of interest on loans once they become 90 days past due and are not well-collateralized or earlier when it becomes doubtful that the full principal and
interest will be collected. Once a loan is placed on nonaccrual status, any interest that is collected will be recorded on a cash basis. Interest on impaired loans is recognized in the same manner as loans that are not considered impaired; that is,
interest is generally recognized on the cash basis once the collection of principal and interest is 90 days or more past due.



BankShares collectively reviews for impairment all consumer loans and smaller homogeneous loans. BankShares considers a loan to be impaired when, based upon current
information and events, it believes it is probable that BankShares will be unable to collect all amounts due according to the contractual terms of the loan agreement. BankShares impaired loans include nonaccrual loans, troubled debt
restructurings, and certain other nonperforming loans. For collateral dependent loans, BankShares bases the measurement of these impaired loans on the fair value of the loans collateral properties. For all other loans, BankShares uses the
measurement of these impaired loans on the more readily determinable of the present value of expected future cash flows discounted at the loans effective interest rate or the observable market price. Impairment losses are recognized through an
increase in the allowance for loan losses and a corresponding charge to the provision for loan losses. Adjustments to impairment losses due to changes in the fair value of impaired loans collateral properties are included in the provision for
loan losses.





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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements



December 31, 2004 and 2003



(f) Loan Fees and Costs



BankShares adopted Statement of Financial Accounting Standards No. 91, Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases. Using a method that approximates the interest method, loan origination and commitment fees and certain costs are deferred over the contractual life of the related loan as an
adjustment to the net interest margin. A regular review is conducted on the pricing levels of fees and costs as experience with our lending processes increases.



(g) Allowance for Loan Losses



The allowance for loan losses is maintained at a level, which, in managements judgment, is adequate to absorb credit losses inherent in the loan portfolio. The
amount of the allowance is based on managements evaluation of the collectibility of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, economic
conditions, and other risks inherent in the portfolio. Management reviews the past due reports and risk ratings and discusses individually the loans on these reports with the responsible loan officers. Management uses these tools and provides a
quarterly analysis of the allowance based on peer analysis, regulatory reserve analysis and an analysis based on the experience in each category of commercial, real estate or consumer loans. The regulatory analysis is generally utilized to allocate
the reserve to each of the different loan categories. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows. This allowance, then, is designated as a specific reserve. The
remainder of the allowance is then unallocated. Although management uses available information to recognize losses on loans, because of uncertainties associated with local economic conditions, collateral values, and future cash flows on impaired
loans, it is reasonably possible that a material change could occur in the allowance for loan losses in the near term. However, the amount of the change that is reasonably possible cannot be estimated. The allowance is increased by a provision for
loan losses, which is charged to expense, and reduced by charge-offs, net of recoveries. Changes in the allowance relating to impaired loans are charged or credited to the provision for loan losses. Past due status is determined based on contractual
terms.



(h) Other Real Estate



Other real estate comprises properties acquired through foreclosure proceedings or
acceptance of a deed in lieu of foreclosure. The properties are carried at the fair market value less selling costs, based on appraised value. Loan losses arising from the acquisition of such properties are charged against the allowance for loan
losses. Any subsequent write-downs are charged to expenses. While management uses available information to recognize losses on other real estate, additional write-downs may be necessary based on changes in economic conditions.



(i) Furniture, Fixtures and Equipment



Furniture, fixtures and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are charged to expense on a straight-line basis over the estimated useful lives. Maintenance, repairs and minor improvements are charged to expense as incurred. Significant improvements are capitalized.



(j) Organizational Costs



The American Institute of CPAs has issued Statement of Position 98-5, Reporting
on the Costs of Start-Up Activities. In general, the SOP requires that organizational and similar start-up costs be expensed. Examples of such costs that have been incurred by the Corporation are legal fees, consulting fees, and regulatory
application fees. The Corporation adopted the requirements of the SOP from its inception and has accordingly expensed all organizational costs.



(k) Stock Options and Warrants



As permitted by Statement of Financial Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, the Corporation accounts for its stock options and warrants using the intrinsic value method
prescribed in Accounting Principles





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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements



December 31, 2004 and 2003



Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees. APB No. 25
requires compensation expense to be recorded on the date of grant only if the current market value price of the underlying stock exceeds the exercise price. Proforma information is presented as if net income had been determined under the fair value
based method as prescribed by SFAS No. 123.



In December 2002, the FASB issued
FASB Statement No. 148, Accounting for Stock-Based Compensation. This new standard provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based compensation. In addition, the
statement amends the disclosure requirements of FASB statement no. 123 to require prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based compensation and the underlying effect of the
method used on reported results until exercised. The following table illustrates the effect on the net income (loss) and net income (loss) per share if the corporation had applied the fair value recognition provisions of FASB Statement No. 123,
Accounting for Stock Based Compensation, to its stock options and warrants:



|                                                                                                               |  |                |         |                |   |          |  
|-------------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | -------------- | - | -------- | -
|                                                                                                               |  | Year Ended2004 |         | Year Ended2003 |  
|Net income (loss) as reported                                                                                  |  | $              | 775,198 |                | $ | (611,772 | )
|Deduct total stock-based employee compensation expense determined under fair value based method for all awards |  |                |        |                |   | (217,255 | )
|Proforma net income (loss)                                                                                     |  | $              | 775,198 |                | $ | (829,027 | )
|Net income (loss) per share:                                                                                   |  |                |         |                |   |          |  
|Basic-as reported                                                                                              |  | $              | .55     |                | $ | (.45     | )
|Basic-proforma                                                                                                 |  | $              | .55     |                | $ | (.61     | )
|                                                                                                               |  |               
|Diluted-as reported                                                                                            |  | $              | .55     |                | $ | (.45     | )
|Diluted-proforma                                                                                               |  | $              | .55     |                | $ | (.61     | )



(l) Advertising Costs



Advertising costs are expensed as incurred.



(m) Income Taxes



The Corporation is subject to federal and state income taxes. However, no taxes have been accrued or paid because of operating losses
incurred. The liability (or balance sheet) approach is used in financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of
assets and liabilities that will result in taxable or deductible amounts in the future. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or
refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.



(n) Net Income (Loss) Per Share



Statement of Financial Accounting Standards No. 128, Accounting for Earnings Per Share requires dual presentation of basic and diluted earnings per share on
the face of the statements of income and requires a reconciliation of the numerators and denominators of the basic and diluted earnings per share calculation. Basic income per share is calculated based on the weighted average number of shares of
common stock outstanding during each period. Diluted income per share is computed using weighted average shares outstanding adjusted to reflect the dilutive effect of all potential common shares that were outstanding during the period. For the year
ending December 31, 2004 basic income per share and average shares outstanding were $.55 and 1,401,303. Diluted income per share and average shares outstanding were $.55 and 1,401,960.





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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements



December 31, 2004 and 2003



For the year ending December 31, 2003 the effect of the stock options and warrants were
anti-dilutive and as such were not reflected in fully diluted loss per share. At December 31, 2004 and December 31, 2003, there were 75,833 warrants outstanding and exercisable. At December 31, 2004 and 2003, there were 60,000 options that were
outstanding and exercisable.



(o) Use of Estimates



The presentation 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 and 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.



The determination of the adequacy of the allowance for loan losses is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. In connection with
the determination of the estimated losses on loans, management obtains independent appraisals for significant collateral.



The Corporations loans are generally secured by specific items of collateral including real property, consumer assets, and business assets. Although the Corporation
has a diversified loan portfolio, a substantial portion of its debtors ability to honor their contracts is dependent on local economic conditions.



While management uses available information to recognize losses on loans, further reductions in the carrying amounts of loans may be necessary based on changes in local
economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans. Such agencies may require the Corporation to recognize additional losses based on their
judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the estimated losses on loans may change materially in the near term.



However, the amount of the change that is reasonably possible cannot be estimated.



Note 2  Securities



The carrying values, unrealized gains and losses and approximate market values of investment
securities at December 31, 2004 and 2003 are shown in the tables below. The entire investment portfolio is classified as available-for-sale to preserve maximum liquidity for funding needs.



|                                    |  |               |           |                       |   |                        |  |   |                         |   |  |   |          
|----------------------------------- |  | ------------- | --------- | --------------------- | - | ---------------------- |  | - | ----------------------- | - |  | - | ---------
|                                    |  | 2004         
|                                    |  | AmortizedCost |           | Gross UnrealizedGains |   | Gross UnrealizedLosses |  |   | ApproximateMarket Value
|U.S. government agencies            |  | $             | 3,299,880 |                       | $ | 8,871                  |  | $ | (3,938                  | ) |  | $ | 3,304,813
|Corporate bonds                     |  |               | 307,548   |                       |   | 3,258                  |  |   |                        |   |  |   | 310,806  
|                                    |  |               |           |                       |   |                        |  |   |                         |   |  |   |          
|Total securities available-for-sale |  | $             | 3,607,428 |                       | $ | 12,129                 |  | $ | (3,938                  | ) |  | $ | 3,615,619
|                                    |  |               |           |                       |   |                        |  |   |                         |   |  |   |          
|                                    | 
|                                    |  | 2003         
|                                    |  | AmortizedCost |           | Gross UnrealizedGains |   | Gross UnrealizedLosses |  |   | ApproximateMarket Value
|U.S. government agencies            |  | $             | 4,299,945 |                       | $ | 938                    |  | $ | (871                    | ) |  | $ | 4,300,012
|Corporate bonds                     |  |               | 314,410   |                       |   | 9,926                  |  |   |                        |   |  |   | 324,336  
|                                    |  |               |           |                       |   |                        |  |   |                         |   |  |   |          
|Total securities available-for-sale |  | $             | 4,614,355 |                       | $ | 10,864                 |  | $ | (871                    | ) |  | $ | 4,624,348
|                                    |  |               |           |                       |   |                        |  |   |                         |   |  |   |          





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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements



December 31, 2004 and 2003



Federal reserve bank stock is included in restricted equity securities and totaled $153,100
at December 31, 2004 and 2003, respectively.



