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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, 2006



| ̈ | TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES AND EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the transition period from  to

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

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



|                    |  |                                          
|------------------- |  | -----------------------------------------
|Title of each class |  | Name of each exchange on which registered
|None                |  | None                                     

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

Common Stock, No Par Value

(Title
of class)



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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 there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B 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

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

State issuers revenues for its most recent fiscal year $14,509,302.

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. $21,428,844.50 based on $16.75 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 1,763,853 shares outstanding as of January 31, 2007.

Documents incorporated by reference. Portions of the Corporations 2007 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                                                                                                                   |  | 1-7  
|        |  |                                                                                                                                          
|Item 2  |  | Description of Property                                                                                                                   |  | 7    
|        |  |                                                                                                                                          
|Item 3  |  | Legal Proceedings                                                                                                                         |  | 8    
|        |  |                                                                                                                                          
|Item 4  |  | Submission of Matters to a Vote of Security Holders                                                                                       |  | 8    
|        |  |                                                                                                                                          
|        |  | PART II                                                                                                                                   |  |      
|        |  |                                                                                                                                          
|Item 5  |  | Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities                            |  | 8-9  
|        |  |                                                                                                                                          
|Item 6  |  | Managements Discussion and Analysis                                                                                                      |  | 9-17 
|        |  |                                                                                                                                          
|Item 7  |  | Financial Statements                                                                                                                      |  | 18-43
|        |  |                                                                                                                                          
|Item 8  |  | Changes In and Disagreements with Accountants on Accounting and Financial Disclosure                                                      |  | 44   
|        |  |                                                                                                                                          
|Item 8A |  | Controls and Procedures                                                                                                                   |  | 44   
|        |  |                                                                                                                                          
|Item 8B |  | Other Information                                                                                                                         |  | 44   
|        |  |                                                                                                                                          
|        |  | PART III                                                                                                                                  |  |      
|        |  |                                                                                                                                          
|Item 9  |  | Directors, Executive Officers, Promoters and Control Persons, and Corporate Governance; Compliance with Section 16(a) of the Exchange Act |  | 44-46
|        |  |                                                                                                                                          
|Item 10 |  | Executive Compensation                                                                                                                    |  | 46   
|        |  |                                                                                                                                          
|Item 11 |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                                            |  | 46   
|        |  |                                                                                                                                          
|Item 12 |  | Certain Relationships and Related Transactions, and Director Independence                                                                 |  | 46   
|        |  |                                                                                                                                          
|Item 13 |  | Exhibits                                                                                                                                  |  | 46   
|        |  |                                                                                                                                          
|Item 14 |  | Principal Accountant Fees and Services                                                                                                    |  | 46   



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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 also had a private placement offering which raised $1,807,101 that began on September 20, 2004 and terminated January 31, 2005. These shares were registered with the Securities and Exchange Commission (SEC) effective
December 8, 2006. MainStreet has one wholly owned subsidiary bank, Franklin Community Bank, N.A. (Franklin Bank). MainStreet also has a wholly owned real estate company, MainStreet RealEstate, Inc.

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 because it allows expansion and diversification of business activities through newly formed subsidiaries or through acquisitions. MainStreets business is conducted through its
subsidiary bank. MainStreet also provides outsourced servicing to River Bancorp, Inc. (holding company for Smith River Community Bank, N.A. and 1stMedallion Mortgage Corporation), for an annual fee.

Franklin Community Bank, N.A.

Franklin Bank is a nationally chartered commercial bank and member of the Federal Reserve 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. It is anticipated that Franklin Bank will open an additional branch in 2007 in the Union Hall area of Franklin County. Franklin Banks primary service area is Franklin County, Town of Rocky Mount and surrounding areas.

MainStreet RealEstate, Inc.

MainStreet RealEstate,
Inc. was formed effective February 8, 2007 as a subsidiary of MainStreet. It was formed for the sole purpose of owning the real estate of the Corporation.

Smith River Community Bank, N.A.

Smith River Community Bank, N.A. (Smith River) opened on July 24, 2000 as a nationally
chartered commercial bank and member of the Federal Reserve, and was a subsidiary of MainStreet.