The amortized costs and market
values of securities available-for-sale at December 31, 2004, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.



|                                          |  |               |           |                         |   |          
|----------------------------------------- |  | ------------- | --------- | ----------------------- | - | ---------
|                                          |  | AmortizedCost |           | ApproximateMarket Value
|Due in one year or less                   |  | $             | 999,879   |                         | $ | 1,000,000
|Due after one year but within five years  |  |               | 2,607,549 |                         |   | 2,615,619
|Due after five years but within ten years |  |               |          |                         |   |         
|Due after ten years                       |  |               |          |                         |   |         
|                                          |  |               |           |                         |   |          
|                                          |  | $             | 3,607,428 |                         | $ | 3,615,619
|                                          |  |               |           |                         |   |          



There were no gain or losses realized
on sales and calls of securities available-for-sale in 2004 and 2003, respectively. Securities available-for-sale with carrying values approximating $2,300,000 and $0 at December 31, 2004 and December 31, 2003, respectively, were pledged to secure
public deposits and for other purposes as required or permitted by law. There were no securities at December 31, 2004 or December 31, 2003 that have been in a continuous unrealized loss position for greater than twelve months.



Note 3  Allowance for Loan Losses



Changes in the allowance for loan losses for the years ended December 31, 2004 and 2003 are
as follows:



|                                 |  |      |           |   |      |   |        
|-------------------------------- |  | ---- | --------- | - | ---- | - | -------
|                                 |  | 2004 |           |   | 2003
|Balance at beginning of year     |  | $    | 540,601   |   |      | $ | 130,700
|Provision for loan losses        |  |      | 956,900   |   |      |   | 409,901
|Losses charged to allowance      |  |      | (374,287  | ) |      |   |       
|Recoveries credited to allowance |  |      |          |   |      |   |       
|                                 |  |      |           |   |      |   |        
|Balance at end of year           |  | $    | 1,123,214 |   |      | $ | 540,601
|                                 |  |      |           |   |      |   |        



Net charge offs for 2004 and 2003 were
..57% and .00%, respectively. There were no nonperforming loans at December 31, 2004 and 2003, respectively. There were no loans identified as impaired at December 31, 2004 and 2003, respectively, in accordance with SFAS No. 114. The average balance
during 2004 and 2003 for impaired loans was approximately $715,366 and $0, respectively. There was no interest income reflected in the 2004 income statement related to the impaired loans.



Overdrafts reclassified to loans at December 31, 2004 and 2003 were $16,091 and $7,191, respectively.



Note 4  Related Party Loans



Directors, executive officers and related interests provide the corporation with business
and many are among its significant depositors and borrowers. Total amounts outstanding at December 31, 2004 and 2003 for all such loans are summarized below:



|                             |  |      |            |   |      |   |            |  
|---------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                             |  | 2004 |            |   | 2003 |  
|Balance at beginning of year |  | $    | 3,373,031  |   |      | $ | 1,350,920  |  
|Additions                    |  |      | 6,162,447  |   |      |   | 7,076,864  |  
|Payments                     |  |      | (6,093,762 | ) |      |   | (5,054,753 | )
|                             |  |      |            |   |      |   |            |  
|Balance at end of year       |  | $    | 3,441,716  |   |      | $ | 3,373,031  |  
|                             |  |      |            |   |      |   |            |  





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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements



December 31, 2004 and 2003



These loans, in the opinion of management, were made in the ordinary course of business on
substantially the same terms, including interest rates and security for loans, as those prevailing at the time in comparable transactions with others and did not involve more than the normal risk of collectibility or present other unfavorable
features. Total unfunded commitments were $729,115 and $587,259 at December 31, 2004 and 2003, respectively.



Note 5  Furniture, Fixtures and Equipment



Furniture, fixtures and equipment at December 31, 2004 and 2003 are as follows:



|                                          |  |      |          |   |      |   |         |  
|----------------------------------------- |  | ---- | -------- | - | ---- | - | ------- | -
|                                          |  | 2004 |          |   | 2003 |  
|Furniture and equipment                   |  | $    | 648,357  |   |      | $ | 417,364 |  
|Computer software                         |  |      | 60,310   |   |      |   | 34,655  |  
|Leasehold improvements                    |  |      | 161,491  |   |      |   | 103,004 |  
|                                          |  |      |          |   |      |   |         |  
|                                          |  |      | 870,158  |   |      |   | 555,023 |  
|Accumulated depreciation and amortization |  |      | (163,853 | ) |      |   | (53,886 | )
|                                          |  |      |          |   |      |   |         |  
|Furniture, fixtures and equipment, net    |  | $    | 706,305  |   |      | $ | 501,137 |  
|                                          |  |      |          |   |      |   |         |  



Note 6  Deposits



The maturities of time deposits $100,000 and over and other time deposits
at December 31, 2004 and 2003 are as follows:



|                         |  |                                |            |                     |   |           
|------------------------ |  | ------------------------------ | ---------- | ------------------- | - | ----------
|                         |  | 2004                          
|                         |  | Time Deposits$100,000 and Over |            | Other Time Deposits
|Three months or less     |  | $                              | 7,950,585  |                     | $ | 12,950,390
|Over 3 through 6 months  |  |                                | 5,305,003  |                     |   | 7,110,508 
|Over 6 through 12 months |  |                                | 1,244,594  |                     |   | 4,528,012 
|Over 12 months           |  |                                | 1,033,264  |                     |   | 3,762,995 
|                         |  |                                |            |                     |   |           
|Total                    |  | $                              | 15,533,446 |                     | $ | 28,351,905
|                         |  |                                |            |                     |   |           
|                         | 
|                         |  | 2003                          
|                         |  | Time Deposits$100,000 and Over |            | Other Time Deposits
|Three months or less     |  | $                              | 1,433,258  |                     | $ | 1,458,650 
|Over 3 through 6 months  |  |                                | 1,694,635  |                     |   | 2,943,258 
|Over 6 through 12 months |  |                                | 1,311,518  |                     |   | 4,637,267 
|Over 12 months           |  |                                | 1,036,135  |                     |   | 2,785,195 
|                         |  |                                |            |                     |   |           
|Total                    |  | $                              | 5,475,546  |                     | $ | 11,824,370
|                         |  |                                |            |                     |   |           



Total deposit dollars from executive
officers, directors, and their related interests at December 31, 2004 and 2003 were $3,743,130 and $2,661,813, respectively.





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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements



December 31, 2004 and 2003



Note 7  Income Taxes



The liability (or balance sheet) approach is used in financial accounting and reporting for
income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future. Valuation
allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and
liabilities.



Allocation of federal and state income taxes between current and
deferred portions is as follows:



|                                  |  |      |          |   |      |   |          |  
|--------------------------------- |  | ---- | -------- | - | ---- | - | -------- | -
|                                  |  | 2004 |          |   | 2003 |  
|Current                           |  | $    |         |   |      | $ |         |  
|Deferred tax provision (benefit)  |  |      | 35,651   |   |      |   | (190,635 | )
|Adjustment to valuation allowance |  |      | (513,010 | ) |      |   | 190,635  |  
|                                  |  |      |          |   |      |   |          |  
|Income Tax Benefit                |  | $    | (477,359 | ) |      | $ |         |  
|                                  |  |      |          |   |      |   |          |  



The reasons for the differences
between the statutory federal income tax rate and the effective tax rate are summarized as follows:



|                                        |  |      |          |   |      |   |          |  
|--------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | -
|                                        |  | 2004 |          |   | 2003 |  
|Computed at the expected statutory rate |  | $    | 34,579   |   |      | $ | (164,634 | )
|Nondeductible Meals & Entertainment     |  |      | 1,502    |   |      |   | 1,314    |  
|Tax / Book Loan Fee Income              |  |      |         |   |      |   | (26,469  | )
|Other                                   |  |      | (430     | ) |      |   | (846     | )
|Adjustment to valuation allowance       |  |      | (513,010 | ) |      |   | 190,635  |  
|                                        |  |      |          |   |      |   |          |  
|Income Tax Benefit                      |  | $    | (477,359 | ) |      | $ |         |  
|                                        |  |      |          |   |      |   |          |  



The components of deferred tax assets
and liabilities are as follows:



|                                                 |  |      |         |      |   |          |  
|------------------------------------------------ |  | ---- | ------- | ---- | - | -------- | -
|                                                 |  | 2004 |         | 2003 |  
|Allowance for loan losses                        |  | $    | 315,422 |      | $ | 156,848  |  
|Net operating loss carry forward                 |  |      | 160,086 |      |   | 290,550  |  
|Other                                            |  |      | 65      |      |   | 923      |  
|Organizational costs                             |  |      | 74,113  |      |   | 102,405  |  
|                                                 |  |      |         |      |   |          |  
|Deferred tax assets                              |  |      | 549,686 |      |   | 550,726  |  
|                                                 |  |      |         |      |   |          |  
|Prepaid service contracts and insurance          |  |      | 25,421  |      |   | 18,046   |  
|Depreciation and amortization                    |  |      | 46,824  |      |   | 19,374   |  
|Unrealized gain on securities available-for-sale |  |      | 2,785   |      |   | 3,398    |  
|Other                                            |  |      | 82      |      |   | 296      |  
|                                                 |  |      |         |      |   |          |  
|Deferred tax liabilities                         |  |      | 75,112  |      |   | 41,114   |  
|                                                 |  |      |         |      |   |          |  
|Net deferred tax assets                          |  | $    | 474,574 |      | $ | 509,612  |  
|Valuation allowance                              |  |      |        |      |   | (509,612 | )
|                                                 |  |      |         |      |   |          |  
|Net realizable value of net deferred tax assets  |  | $    | 474,574 |      | $ |         |  
|                                                 |  |      |         |      |   |          |  



The Corporations approximate
$471,000 in net operating losses, which expire in various amounts between 2020 and 2024, are available to offset future taxable income.





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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements



December 31, 2004 and 2003



Note 8  Net Income (Loss) Per Share



|                                                     |  |                              |         |                   |           |                 |   |    
|---------------------------------------------------- |  | ---------------------------- | ------- | ----------------- | --------- | --------------- | - | ---
|                                                     |  | Year Ended December 31, 2004
|                                                     |  | IncomeNumerator              |         | SharesDenominator |           | Per ShareAmount
|Basic EPS                                            |  |                              |         |                   |           |                 |   |    
|Net income from continuing operations                |  | $                            | 579,063 |                   | 1,401,303 |                 | $ | .41
|Net income from discontinuing operations, net of tax |  | $                            | 196,135 |                   | 1,401,303 |                 | $ | .14
|Net income available to common shareholders          |  | $                            | 775,198 |                   | 1,401,303 |                 | $ | .55
|Diluted EPS                                          |  |                              |         |                   |           |                 |   |    
|Net income from continuing operations                |  | $                            | 579,063 |                   | 1,401,960 |                 | $ | .41
|Net income from discontinuing operations net, of tax |  | $                            | 196,135 |                   | 1,401,960 |                 | $ | .14
|Net income available to common shareholders          |  | $                            | 775,198 |                   | 1,401,960 |                 | $ | .55



|                                      |  |                              |          |   |                   |           |                 |   |      |  
|------------------------------------- |  | ---------------------------- | -------- | - | ----------------- | --------- | --------------- | - | ---- | -
|                                      |  | Year Ended December 31, 2003 |         
|                                      |  | IncomeNumerator              |          |   | SharesDenominator |           | Per ShareAmount |  
|Basic EPS                             |  |                              |          |   |                   |           |                 |   |      |  
|Loss from continuing operations       |  | $                            | (484,218 | ) |                   | 1,368,970 |                 | $ | (.36 | )
|Loss from discontinuing operations    |  | $                            | (127,554 | ) |                   | 1,368,970 |                 | $ | (.09 | )
|Loss available to common shareholders |  | $                            | (611,772 | ) |                   | 1,368,970 |                 | $ | (.45 | )
|Diluted EPS                           |  |                              |          |   |                   |           |                 |   |      |  
|Loss from continuing operations       |  | $                            | (484,218 | ) |                   | 1,368,970 |                 | $ | (.36 | )
|Loss from discontinuing operations    |  | $                            | (127,554 | ) |                   | 1,368,970 |                 | $ | (.09 | )
|Loss available to common shareholders |  | $                            | (611,772 | ) |                   | 1,368,970 |                 | $ | (.45 | )



Note 9  Comprehensive Income



BankShares adopted Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income upon the opening of the Bank. This statement established standards for reporting and presentation of comprehensive income and its components. The following table discloses the reclassifications related to
securities available-for-sale that are included in accumulated other comprehensive income on the balance sheet as of December 31, 2004 and 2003.





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Notes to Consolidated Financial Statements



December 31, 2004 and 2003



Net unrealized losses on securities available-for-sale:



|                                                                   |  |                            |         |   |                            |   |         |  
|------------------------------------------------------------------ |  | -------------------------- | ------- | - | -------------------------- | - | ------- | -
|                                                                   |  | Year EndedDecember 31,2004 |         |   | Year EndedDecember 31,2003 |  
|Net unrealized holding losses during the year                      |  | $                          | (75,708 | ) |                            | $ | (14,117 | )
|Less reclassification adjustments for gains included in net income |  |                            |        |   |                            |   |        |  
|Income tax expense                                                 |  |                            | (2,785  | ) |                            |   |        |  
|                                                                   |  |                            |         |   |                            |   |         |  
|Change in Accumulated Other Comprehensive Income                   |  | $                          | (78,488 | ) |                            | $ | (14,117 | )
|                                                                   |  |                            |         |   |                            |   |         |  



Note 10 - Employee Benefit Plans



MainStreet funds certain costs for medical benefits in amounts determined
at the discretion of management. There are no postretirement benefits at this time. BankShares has a 401-K plan which provides for contributions by employees. BankShares currently does not have a matching contribution. A matching contribution is
scheduled to begin in second quarter 2005.



Note 11  Leases and
Commitments



At December 31, 2004 the Corporation had one lease agreement
for its facility in Martinsville, Virginia. MainStreets executive office lease, which commenced on August 1, 2002, was for 2,000 square feet of space located in the Patrick Henry Shopping Mall at Suite 12, 730 East Church Street in
Martinsville, Virginia. On January 28, 2004, MainStreet signed a new lease for the executive offices and operations area for 3,000 square feet of area located in the Patrick Henry Shopping Mall, Suite 30. This new lease, which commenced May 1, 2004,
will expire April 30, 2009 and replaces the existing lease.



Franklin
Banks main office is located at 400 Old Franklin Turnpike, Suite 100, Rocky Mount, Virginia, in a section of town known as the Rocky Mount Marketplace. The bank leases a two-story facility with approximately 8,200 square feet of which the Bank
provides permanent financing to the owners. The lease is for a 15-year period and the expiration date of the lease is June 30, 2018. One of the owners is also a director of Franklin Bank and both owners are shareholders of BankShares. A branch of
Franklin Bank opened on April 9, 2004 at 12930 Booker T. Washington Highway, Hardy, Virginia. The bank also provides permanent financing to the owner of this facility, of which a director of the bank is a partner. The lease commenced on April 7,
2004 and will expire April 6, 2019. Management deems these leases to be made at comparable market values.



In addition to the leases for office space, the corporation also leases various pieces of office equipment under short and long-term leases.



Total rent expense approximated $187,000 and $80,000 for the years ended December 31, 2004 and 2003, respectively. Future rental payments
under non-cancelable operating leases approximate $208,000, $208,000, $208,000, $208,000 and $194,000 for the years ended December 31, 2005, 2006, 2007, 2008 and 2009, respectively.



Neither the Corporation or Franklin Bank own any real property.



The Corporation has entered into an employment agreement with its President and Chief Executive Officer. The agreement has a three-year term
and is automatically extended by one year if not terminated at least 90 days prior to each anniversary date. Under the terms of the agreement, the individual will continue in a consulting capacity after the end of the period of



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Notes to Consolidated Financial Statements



December 31, 2004 and 2003



employment until age 70. The Corporation has also entered into an employment contract with
its Executive Vice President and Chief Financial Officer. This agreement also has a three-year term and is automatically extended by one year if not terminated at least 90 days prior to each anniversary.



Note 12 - Stock Options and Warrants



On the opening date of Smith River Bank, July 24, 2000, the President and CEO was granted
30,000 stock options at the then fair market value of $10.00. The stock options became exercisable if Mr. McCullar was employed as President and CEO of MainStreet and Smith River Bank on the first anniversary of the day the bank opened for business
(the first 10,000 options) and on each of the next two anniversaries (for each of the next two 10,000 option grants). All such options are now vested and exercisable. Each of the options has a ten-year term from the date of grant and will expire 30
days after employment is terminated. None of these options have been exercised. Other options in the amount of 30,000, of which all are vested and exercisable, have been granted at the then fair market value of $10.50 to former or current employees.



Each organizer/director was granted one warrant for each share of stock that
they purchased in the original offering. These warrants were granted on July 24, 2000 and totaled 87,500 warrants. Each warrant entitles the organizer/director to purchase, at anytime within ten years from the date of grant, an additional
share at $10.00 per share. The right to exercise the warrants vested for one-third (1/3) of the shares covered by the warrants on each of the first three anniversaries of the date Smith River Bank opened for business, so long as the
organizer/director had served continuously as a director of MainStreet or Smith River Bank from its opening until the particular anniversary and had attended a minimum of 75% of the Board of Directors meetings during the period. The warrants are
detachable and the shares with which they were originally issued as a unit may be separately transferred. The warrants are generally not transferable except by operation of law. BankShares has the right, upon notice from any regulatory authority, to
require immediate exercise or forfeiture of the warrants if the exercise is reasonably necessary in order to inject additional capital into the Bank. Of these warrants, 75,833 are fully vested and 11,667 have been forfeited. None have been
exercised.



The shareholders of MainStreet approved the 2004 Key Employee Stock
Option Plan, (the Plan), at its Annual Meeting on April 15, 2004. The Plan permits the grant of Non-Qualified Stock Options and Incentive Stock Options to persons designated as Key Employees of BankShares or its subsidiaries.
The Plan was effective by the Board of Directors as of January 21, 2004 and remains in effect, subject to the right of the Board of Directors to terminate the Plan, until January 21, 2009, at which time it terminates except with respect to awards
made prior to and outstanding on that date which remain valid in accordance with their terms. The maximum number of shares that may be issued under the Plan may not exceed 137,000. As of December 31, 2004, there were no awards granted under this
Plan.