On January 13, 2005, MainStreet, Smith River and
Argentum Capital Management, LLC, (Argentum), entered into an Agreement pursuant to which MainStreet sold, and investors retained by Argentum for this purpose purchased, all of the outstanding shares of the common stock of Smith River
Bank for $6,500,000. The transaction was consummated on March 23, 2005. As part of the transaction, MainStreet agreed 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 at December 31, 2006 and 2005 was $152,647 and
$641,087, respectively. MainStreet has paid Smith River $201,526 in 2006 to indemnify them for two such loans. The reserve against such loans was $48,474 and $250,000 at December 31, 2006 and 2005, respectively. Also as part of the transaction,
Smith River Bank agreed to outsource certain administrative and related activities to MainStreet for a period of three years following the closing for an annual fee of $505,000.



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##### Table of Contents

Competition

Franklin
Bank experiences 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. Franklin Bank has 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. Also, in February 2007 we implemented branch capture, a process by which checks are processed by tellers rather than item processing, which will allow for better efficiencies along with all day banking. We will also receive and send our
cash letters electronically.

Employees

The total
number of full-time equivalent persons employed by MainStreet and its wholly owned bank subsidiary as of December 31, 2006 was 48.5. 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



|                                           |  |                 |             |   |          |   |             |  |      |                 |  |   |             |   |             |   |           |  |      |  
|------------------------------------------ |  | --------------- | ----------- | - | -------- | - | ----------- |  | ---- | --------------- |  | - | ----------- | - | ----------- | - | --------- |  | ---- | -
|                                           |  | 2006            |             |   | 2005     |  
|                                           |  | Average Balance |             |   | Interest |   | Yield/ Rate |  |      | Average Balance |  |   | Interest    |   | Yield/ Rate |  
|                                           |  |                 |             |   |          |  
|Loans, net of unearned                     |  | $               | 154,369,148 |   |          | $ | 12,533,784  |  | 8.12 | %               |  | $ | 120,396,058 |   |             | $ | 8,496,725 |  | 7.06 | %
|Securities available-for-sale              |  |                 | 3,992,197   |   |          |   | 162,011     |  | 4.37 |                 |  |   | 2,686,752   |   |             |   | 96,218    |  | 3.58 |  
|Restricted equity securities               |  |                 | 1,243,767   |   |          |   | 72,153      |  | 5.80 |                 |  |   | 804,398     |   |             |   | 38,696    |  | 4.81 |  
|Interest-bearing deposits in banks         |  |                 | 243,801     |   |          |   | 12,263      |  | 5.03 |                 |  |   | 217,555     |   |             |   | 5,129     |  | 2.36 |  
|Federal funds sold                         |  |                 | 8,935,636   |   |          |   | 445,851     |  | 4.99 |                 |  |   | 4,156,068   |   |             |   | 139,144   |  | 3.35 |  
|                                           |  |                 |             |   |          |   |             |  |      |                 |  |   |             |   |             |   |           |  |      |  
|Total Interest Earning Assets              |  |                 | 168,784,549 |   |          |   | 13,226,062  |  | 7.84 | %               |  |   | 128,260,831 |   |             |   | 8,775,912 |  | 6.84 | %
|Cash and due from banks                    |  |                 | 2,860,894   |   |          |   |             |  |      |                 |  |   | 2,633,035   |   |             |   |           |  |      |  
|Other assets                               |  |                 | 2,558,828   |   |          |   |             |  |      |                 |  |   | 1,940,916   |   |             |   |           |  |      |  
|Allowance for loan losses                  |  |                 | (1,869,998  | ) |          |   |             |  |      |                 |  |   | (1,475,410  | ) |             |   |           |  |      |  
|Assets held for sale                       |  |                 |            |   |          |   |             |  |      |                 |  |   | 13,731,636  |   |             |   |           |  |      |  
|                                           |  |                 |             |   |          |   |             |  |      |                 |  |   |             |   |             |   |           |  |      |  
|Total Assets                               |  | $               | 172,334,273 |   |          |   |             |  |      |                 |  | $ | 145,091,008 |   |             |   |           |  |      |  
|                                           |  |                 |             |   |          |   |             |  |      |                 |  |   |             |   |             |   |           |  |      |  