The Corporation has reserved 284,500 shares of authorized but unissued
shares of common stock related to these option and warrant agreements.



The per
share weighted average fair value of stock options and warrants granted during 2003 and 2000 was $4.07 and $5.02, respectively, on the date of grant utilizing the Black-Scholes option-pricing model with the following assumptions:



|                                      |  |             |  
|------------------------------------- |  | ----------- | -
|                                      |  | 2003 Grants |  
|Risk-free interest rate               |  | 3.463       | %
|Expected life of options and warrants |  | 10 years    |  
|Expected volatility of stock price    |  | 20          | %
|Expected dividend yield               |  | 0           | %



The Corporation applies APB Opinion
No. 25, Accounting for Stock Issued to Employees, in accounting for its stock options and warrants and, accordingly, no compensation cost has been recognized for its stock options or warrants in the consolidated financial statements. The stock
options and warrants granted had an exercise price equal to the market value of the



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Notes to Consolidated Financial Statements



December 31, 2004 and 2003



underlying common stock on the date of grant. The following table illustrates the effect on
the net income (loss) and net income (loss) per share if the corporation had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock Based Compensation, to its stock options and warrants:



|                                                                                                               |  |                |         |                |   |          |  
|-------------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | -------------- | - | -------- | -
|                                                                                                               |  | Year Ended2004 |         | Year Ended2003 |  
|Net income (loss) as reported                                                                                  |  | $              | 775,198 |                | $ | (611,772 | )
|Deduct total stock-based employee compensation expense determined under fair value based method for all awards |  |                |        |                |   | (217,255 | )
|Proforma net income (loss)                                                                                     |  | $              | 775,198 |                | $ | (829,027 | )
|                                                                                                               |  |               
|Net income (loss) per share:                                                                                   |  |                |         |                |   |          |  
|Basic-as reported                                                                                              |  | $              | .55     |                | $ | (.45     | )
|Basic-proforma                                                                                                 |  | $              | .55     |                | $ | (.61     | )
|                                                                                                               |  |               
|Diluted-as reported                                                                                            |  | $              | .55     |                | $ | (.45     | )
|Diluted-proforma                                                                                               |  | $              | .55     |                | $ | (.61     | )



Following is a status and summary of
changes of options and warrants during the years ended December 31, 2004 and 2003 with a range and weighted average exercise price of $10.00$10.50, respectively, and $10.11 at December 31, 2004 and December 31, 2003. The weighted average
contractual maturity of the options and warrants was 6.6 and 7.6 years at December 31, 2004 and 2003, respectively.



|                                 |  |                |  |               
|-------------------------------- |  | -------------- |  | --------------
|                                 |  | Year Ended2004 |  | Year Ended2003
|Outstanding at beginning of year |  | 135,833        |  | 105,833       
|Granted                          |  |               |  | 30,000        
|Exercised                        |  |               |  |              
|Forfeited                        |  |               |  |              
|                                 |  |                |  |               
|Outstanding at year-end          |  | 135,833        |  | 135,833       
|                                 |  |                |  |               



At December 31, 2004 and December 31,
2003 there were 60,000 options and 75,833 warrants exercisable at a weighted average price of $10.11.



Note 13  Regulatory Requirements and Restrictions



Under the applicable federal laws, the Comptroller of the Currency restricts the total dividend payments of any calendar year, without prior approval, to the net profits of that year as defined, combined with retained
net profits for the two preceding years. BankShares will not be paying dividends until they become profitable and it is deemed appropriate by management.



Franklin Bank is a member of the Federal Reserve System; however, Franklin processes daily through a correspondent bank, Community Bankers Bank. Franklin Bank must
currently maintain a reserve balance of $250,000 with the correspondent bank.



BankShares and Franklin Bank are subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital ratios can initiate certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a material effect on the consolidated financial statements. Quantitative measures established by regulations to ensure capital adequacy require BankShares and Franklin Bank to



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Notes to Consolidated Financial Statements



December 31, 2004 and 2003



maintain minimum capital ratios. At December 31, 2004, BankShares Tier II risked based
capital ratio had fallen below the minimum for a well-capitalized bank along with Franklin Banks Tier II risk-based capital ratios. In addition, Franklin Banks Tier I leverage ratio was below the well capitalized level for a denovo bank.
As a result, BankShares has implemented a capital restoration plan. A private placement offering commenced in September 2004 and as of December 31, 2004, 156,038 shares of common stock at a price of $9.00 per share for a total of $1,404,342 had been
sold. In addition, BankShares and Smith River Bank entered into a purchase agreement with Argentum Capital Management, LLC pursuant to which MainStreet will sell and Argentum and its assigns will purchase all of the outstanding shares of common
stock of Smith River Bank for $6,500,000. At December 31, 2004, BankShares and Franklin Bank were above capital adequacy requirements to which they are subject. Actual capital amounts and ratios for MainStreet are presented in the following table:



|                                         |  |        |            |       |                      |   |        |                        |            |  |      |        |  |       |            |  |       |  
|---------------------------------------- |  | ------ | ---------- | ----- | -------------------- | - | ------ | ---------------------- | ---------- |  | ---- | ------ |  | ----- | ---------- |  | ----- | -
|                                         |  | Actual |            |       | For Capital Adequacy |   |        | To Be Well Capitalized |           
|As of December 31, 2004                  |  | Amount |            | Ratio |                      |   | Amount |                        | Ratio      |  |      | Amount |  | Ratio |           
|Total capital (to risk weighted assets)  |  | $      | 13,365,708 |       | 8.96                 | % |        | $                      | 11,929,000 |  | 8.00 | %      |  | $     | 14,912,000 |  | 10.00 | %
|Tier I capital (to risk weighted assets) |  |        | 12,242,494 |       | 8.21                 |   |        |                        | 5,965,000  |  | 4.00 |        |  |       | 8,947,000  |  | 6.00  |  
|Tier I capital (to average assets)       |  |        | 12,242,494 |       | 7.86                 |   |        |                        | 6,229,000  |  | 4.00 |        |  |       | 7,786,000  |  | 5.00  |  
|                                         |  |        |           
|                                         |  | Actual |            |       | For Capital Adequacy |   |        | To Be Well Capitalized |           
|As of December 31, 2003                  |  | Amount |            | Ratio |                      |   | Amount |                        | Ratio      |  |      | Amount |  | Ratio |           
|Total capital (to risk weighted assets)  |  | $      | 10,641,491 |       | 10.80                | % |        | $                      | 7,883,000  |  | 8.00 | %      |  | $     | 9,854,000  |  | 10.00 | %
|Tier I capital (to risk weighted assets) |  |        | 10,100,890 |       | 10.25                |   |        |                        | 3,941,000  |  | 4.00 |        |  |       | 5,912,000  |  | 6.00  |  
|Tier I capital (to average assets)       |  |        | 10,100,890 |       | 10.31                |   |        |                        | 3,919,000  |  | 4.00 |        |  |       | 4,899,000  |  | 5.00  |  



Actual capital amounts and ratios for
Franklin Bank are presented in the following table:



|                                         |  |        |           |       |                     |   |        |                                                                |           |  |      |        |  |       |           |  |       |  
|---------------------------------------- |  | ------ | --------- | ----- | ------------------- | - | ------ | -------------------------------------------------------------- | --------- |  | ---- | ------ |  | ----- | --------- |  | ----- | -
|                                         |  | Actual |           |       | For CapitalAdequacy |   |        | To Be Well CapitalizedUnder Prompt CorrectiveAction Provisions |          
|As of December 31, 2004                  |  | Amount |           | Ratio |                     |   | Amount |                                                                | Ratio     |  |      | Amount |  | Ratio |          
|Total capital (to risk weighted assets)  |  | $      | 8,406,239 |       | 9.41                | % |        | $                                                              | 7,147,000 |  | 8.00 | %      |  | $     | 8,934,000 |  | 10.00 | %
|Tier I capital (to risk weighted assets) |  |        | 7,289,239 |       | 8.16                |   |        |                                                                | 3,573,000 |  | 4.00 |        |  |       | 5,360,000 |  | 6.00  |  
|Tier I capital (to average assets)       |  |        | 7,289,239 |       | 7.61                |   |        |                                                                | 3,832,000 |  | 4.00 |        |  |       | 4,789,000 |  | 5.00  |  





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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements



December 31, 2004 and 2003



|                                         |  |        |           |       |                     |   |        |                                                                |           |  |      |        |  |       |           |  |       |  
|---------------------------------------- |  | ------ | --------- | ----- | ------------------- | - | ------ | -------------------------------------------------------------- | --------- |  | ---- | ------ |  | ----- | --------- |  | ----- | -
|                                         |  | Actual |           |       | For CapitalAdequacy |   |        | To Be Well CapitalizedUnder Prompt CorrectiveAction Provisions |          
|As of December 31, 2003                  |  | Amount |           | Ratio |                     |   | Amount |                                                                | Ratio     |  |      | Amount |  | Ratio |          
|Total capital (to risk weighted assets)  |  | $      | 5,162,881 |       | 10.65               | % |        | $                                                              | 3,471,000 |  | 8.00 | %      |  | $     | 4,339,000 |  | 10.00 | %
|Tier I capital (to risk weighted assets) |  |        | 4,622,280 |       | 11.90               |   |        |                                                                | 1,736,000 |  | 4.00 |        |  |       | 2,603,000 |  | 6.00  |  
|Tier I capital (to average assets)       |  |        | 4,622,280 |       | 10.38               |   |        |                                                                | 1,780,000 |  | 4.00 |        |  |       | 2,226,000 |  | 5.00  |  



Smith River Bank, whose assets are
held for sale as shown in Footnote #19, was well-capitalized at December 31, 2004.



Note 14  Parent Company Financial Information



CONDENSED BALANCE SHEETS



|                                               |  |                   |            |                   |   |           
|---------------------------------------------- |  | ----------------- | ---------- | ----------------- | - | ----------
|                                               |  | December 31, 2004 |            | December 31, 2003
|Assets                                         |  |                   |            |                   |   |           
|                                               |  |                  
|Cash and due from banks                        |  | $                 | 105,772    |                   | $ | 76,398    
|Interest-bearing deposits in other banks       |  |                   | 223,652    |                   |   | 1,142,645 
|Furniture, fixtures and equipment, net         |  |                   | 96,782     |                   |   | 11,372    
|Other assets                                   |  |                   | 164,772    |                   |   | 54,219    
|Investment in subsidiary bank                  |  |                   | 7,294,645  |                   |   | 4,632,273 
|Investment in assets held for sale             |  |                   | 4,477,503  |                   |   | 4,315,264 
|                                               |  |                   |            |                   |   |           
|Total Assets                                   |  | $                 | 12,363,126 |                   | $ | 10,232,171
|                                               |  |                   |            |                   |   |           
|Liabilities and Shareholders Equity           |  |                   |            |                   |   |           
|                                               |  |                  
|Accrued interest payable and other liabilities |  | $                 | 79,547     |                   | $ | 11,708    
|                                               |  |                  
|Shareholders Equity                           |  |                   |            |                   |   |           
|                                               |  |                  
|Common shareholders equity                    |  |                   | 12,283,579 |                   |   | 10,220,463
|                                               |  |                   |            |                   |   |           
|Total Liabilities and Shareholders Equity     |  | $                 | 12,363,126 |                   | $ | 10,232,171
|                                               |  |                   |            |                   |   |           



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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements



December 31, 2004 and 2003



CONDENSED STATEMENTS OF INCOME (LOSS)



|                                                              |  |                             |           |   |                             |   |           |  
|------------------------------------------------------------- |  | --------------------------- | --------- | - | --------------------------- | - | --------- | -
|                                                              |  | Year EndedDecember 31, 2004 |           |   | Year EndedDecember 31, 2003 |  
|Income                                                        |  |                             |           |   |                             |   |           |  
|Equity in undistributed income (loss) of subsidiary banks     |  | $                           | 531,959   |   |                             | $ | (480,975  | )
|Equity in undistributed income (loss) of assets held for sale |  |                             | 196,135   |   |                             |   | (127,554  | )
|Interest income                                               |  |                             | 2,608     |   |                             |   | 16,876    |  
|Other income                                                  |  |                             | 604,175   |   |                             |   | 711,044   |  
|Affiliate fee income                                          |  |                             | 491,806   |   |                             |   | 448,245   |  
|                                                              |  |                             |           |   |                             |   |           |  
|Total Income                                                  |  |                             | 1,826,683 |   |                             |   | 567,636   |  
|                                                              |  |                            
|Expenses                                                      |  |                             |           |   |                             |   |           |  
|Salaries and employee benefits                                |  |                             | 594,782   |   |                             |   | 497,950   |  
|Severance payments                                            |  |                             |          |   |                             |   | 223,136   |  
|Occupancy and equipment expense                               |  |                             | 93,770    |   |                             |   | 48,836    |  
|Professional fees                                             |  |                             | 161,827   |   |                             |   | 177,789   |  
|Outside processing                                            |  |                             | 69,136    |   |                             |   | 58,671    |  
|Other expenses                                                |  |                             | 180,335   |   |                             |   | 173,026   |  
|                                                              |  |                             |           |   |                             |   |           |  
|Total Expenses                                                |  |                             | 1,099,850 |   |                             |   | 1,179,408 |  
|                                                              |  |                             |           |   |                             |   |           |  
|Net Income (Loss) Before Tax                                  |  |                             | 726,833   |   |                             |   | (611,772  | )
|Income Tax Benefit                                            |  |                             | (48,365   | ) |                             |   |          |  
|                                                              |  |                             |           |   |                             |   |           |  
|Net Income (Loss)                                             |  | $                           | 775,198   |   |                             | $ | (611,772  | )
|                                                              |  |                             |           |   |                             |   |           |  





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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements



December 31, 2004 and 2003



CONDENSED STATEMENTS OF CASH FLOWS



|                                                                        |  |                              |            |   |                             |   |          |  
|----------------------------------------------------------------------- |  | ---------------------------- | ---------- | - | --------------------------- | - | -------- | -
|                                                                        |  | Year Ended December 31, 2004 |            |   | Year EndedDecember 31, 2003 |  
|Cash Flows From Operating Activities:                                   |  |                              |            |   |                             |   |          |  
|Net income (loss) from continuing operations                            |  | $                            | 579,063    |   |                             | $ | (484,218 | )
|Net income (loss) from discontinuing operations                         |  |                              | 196,135    |   |                             |   | (127,554 | )
|Adjustments to reconcile net income (loss) to net cash from operations: |  |                              |            |   |                             |   |          |  
|Depreciation                                                            |  |                              | 12,687     |   |                             |   | 1,462    |  
|Equity in undistributed income (loss) of subsidiary bank                |  |                              | (531,959   | ) |                             |   | 480,975  |  
|Equity in assets held for sale                                          |  |                              | (196,135   | ) |                             |   | 127,554  |  
|Increase in other assets                                                |  |                              | (110,553   | ) |                             |   | (27,997  | )
|Increase (decrease) in other liabilities                                |  |                              | 67,839     |   |                             |   | (23,145  | )
|                                                                        |  |                              |            |   |                             |   |          |  
|Net Cash Provided (Used) by Operating Activities                        |  |                              | 17,077     |   |                             |   | (52,923  | )
|                                                                        |  |                              |            |   |                             |   |          |  
|Cash Flows From Investing Activities:                                   |  |                              |            |   |                             |   |          |  
|Decrease in interest-bearing deposits                                   |  |                              | 918,993    |   |                             |   | 60,514   |  
|Purchases of furniture and equipment                                    |  |                              | (98,097    | ) |                             |   | (9,955   | )
|Capital contributed to subsidiary banks                                 |  |                              | (2,175,005 | ) |                             |   |         |  
|                                                                        |  |                              |            |   |                             |   |          |  
|Net Cash Provided (Used) in Investing Activities                        |  |                              | (1,354,109 | ) |                             |   | 50,559   |  
|                                                                        |  |                              |            |   |                             |   |          |  
|Cash Flows from Financing Activities:                                   |  |                              |            |   |                             |   |          |  
|Proceeds from issuance of common stock                                  |  |                              | 1,444,347  |   |                             |   |         |  
|Costs of stock issuance                                                 |  |                              | (77,941    | ) |                             |   |         |  
|                                                                        |  |                              |            |   |                             |   |          |  
|Net Cash Provided By Financing Activities                               |  |                              | 1,366,406  |   |                             |   |         |  
|                                                                        |  |                              |            |   |                             |   |          |  
|Net Increase (Decrease) in Cash                                         |  |                              | 29,374     |   |                             |   | (2,364   | )
|Cash at Beginning of Year                                               |  |                              | 76,398     |   |                             |   | 78,762   |  
|                                                                        |  |                              |            |   |                             |   |          |  
|Cash at End of Year                                                     |  | $                            | 105,772    |   |                             | $ | 76,398   |  
|                                                                        |  |                              |            |   |                             |   |          |  



Note 15  Financial
Instruments With Off-Balance-Sheet Risk



In the normal course of business
to meet the financing needs of its customers, BankShares is a party to financial instruments with off-balance-sheet risk. These financial instruments involve commitments to extend credit. These instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the consolidated balance sheet.



The Corporations exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit is represented by the contractual amount of those instruments. The same credit
policy is used in making commitments as is used for on-balance-sheet risk. At December 31, 2004 and 2003 outstanding commitments to extend credit were $34,773,854, and $17,435,232 respectively. Primarily, these outstanding commitments to extend
credit are variable rate.



Commitments to extend credit are agreements to lend
to a customer as long as there is no breach of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments may expire without ever being
drawn upon, therefore, the total commitment amounts do not necessarily represent future cash outlays for the Corporation.





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##### Table of Contents

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements



December 31, 2004 and 2003



Note 16  Concentrations of Credit Risk



Virtually all of MainStreets business activity is with customers located in our
primary market area. Accordingly, operating results are closely correlated with the economic trends within the region and influenced by the significant industries within the region including furniture, pre-built housing, real estate development,
agricultural, and resort and leisure services. In addition, the ultimate collectibility of the loan portfolio is susceptible to changes in the market condition of the region. The commercial portfolio is diversified, but does have three areas
classified as concentrations of credit at December 31, 2004. The areas of concentrations of credits are in loans for real estate with an outstanding balance of $11,009,692; loans for construction of buildings with an outstanding balance of
$10,507,422; and loans for construction of heavy and civil engineering buildings with an outstanding balance of $4,850,326. At December 31, 2003, there were two areas classified as concentrations of credit which were loans for real estate with an
outstanding balance of $7,836,471, and loans for construction of buildings with an outstanding balance of $3,517,369.