|Interest checking deposits                 |  | $               | 8,167,352   |   |          | $ | 242,205     |  | 2.97 | %               |  | $ | 6,832,565   |   |             | $ | 105,248   |  | 1.54 | %
|Money market deposits                      |  |                 | 9,824,834   |   |          |   | 363,423     |  | 3.70 |                 |  |   | 10,489,281  |   |             |   | 198,387   |  | 1.89 |  
|Savings deposits                           |  |                 | 14,555,770  |   |          |   | 297,509     |  | 2.04 |                 |  |   | 20,018,301  |   |             |   | 395,035   |  | 1.97 |  
|Time deposits $100,000 and over            |  |                 | 37,660,618  |   |          |   | 1,776,864   |  | 4.72 |                 |  |   | 22,677,554  |   |             |   | 809,269   |  | 3.57 |  
|Other time deposits                        |  |                 | 55,965,417  |   |          |   | 2,543,067   |  | 4.54 |                 |  |   | 37,442,668  |   |             |   | 1,267,906 |  | 3.39 |  
|Federal funds purchased                    |  |                 | 43,090      |   |          |   | 2,466       |  | 5.72 |                 |  |   | 285,178     |   |             |   | 9,715     |  | 3.41 |  
|Short-term borrowings                      |  |                 | 9,109,589   |   |          |   | 486,548     |  | 5.34 |                 |  |   | 1,095,890   |   |             |   | 33,081    |  | 3.02 |  
|Long-term borrowings                       |  |                 | 3,780,822   |   |          |   | 158,772     |  | 4.20 |                 |  |   | 6,219,178   |   |             |   | 198,885   |  | 3.20 |  
|                                           |  |                 |             |   |          |   |             |  |      |                 |  |   |             |   |             |   |           |  |      |  
|Total interest-bearing liabilities         |  |                 | 139,107,492 |   |          |   | 5,870,854   |  | 4.22 | %               |  |   | 105,060,615 |   |             |   | 3,017,526 |  | 2.87 | %
|Demand deposits                            |  |                 | 14,501,149  |   |          |   |             |  |      |                 |  |   | 12,161,430  |   |             |   |           |  |      |  
|Other liabilities                          |  |                 | 1,013,595   |   |          |   |             |  |      |                 |  |   | 927,823     |   |             |   |           |  |      |  
|Liabilities held for sale                  |  |                 |            |   |          |   |             |  |      |                 |  |   | 12,698,731  |   |             |   |           |  |      |  
|                                           |  |                 |             |   |          |   |             |  |      |                 |  |   |             |   |             |   |           |  |      |  
|Total Liabilities                          |  |                 | 154,622,236 |   |          |   |             |  |      |                 |  |   | 130,848,599 |   |             |   |           |  |      |  
|Shareholders Equity                       |  |                 | 17,712,037  |   |          |   |             |  |      |                 |  |   | 14,242,409  |   |             |   |           |  |      |  
|                                           |  |                 |             |   |          |   |             |  |      |                 |  |   |             |   |             |   |           |  |      |  
|Total Liabilities and Shareholders Equity |  | $               | 172,334,273 |   |          |   |             |  |      |                 |  | $ | 145,091,008 |   |             |   |           |  |      |  
|                                           |  |                 |             |   |          |   |             |  |      |                 |  |   |             |   |             |   |           |  |      |  
|Net Interest Earnings                      |  |                 |             |   |          | $ | 7,355,208   |  | 3.62 | %               |  |   |             |   |             | $ | 5,758,386 |  | 3.97 | %
|                                           |  |                 |             |   |          |   |             |  |      |                 |  |   |             |   |             |   |           |  |      |  
|Net Yield on Interest Earning Assets       |  |                 |             |   |          |   |             |  | 4.37 | %               |  |   |             |   |             |   |           |  | 4.49 | %
|                                           |  |                 |             |   |          |   |             |  |      |                 |  |   |             |   |             |   |           |  |      |  

Loan fees, net of costs, are included in total interest income. Gross loan fee income totaled $586,808 and
$635,837 as of December 31, 2006 and 2005, respectively. The average balance of nonaccrual assets is included in the calculation of asset yields. The yield is calculated based on the tax equivalent yield for tax exempt interest on municipal
securities.



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##### Table of Contents

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.



|                                          |  |                                                            |           |   |                                                            |   |                         |  |   |               |   |  |             |           |   |                         |   |         |   |  |   |           |  
|----------------------------------------- |  | ---------------------------------------------------------- | --------- | - | ---------------------------------------------------------- | - | ----------------------- |  | - | ------------- | - |  | ----------- | --------- | - | ----------------------- | - | ------- | - |  | - | --------- | -
|                                          |  | 2006 Compared to 2005 Increase (Decrease) Due to Change In |           |   | 2005 Compared to 2004 Increase (Decrease) Due to Change In |  
|                                          |  | AverageVolume                                              |           |   | AverageRate                                                |   | TotalIncrease(Decrease) |  |   | AverageVolume |   |  | AverageRate |           |   | TotalIncrease(Decrease) |  
|Interest Income:                          |  |                                                            |           |   |                                                            |   |                         |  |   |               |   |  |             |           |   |                         |   |         |   |  |   |           |  
|Loans, net of unearned                    |  | $                                                          | 2,632,901 |   |                                                            | $ | 1,404,158               |  | $ | 4,037,059     |   |  | $           | 3,746,302 |   |                         | $ | 835,412 |   |  | $ | 4,581,714 |  
|Securities available-for-sale             |  |                                                            | 51,638    |   |                                                            |   | 14,155                  |  |   | 65,793        |   |  |             | (7,040    | ) |                         |   | 7,262   |   |  |   | 222       |  
|Restricted equity securities              |  |                                                            | 24,297    |   |                                                            |   | 9,160                   |  |   | 33,457        |   |  |             | 26,248    |   |                         |   | (352    | ) |  |   | 25,896    |  
|Interest-bearing deposits in banks        |  |                                                            | 686       |   |                                                            |   | 6,448                   |  |   | 7,134         |   |  |             | 150       |   |                         |   | 2,280   |   |  |   | 2,430     |  
|Federal funds sold                        |  |                                                            | 215,027   |   |                                                            |   | 91,680                  |  |   | 306,707       |   |  |             | (20,179   | ) |                         |   | 83,340  |   |  |   | 63,161    |  
|                                          |  |                                                            |           |   |                                                            |   |                         |  |   |               |   |  |             |           |   |                         |   |         |   |  |   |           |  
|Total Interest Income                     |  | $                                                          | 2,924,549 |   |                                                            | $ | 1,525,601               |  | $ | 4,450,150     |   |  | $           | 3,745,481 |   |                         | $ | 927,942 |   |  | $ | 4,673,423 |  
|                                          |  |                                                            |           |   |                                                            |  
|Interest Expense:                         |  |                                                            |           |   |                                                            |   |                         |  |   |               |   |  |             |           |   |                         |   |         |   |  |   |           |  
|Interest checking deposits                |  | $                                                          | 23,877    |   |                                                            | $ | 113,080                 |  | $ | 136,957       |   |  | $           | 50,999    |   |                         | $ | (608    | ) |  | $ | 50,391    |  
|Money market deposits                     |  |                                                            | (13,313   | ) |                                                            |   | 178,349                 |  |   | 165,036       |   |  |             | (8,978    | ) |                         |   | 340     |   |  |   | (8,638    | )
|Savings deposits                          |  |                                                            | (111,204  | ) |                                                            |   | 13,678                  |  |   | (97,526       | ) |  |             | 108,487   |   |                         |   | (663    | ) |  |   | 107,824   |  
|Certificates of deposit $100,000 and over |  |                                                            | 650,467   |   |                                                            |   | 317,128                 |  |   | 967,595       |   |  |             | 370,489   |   |                         |   | 129,073 |   |  |   | 499,562   |  
|Other time deposits                       |  |                                                            | 754,035   |   |                                                            |   | 521,126                 |  |   | 1,275,161     |   |  |             | 507,997   |   |                         |   | 194,002 |   |  |   | 701,999   |  
|Federal funds purchased                   |  |                                                            | (11,361   | ) |                                                            |   | 4,112                   |  |   | (7,249        | ) |  |             | 359       |   |                         |   | 6,166   |   |  |   | 6,525     |  
|Short-term borrowings                     |  |                                                            | 410,299   |   |                                                            |   | 43,168                  |  |   | 453,467       |   |  |             | 33,081    |   |                         |   |        |   |  |   | 33,081    |  
|Long-term borrowings                      |  |                                                            | (91,553   | ) |                                                            |   | 51,440                  |  |   | (40,113       | ) |  |             | 198,885   |   |                         |   |        |   |  |   | 198,885   |  
|                                          |  |                                                            |           |   |                                                            |   |                         |  |   |               |   |  |             |           |   |                         |   |         |   |  |   |           |  
|Total Interest Expense                    |  | $                                                          | 1,611,247 |   |                                                            | $ | 1,242,081               |  | $ | 2,853,328     |   |  | $           | 1,261,319 |   |                         | $ | 328,310 |   |  | $ | 1,589,629 |  
|                                          |  |                                                            |           |   |                                                            |   |                         |  |   |               |   |  |             |           |   |                         |   |         |   |  |   |           |  
|Net Interest Income                       |  | $                                                          | 1,313,302 |   |                                                            | $ | 283,520                 |  | $ | 1,596,822     |   |  | $           | 2,484,162 |   |                         | $ | 599,632 |   |  | $ | 3,083,794 |  
|                                          |  |                                                            |           |   |                                                            |   |                         |  |   |               |   |  |             |           |   |                         |   |         |   |  |   |           |  