MainStreet has established policies related to the credit process and collateral in loan originations. Loans to purchase real and personal property are generally
collateralized by the related property with loan amounts established based on certain percentage limitations of the propertys total stated or appraised value. Credit approval is primarily a function of cash flow, collateral and the evaluation
of the creditworthiness of the individual borrower or project based on pertinent financial information and the amount to be financed.



Note 17  Fair Value of Financial Instruments



The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:



|(a.) | Short-Term Financial Instruments
|---- | --------------------------------



The carrying values of short-term financial instruments including cash and cash equivalents, federal funds sold and interest-bearing deposits in domestic
banks approximate the fair value of these instruments. These financial instruments generally expose the Corporation to limited credit risk and have no stated maturity or have an average maturity of 30-45 days and carry interest rates which
approximate market value.



|(b.) | Securities Available-for-Sale
|---- | -----------------------------



The fair value of investments is estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers.



|(c.) | Loans
|---- | -----



Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, real estate
 commercial, real estate  construction, real estate  mortgage and other consumer.



Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and nonperforming categories.



The fair value of performing loans is calculated by discounting scheduled
cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan as well as estimates for operating expenses and prepayments. The estimate of maturity is based on
managements assumptions with repayment for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions.



|(d.) | Deposits
|---- | --------



The fair value of demand, interest checking, savings and money market deposits is the amount payable on demand.





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##### Table of Contents

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements



December 31, 2004 and 2003



The fair value of fixed maturity time deposits and certificates of deposit
is estimated using the rates currently offered for deposits of similar remaining maturities and repayment characteristics.



|(e.) | Short-term Borrowings
|---- | ---------------------



The carrying amount is a reasonable estimate of fair value.



|(f.) | Commitments to Extend Credit and Standby Letters of Credit
|---- | ----------------------------------------------------------



The only amounts recorded for commitments to extend credit and standby letters of credit are the fees arising from these unrecognized financial
instruments.



The estimated fair values of financial instruments at December
31, 2004 are as follows:



|                                         |  |                |            |            |   |           
|---------------------------------------- |  | -------------- | ---------- | ---------- | - | ----------
|                                         |  | Carrying Value |            | Fair Value
|FINANCIAL ASSETS:                        |  |                |            |            |   |           
|                                         |  |               
|Cash and due from banks                  |  | $              | 1,862,473  |            | $ | 1,862,473 
|Interest-bearing deposits in other banks |  |                | 265,215    |            |   | 265,215   
|Federal funds sold                       |  |                | 2,292,000  |            |   | 2,292,002 
|Securities available-for-sale            |  |                | 3,615,619  |            |   | 4,624,348 
|Restricted equity securities             |  |                | 251,800    |            |   | 251,800   
|Loans, net of unearned income            |  |                | 89,951,795 |            |   | 89,297,574
|                                         |  |                |            |            |   |           
|Total Financial Assets                   |  | $              | 98,238,902 |            | $ | 98,593,412
|                                         |  |                |            |            |   |           
|FINANCIAL LIABILITIES:                   |  |                |            |            |   |           
|                                         |  |               
|Deposits:                                |  |                |            |            |   |           
|Non-interest bearing demand deposits     |  | $              | 8,983,120  |            | $ | 8,983,120 
|Interest checking deposits               |  |                | 4,544,443  |            |   | 4,544,443 
|Money market deposits                    |  |                | 12,023,169 |            |   | 12,023,169
|Savings deposits                         |  |                | 21,002,367 |            |   | 21,002,367
|Time deposits $100,000 and over          |  |                | 15,533,446 |            |   | 15,538,781
|Other time deposits                      |  |                | 28,351,905 |            |   | 28,333,822
|                                         |  |                |            |            |   |           
|Total Financial Liabilities              |  | $              | 90,438,450 |            | $ | 90,425,702
|                                         |  |                |            |            |   |           





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##### Table of Contents

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements



December 31, 2004 and 2003



The estimated fair values of financial instruments at December 31, 2003 are as follows:



|                                         |  |                |            |            |   |           
|---------------------------------------- |  | -------------- | ---------- | ---------- | - | ----------
|                                         |  | Carrying Value |            | Fair Value
|FINANCIAL ASSETS:                        |  |                |            |            |   |           
|                                         |  |               
|Cash and due from banks                  |  | $              | 1,472,270  |            | $ | 1,472,270 
|Interest-bearing deposits in other banks |  |                | 1,148,298  |            |   | 1,148,298 
|Federal funds sold                       |  |                | 1,434,000  |            |   | 1,434,000 
|Securities available-for-sale            |  |                | 4,624,348  |            |   | 4,624,348 
|Restricted equity securities             |  |                | 182,900    |            |   | 182,900   
|Loans, net of unearned income            |  |                | 41,584,367 |            |   | 41,400,132
|                                         |  |                |            |            |   |           
|Total Financial Assets                   |  | $              | 50,446,183 |            | $ | 50,261,948
|                                         |  |                |            |            |   |           
|FINANCIAL LIABILITIES:                   |  |                |            |            |   |           
|                                         |  |               
|Deposits:                                |  |                |            |            |   |           
|Non-interest bearing demand deposits     |  | $              | 5,290,148  |            | $ | 5,290,148 
|Interest checking deposits               |  |                | 2,544,082  |            |   | 2,544,082 
|Money market deposits                    |  |                | 10,513,952 |            |   | 10,513,952
|Savings deposits                         |  |                | 8,931,931  |            |   | 8,931,931 
|Time deposits $100,000 and over          |  |                | 5,475,546  |            |   | 5,471,026 
|Other time deposits                      |  |                | 11,824,370 |            |   | 11,806,287
|                                         |  |                |            |            |   |           
|Total Financial Liabilities              |  | $              | 44,580,029 |            | $ | 44,557,426
|                                         |  |                |            |            |   |           



Fair value estimates are made at a
specific point in time, based on relevant market information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Corporations entire holdings of a
particular financial instrument. Because no market exists for a significant portion of the Corporations financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions,
risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates. Fair value estimates are based on existing on-and-off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and
liabilities that are not considered financial instruments.



Note 18 
Contingencies and Other Matters



The Corporation currently is not involved
in any litigation or similar adverse legal or regulatory matters.



Note 19
 Subsequent Events



On January 13, 2005, MainStreet BankShares,
Inc., Smith River Community Bank, National Association (a wholly-owned bank subsidiary of MainStreet), and Argentum Capital Management, LLC entered into an Agreement pursuant to which MainStreet will sell, and Argentum or its assigns will purchase,
all of the outstanding shares of the common stock of Smith River Bank for $6,500,000.



The transaction is expected to close on or before March 20, 2005, but may terminate earlier by either MainStreet or Argentum under certain circumstances, including by MainStreet if Argentum fails to raise sufficient funds by March 7, 2005.





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##### Table of Contents

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements



December 31, 2004 and 2003



Consummation of the transaction is subject to a number of conditions, including the
completion of the parties due diligence and prior required regulatory approvals, if any. The parties have completed substantial due diligence and believe that no prior regulatory approvals are required.



As part of the transaction, MainSteet will agree to acquire specified loans from Smith River
Bank under certain conditions after the closing. In the event Smith River Bank determines it must charge off one of the specified loans, (after pursuing normal collection efforts), MainStreet will acquire all of Banks right, title and interest
in the charged off loan. MainStreets obligation to purchase such loans will not exceed the principal amount of the loans at the time of purchase plus Smith River Banks out of pocket collection expenses. The outstanding principal balance
of such loans presently is $855,000. Also as part of the transaction, Smith River Bank will agree to outsource certain administrative and related activities to MainStreet for a period of 3 years following the closing for an annual fee of $505,000.



Due to this subsequent event, the assets and liabilities of Smith River Bank
are shown as assets and liabilities held for sale on the consolidated balance sheet. Income (loss) from Smith River Bank is shown as income (loss) from discontinuing operations on the consolidated income statement. Following is a condensed breakdown
of the specific categories.



Smith River Community Bank, N.A.

Condensed Balance Sheets



|                                                        |  |                   |            |   |                   |   |            |  
|------------------------------------------------------- |  | ----------------- | ---------- | - | ----------------- | - | ---------- | -
|                                                        |  | December 31, 2004 |            |   | December 31, 2003 |  
|Assets                                                  |  |                   |            |   |                   |   |            |  
|                                                        |  |                  
|Cash and due from banks                                 |  | $                 | 1,337,869  |   |                   | $ | 2,420,232  |  
|Interest-bearing deposits in other banks                |  |                   | 76,148     |   |                   |   | 32,848     |  
|Federal funds sold                                      |  |                   | 1,239,000  |   |                   |   | 1,962,000  |  
|Securities available-for-sale and restricted securities |  |                   | 6,236,419  |   |                   |   | 7,836,686  |  
|Gross loans                                             |  |                   | 50,283,233 |   |                   |   | 42,295,326 |  
|Unearned deferred fees and costs, net                   |  |                   | 163,312    |   |                   |   | 111,347    |  
|                                                        |  |                   |            |   |                   |   |            |  
|Loans, net of unearned deferred fees and costs, net     |  |                   | 50,446,545 |   |                   |   | 42,406,673 |  
|Allowance for loan losses                               |  |                   | (645,115   | ) |                   |   | (510,775   | )
|                                                        |  |                   |            |   |                   |   |            |  
|Net loans                                               |  |                   | 49,801,430 |   |                   |   | 41,895,898 |  
|Other Assets                                            |  |                   | 791,252    |   |                   |   | 798,856    |  
|                                                        |  |                   |            |   |                   |   |            |  
|Total Assets                                            |  | $                 | 59,482,118 |   |                   | $ | 54,946,520 |  
|                                                        |  |                   |            |   |                   |   |            |  
|Liabilities and Shareholders Equity                    |  |                   |            |   |                   |   |            |  
|                                                        |  |                  
|Deposits                                                |  | $                 | 54,834,754 |   |                   | $ | 50,471,604 |  
|Accrued interest payable and other liabilities          |  |                   | 169,861    |   |                   |   | 159,652    |  
|                                                        |  |                   |            |   |                   |   |            |  
|Total Liabilities                                       |  |                   | 55,004,615 |   |                   |   | 50,631,256 |  
|                                                        |  |                  
|Shareholders Equity                                    |  |                   |            |   |                   |   |            |  
|                                                        |  |                  
|Common shareholders equity                             |  |                   | 4,477,503  |   |                   |   | 4,315,264  |  
|                                                        |  |                   |            |   |                   |   |            |  
|Total Liabilities and Shareholders Equity              |  | $                 | 59,482,118 |   |                   | $ | 54,946,520 |  
|                                                        |  |                   |            |   |                   |   |            |  



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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements



December 31, 2004 and 2003



Smith River Community Bank, N.A.