INVESTMENT PORTFOLIO

All securities at December 31, 2006 and December 31, 2005 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, 2006 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. The
maturities of the mortgage backed securities are based on stated final maturity. Cash flows from prepayments can cause actual maturities to differ significantly.



|                           |  |                         |            |       |                       |   |        |                        |       |  |                    |        |  |       |   |  |        |   |       |   |           |       |      |   |  |   |           
|-------------------------- |  | ----------------------- | ---------- | ----- | --------------------- | - | ------ | ---------------------- | ----- |  | ------------------ | ------ |  | ----- | - |  | ------ | - | ----- | - | --------- | ----- | ---- | - |  | - | ----------
|                           |  | 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  |  | $                       | 14,256,962 |       | 4.48                  | % |        | $                      |      |  |                   | %      |  | $     |  |  |       | % |       | $ |          |       |     | % |  | $ | 14,256,962
|Mortgage backed securities |  |                         |           |       |                      |   |        |                        |      |  |                   |        |  |       |  |  |       |   |       |   | 4,045,692 |       | 5.26 |   |  |   | 4,045,692 
|Municipal bonds            |  |                         |           |       |                      |   |        |                        |      |  |                   |        |  |       |  |  |       |   |       |   | 1,773,657 |       | 4.08 |   |  |   | 1,773,657 
|                           |  |                         |            |       |                       |   |        |                        |       |  |                    |        |  |       |   |  |        |   |       |   |           |       |      |   |  |   |           
|Total                      |  | $                       | 14,256,962 |       |                       |   |        | $                      |      |  |                    |        |  | $     |  |  |        |   |       | $ | 5,819,349 |       |      |   |  | $ | 20,076,311
|                           |  |                         |            |       |                       |   |        |                        |       |  |                    |        |  |       |   |  |        |   |       |   |           |       |      |   |  |   |           



4



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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:



|                                                |  |               |             |   |               |   |             |               |  |   |            |  
|----------------------------------------------- |  | ------------- | ----------- | - | ------------- | - | ----------- | ------------- |  | - | ---------- | -
|                                                |  | December 2006 |             |   | December 2005 |   |             | December 2004 | 
|Commercial, financial and agricultural          |  | $             | 91,439,663  |   |               | $ | 81,138,129  |               |  | $ | 45,157,571 |  
|Real estate-mortgage                            |  |               | 25,293,941  |   |               |   | 27,982,694  |               |  |   | 20,598,689 |  
|Consumer                                        |  |               | 39,614,458  |   |               |   | 35,056,410  |               |  |   | 24,014,637 |  
|                                                |  |               |             |   |               |   |             |               |  |   |            |  
|Gross Loans                                     |  |               | 156,348,062 |   |               |   | 144,177,233 |               |  |   | 89,770,897 |  
|Unearned income and deferred fees               |  |               | 147,565     |   |               |   | 139,449     |               |  |   | 180,898    |  
|                                                |  |               |             |   |               |   |             |               |  |   |            |  
|Loans, net of unearned income and deferred fees |  |               | 156,495,627 |   |               |   | 144,316,682 |               |  |   | 89,951,795 |  
|Less: Allowance for loan losses                 |  |               | (1,942,781  | ) |               |   | (1,777,345  | )             |  |   | (1,123,214 | )
|                                                |  |               |             |   |               |   |             |               |  |   |            |  
|Loans, net                                      |  | $             | 154,552,846 |   |               | $ | 142,539,337 |               |  | $ | 88,828,581 |  
|                                                |  |               |             |   |               |   |             |               |  |   |            |  