Condensed Income (Loss) Statements



|                                                    |  |                             |           |                             |   |           |  
|--------------------------------------------------- |  | --------------------------- | --------- | --------------------------- | - | --------- | -
|                                                    |  | Year EndedDecember 31, 2004 |           | Year EndedDecember 31, 2003 |  
|Interest Income                                     |  | $                           | 3,152,753 |                             | $ | 2,613,108 |  
|Interest Expense                                    |  |                             | 1,059,290 |                             |   | 1,033,992 |  
|                                                    |  |                             |           |                             |   |           |  
|Net Interest Income                                 |  |                             | 2,093,463 |                             |   | 1,579,116 |  
|Provision for loan losses                           |  |                             | 522,300   |                             |   | 240,601   |  
|                                                    |  |                             |           |                             |   |           |  
|Net Interest Income After Provision for Loan Losses |  |                             | 1,571,163 |                             |   | 1,338,515 |  
|Noninterest Income                                  |  |                             | 483,949   |                             |   | 333,849   |  
|Noninterest Expense                                 |  |                             | 1,858,977 |                             |   | 1,799,918 |  
|                                                    |  |                             |           |                             |   |           |  
|Net Income (Loss)                                   |  | $                           | 196,135   |                             | $ | (127,554  | )
|                                                    |  |                             |           |                             |   |           |  





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##### Table of Contents

Item 8. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure



None



Item 8A. Controls and Procedures



MainStreets principal executive officer and principal financial officer have reviewed MainStreets disclosure controls and procedures (as defined in 240.13a-15(e) and 240.15d-15(e)) as of the end of the period covered by this
annual report and based on their evaluation believe that MainStreets disclosure controls and procedures are effective.



Item 8B. Other Information



None



PART III



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



Directors of the Registrant



MainStreets Board of Directors are divided into three classes that serve staggered three-year terms. The members of one class are elected at each annual meeting of
shareholders and hold office until the third annual meeting following their election or until successors are elected and qualified. The term of the Class A Directors expires in 2005, the term of the Class B Directors expires in 2006, and the term of
the Class C Directors expires in 2007. The following tables set forth material information about MainStreets current executive officers and directors.



|                                      |  |                                                                
|------------------------------------- |  | ---------------------------------------------------------------
|Name (Age)                            |  | Offices and Positions Held                                     
|Class A Directors  Term Expires 2005
|                                      | 
|Larry A. Heaton (47)                  |  | Director since October 2002                                    
|                                      |  | President/CEO of Franklin Community Bank, N.A. since           
|                                      |  | October 2002                                                   
|                                      | 
|Morton W. Lester (71)                 |  | Director since January 1999                                    
|                                      | 
|Cecil R. McCullar (68)                |  | Director since January 1999                                    
|                                      |  | President/CEO of MainStreet BankShares, Inc. since January 1999
|                                      |  | President/CEO of Smith River Community Bank, N.A. since        
|                                      |  | January 1999                                                   
|                                      | 
|Michael A. Turner (51)                |  | Director since December 2002                                   
|                                     
|Class B Directors  Term Expires 2006
|                                      | 
|Jesse D. Cahill, Sr. (74)             |  | Director since January 1999                                    
|                                      | 
|Joseph F. Clark (42)                  |  | Director since July 2001                                       
|                                      | 
|Roxann B. Dillon (71)                 |  | Director since January 1999                                    
|                                      | 
|Joe C. Philpott (73)                  |  | Director since January 1999                                    
|                                      | 
|Joel R. Shepherd (41)                 |  | Director since December 2002                                   





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##### Table of Contents

Class C Directors  Terms Expires 2007



| |  |                        |  |                             
| |  | ---------------------- |  | ----------------------------
| |  | Charles L. Dalton (41) |  | Director since July 2001    
| |  |                       
| |  | John M. Deekens (57)   |  | Director since July 2001    
| |  |                       
| |  | Danny M. Perdue (59)   |  | Director since December 2002
| |  |                       
| |  | Milford A. Weaver (79) |  | Director since July 1999    



Jesse D. Cahill, Sr. has been a real
estate broker and general contractor since 1959. He is a director of Caho, Inc., Rocuda Finance, Rocuda Mortgage and Rocuda Fast Cash. He owns 50% of Caho, Inc. and 100% of the other three companies. Mr. Cahill is also a director of Smith River
Community Bank, N.A. It is anticipated that Mr. Cahill will resign as a director of Smith River Community Bank, N.A. upon the consummation of the proposed sale of the Bank.



Joseph F. Clark is President of Clark Brothers Company, Inc., in Stuart, Virginia, of which he is a partial owner. Mr. Clark is also a
manager and partial owner of CBC, LLC, a management business. He is a manager and partial owner of Highland Park, LLC and Fairview Group, LLC.



Charles L. Dalton is Vice President, General Manager and partial owner of Dalton Insurance Agency in Stuart, Virginia.



John M. Deekens is currently the Quality Improvement Manager for Hooker Furniture Corporation
in Martinsville, Virginia since March 1999. Prior to that, he was plant manager for Triwood, Inc. in Ridgeway, Virginia from December 1994 until March 1999 when the business closed.



Roxann B. Dillon is a principal stockholder in Dillon Insurance Agency. She is a retired school teacher.



Larry A. Heaton is President, CEO and a director of Franklin Community Bank, N.A. From
October 2000 until September 2002, Mr. Heaton was a consultant for MainStreet BankShares, Inc. working on the study, application and organization of Franklin Community Bank, N.A. Prior to that, he was Senior Vice President/Regional Retail Banking
Manager with BB&T from July 1999 through April 2000. Prior to that position, he served as President and CEO and Director of the Bank of Ferrum from June 1991 to July 1999. He served as Senior Commercial Loan Officer at Piedmont Trust Bank
(affiliate bank of Bank of Ferrum) from 1983 to 1991, and prior to that, in various capacities with Piedmont Trust Bank. Mr. Heaton serves as a director of the Franklin County YMCA and the United Way of Franklin County. He also serves on the Board
of Trustees for Ferrum College. He is also a member of the Rocky Mount Rotary Club.



Morton W. Lester is President of The Lester Corporation, a real estate investment and property management company, and Vice President of Motor Imports, Inc. Currently, Mr. Lester serves on the Blue Ridge Airport Authority, and has served as
its chairman for many years. Mr. Lester is also a director of Smith River Community Bank, N.A. It is anticipated that Mr. Lester will resign as a director of Smith River Community Bank, N.A. upon consummation of the proposed sale of the Bank.



Cecil R. McCullar has worked for several banks. Most recently he was the
President and CEO of First American FSB, a $450 million thrift which is a wholly owned subsidiary of First American Corporation from 1995 to 1998, and Charter Federal Savings Bank, which was a $750 million thrift with 28 branches throughout
southwest Virginia and Knoxville, Tennessee from 1993 to 1995. He is also President, CEO, and a director of Smith River Community Bank, N.A. It is anticipated that Mr. McCullar will resign his positions with Smith River Community Bank, N.A. upon the
consummation of the proposed sale of the Bank.



Danny M. Perdue is currently
the owner of the Franklin, Panda and 604 Minute Markets, Redwood Minute Market, Perdue Properties, Inc. and the Franklin Shopping Center, all located in Franklin County. Mr. Perdue is also a director of Franklin Community Bank, N.A.



Joe C. Philpott, retired, worked for Bassett Furniture Industries for 42 years, retiring as
Executive Vice President of Manufacturing and a director.



Joel R. Shepherd is
the Owner and Manager of Virginia Home Furnishings, Inc., Blue Ridge Antique Center, Inc., 220 Self Storage, Inc., Shepherd properties, LLC and Orient Bay, LLC. Prior to developing his current businesses, Mr. Shepherd served from 1986 to 1993 as a
Vice President and Portfolio Manager in the Funds Management Division of Dominion



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##### Table of Contents

Bankshares, Inc. (acquired by First Union). Mr. Shepherd is also a director of Franklin Community Bank, N.A.



Michael A. Turner has served as the Owner and President of Turners Building, Inc.
from 1976 to present. He also serves as a partner in T & J Property Associates and TNT Associates, LLC. In addition, Mr. Turner was a partner in Deep River Investments (developer of real estate) from 1989 to 2003. He is also a director of
Franklin Community Bank, N.A.



Milford A. Weaver is presently co-founder and
partial owner of Virginia Blower Company in Collinsville and Galax, Virginia. He is also a director and partial owner of Collinsville Land Corporation.



There are no family relationships that need to be reported, nor are any directors serving as directors on boards of other reporting companies.



Executive Officers Not a Director



|                     |  |                            |  |                            
|-------------------- |  | -------------------------- |  | ---------------------------
|Name (Age)           |  | Offices and Positions Held |  | First Elected As an Officer
|Brenda H. Smith (45) |  | Executive Vice President   |  | 8/99                       
|                     |  | Chief Financial Officer    |  |                            
|                     |  | Corporate Secretary        |  |                            



Brenda H. Smith joined the Corporation
in August 1999. From 1995 to 1999, she was Vice President, Corporate Controller and Assistant Secretary of MainStreet Financial Corporation, a $2 billion multi-bank holding company headquartered in Martinsville, Virginia. From 1988 to 1995, she was
an Accounting Officer for Piedmont Trust Bank, a subsidiary of MainStreet Financial Corporation.



MainStreets Board of Directors has determined that MainStreet does not have a financial expert serving on its Audit Committee. MainStreet is a small and relatively young corporation located outside a major
metropolitan area. MainStreet has not been able to attract a director who qualifies as a financial expert (as defined in the Sarbanes Oxley Act) to serve on the Audit Committee.



MainStreet has adopted a Code of Ethics for all of its employees including its Chief
Executive and Chief Accounting Officers. A copy of the Code of Ethics may be obtained by writing to Brenda H. Smith, Executive Vice President, 730 East Church Street, Suite 30, Martinsville, Virginia, 24112.



Item 10. Executive Compensation



The information
required by Item 10 of Form 10-KSB appears on pages 13 through 16 of the Corporations 2005 Proxy Statement and is incorporated herein by reference.



Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters



The information required by Item 11 of Form 10-KSB appears on pages 9 through 10 of the Corporations 2005 Proxy Statement and is incorporated herein by reference.



Item 12. Certain Relationships and Related Transactions



MainStreets executive officers and directors, and other corporations, business organizations, and persons with which some of MainStreets executive officers and directors are associated have banking relationships with the
subsidiary banks. All such transactions were made in the ordinary course of business on substantially the same terms, including interest rates and security for loans, as those prevailing at the time in comparable transactions with others and did not
involve more than the normal risk of collectibility or present other unfavorable features. Information related to loans to MainStreets executive officers and directors and their related interests can be found in Part II, Item 7, Note 4 of this
document. Deposit information related to MainStreets executive officers and directors and their related interests can be found in Part II, Item 7, Note 6 of this document.



47



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##### Table of Contents

Franklin Community Bank, N.A., a subsidiary of MainStreet BankShares, Inc., leases its main office in Rocky Mount,
Virginia and its Westlake office. The owners of the buildings are directors of Franklin Bank.



Item 13. Exhibits



a) See Index
to Exhibits.



Item 14. Principal Accountant Fees and Services



The information required by Item 14 of Form 10-KSB appears on pages 17 through 19 of the Corporations 2005 Proxy Statement and is incorporated herein by reference.



48



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##### Table of Contents

SIGNATURES



In accordance with section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.



MAINSTREET BANKSHARES, INC.



|    |  |                                                         
|--- |  | --------------------------------------------------------
|By: |  | /s/ Cecil R. McCullar                                   
|    |  | Cecil R. McCullar, President and Chief Executive Officer



In accordance with the
Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



|                        |  |                                                                                                    |      |        
|----------------------- |  | -------------------------------------------------------------------------------------------------- | ---- | -------
|NAME                    |  | TITLE                                                                                              |      | DATE   
|/s/ Cecil R. McCullar   |  | President and Chief Executive Officer,
Director, President/CEO of Smith River Community Bank, N.A. |      | 3/21/05
|Cecil R. McCullar       |  |                                                                                                    | Date
|                        |  |                                                                                                    |     
|                        |  |                                                                                                   
|/s/ Brenda H. Smith     |  | Executive Vice President Chief Financial
Officer Corporate Secretary                               |      | 3/21/05
|Brenda H. Smith         |  |                                                                                                    | Date
|                        |  |                                                                                                    |     
|                        |  |                                                                                                   
|/s/ Jesse D. Cahill, Sr |  | Director                                                                                           |      | 3/21/05
|Jesse D. Cahill, Sr.    |  |                                                                                                    |      | Date   
|                        |  |                                                                                                   
|/s/ Joseph F. Clark     |  | Director                                                                                           |      | 3/21/05
|Joseph F. Clark         |  |                                                                                                    |      | Date   
|                        |  |                                                                                                   
|/s/ Charles L. Dalton   |  | Director                                                                                           |      | 3/21/05
|Charles L. Dalton       |  |                                                                                                    |      | Date   
|                        |  |                                                                                                   
|/s/ John M. Deekens     |  | Director                                                                                           |      | 3/21/05
|John M. Deekens         |  |                                                                                                    |      | Date   
|                        |  |                                                                                                   
|/s/ Roxann B. Dillon    |  | Director                                                                                           |      | 3/21/05
|Roxann B. Dillon        |  |                                                                                                    |      | Date   
|                        |  |                                                                                                   
|/s/ Larry A. Heaton     |  | Director President/CEO of Franklin Community Bank, N.A.                                            |      | 3/21/05
|Larry A. Heaton         |  |                                                                                                    | Date
|                        |  |                                                                                                    |     
|                        |  |                                                                                                   
|/s/ Morton W. Lester    |  | Chairman of the Board                                                                              |      | 3/21/05
|Morton W. Lester        |  |                                                                                                    |      | Date   
|                        |  |                                                                                                   
|/s/ Danny M. Perdue     |  | Director                                                                                           |      | 3/21/05
|Danny M. Perdue         |  |                                                                                                    |      | Date   
|                        |  |                                                                                                   
|/s/ Joe C. Philpott     |  | Director                                                                                           |      | 3/21/05
|Joe C. Philpott         |  |                                                                                                    |      | Date   
|                        |  |                                                                                                   
|/s/ Joel R. Shepherd    |  | Director                                                                                           |      | 3/21/05
|Joel R. Shepherd        |  |                                                                                                    |      | Date   



49



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##### Table of Contents

|                      |  |          |  |        
|--------------------- |  | -------- |  | -------
|/s/ Michael A. Turner |  | Director |  | 3/21/05
|Michael A. Turner     |  |          |  | Date   
|                      |  |         
|/s/ Milford A. Weaver |  | Director |  | 3/21/05
|Milford A. Weaver     |  |          |  | Date   



50



---

##### Table of Contents

Index to Exhibits



|         |  |                                                                                                                                                                                                                                                                                           
|-------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number   |  | Description of Exhibit                                                                                                                                                                                                                                                                    
|3(i)**   |  | Restated Articles of Incorporation of the Corporation, dated March 6, 2001.                                                                                                                                                                                                               
|         | 
|3(ii)    |  | By-laws of the Corporation, dated August 5, 1999 amended February 20, 2001 and amended October 16, 2002 and amended September 17, 2003 filed on a Form 8-K on September 19, 2003 and herein
incorporated by reference.                                                                    
|         | 
|4.1      |  | Warrant Plan and Certificates as adopted July 27, 1999 and amended August 26, 1999 and amended December 19, 2000 incorporated by reference to the Corporations Quarterly Form 10-QSB for
quarter ended September 30, 1999, filed December 20, 1999, and herein incorporated by reference.
|         | 
|4.2      |  | Provision in Registrants Articles of Incorporation and Bylaws defining the Rights of Holders of the Registrants common stock (included in Exhibits 3.1 and 3.2,
respectively).                                                                                                          
|         | 
|4.3*     |  | Form of Shares Subscription Agreement.                                                                                                                                                                                                                                                    
|         | 
|4.3.1*** |  | Form of Shares Subscription Agreement.                                                                                                                                                                                                                                                    
|         | 
|4.4*     |  | Form of Units Subscription Agreement.                                                                                                                                                                                                                                                     
|         | 
|4.5      |  | 2004 Key Employee Stock option Plan filed March 16, 2005 on Form S-8 and herein incorporated by reference.                                                                                                                                                                                
|         | 
|10.1     |  | Stock Purchase Agreement By and Among Argentum Capital Management, LLC, and Assigns; MainStreet BankShares, Inc., and Smith River Community Bank, N.A. dated 1/13/05 filed on Form 8-K on
January 14, 2005, and herein incorporated by reference.                                         
|         | 
|14       |  | Code of Ethics.                                                                                                                                                                                                                                                                           
|         | 
|21       |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                           
|         | 
|31.1     |  | Certification of President and Chief Executive Officer Pursuant to Rule 13a-15(e) under the Securities and Exchange Act of 1934.                                                                                                                                                          
|         | 
|31.2     |  | Certification of Executive Vice President, Chief Financial Officer, and Corporate Secretary Pursuant to Rule 13a-15(e) under the Securities and Exchange Act of 1934.                                                                                                                     
|         | 
|32       |  | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 USC 1350).                                                                                                                                                                                                    

---

|* | (Incorporated by reference to Registration statement #333-86993 on Form SB-2 filed September 13, 1999.)
|- | -------------------------------------------------------------------------------------------------------

|** | (Incorporated by reference to the Corporations Annual Report on Form 10-KSB filed March 15, 2001.)
|-- | ---------------------------------------------------------------------------------------------------

|*** | (Incorporated by reference to Registration Statement # 333-63424 on Form SB-2 filed June 20, 2001.)
|--- | ---------------------------------------------------------------------------------------------------



51