For the most part, 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, 2006. The areas of concentrations of credits are in loans for real estate with an outstanding balance of $25,324,821; loans for construction of buildings with an outstanding balance of $25,367,171; and loans for
construction of heavy and civil engineering buildings with an outstanding balance of $13,946,896. In addition, we also consider our residential construction as a concentration of credit which totaled $26,329,540 at December 31, 2006. At
December 31, 2005 there were three areas classified as concentrations of credit which were loans for real estate with an outstanding balance of $21,295,282; loans for construction of buildings with an outstanding balance of $20,834,734; and
loans for construction of heavy and civil engineering buildings with an outstanding balance of $13,097,467.

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, 2006 and their maturity distribution.



|                                          |  |                 |            |                                |   |                  |  |       |           |  |   |           
|----------------------------------------- |  | --------------- | ---------- | ------------------------------ | - | ---------------- |  | ----- | --------- |  | - | ----------
|                                          |  | Within One Year |            | After One But WithinFive Years |   | After Five Years |  | Total
|Commercial, financial and agricultural    |  | $               | 46,259,328 |                                | $ | 39,120,143       |  | $     | 6,060,192 |  | $ | 91,439,663
|Interest rates are floating or adjustable |  |                 | 36,302,806 |                                |   | 9,592,438        |  |       | 4,121,807 |  |   | 50,017,051
|Interest rates are fixed or predetermined |  |                 | 9,956,522  |                                |   | 29,527,705       |  |       | 1,938,385 |  |   | 41,422,612

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. Net charge-offs of $25,908, $36,269 and $374,287 for 2006, 2005 and 2004, respectively, equated to .02%,
..03% and .57%, respectively, of average loans outstanding, net of unearned deferred fees and costs. There were no loans past due more than 90 days at December 31, 2006, December 31, 2005 and December 31, 2004. Nonaccrual loans
were $588,762, $10,975 and $0 at December 31, 2006, December 31, 2005 and December 31, 2004, respectively. These loans are also considered impaired loans. Lost interest related to impaired loans as of December 31,
2006, December 31, 2005 and December 31, 2004 was $21,804, $739 and $0, respectively.



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##### Table of Contents

At December 31, 2006, 2005 and 2004 MainStreet had $310,772, $20,000 and $0, respectively, in other real estate,
which is property acquired through foreclosure. Other real estate is carried at its fair market value.

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 31,2006 |             |   | December 31,2005 |   |             | December 31, 2004 | 
|Average amount of loans, net of unearned, outstanding during the year                 |  | $                | 154,369,148 |   |                  | $ | 120,396,058 |                   |  | $ | 65,754,464 |  
|Balance of allowance for loan losses at beginning of year                             |  |                  | 1,777,345   |   |                  |   | 1,123,214   |                   |  |   | 540,601    |  
|Loans charged off:                                                                    |  |                  |             |   |                  |   |             |                   |  |   |            |  
|Commercial, financial and agricultural                                                |  |                  | (30,039     | ) |                  |   | (31,219     | )                 |  |   | (361,093   | )
|Real estatemortgage                                                                  |  |                  | (10,035     | ) |                  |   | (22,000     | )                 |  |   |           |  
|Consumer                                                                              |  |                  | (1,681      | ) |                  |   | (16,264     | )                 |  |   | (13,194    | )
|                                                                                      |  |                  |             |   |                  |   |             |                   |  |   |            |  
|Total loans charged off:                                                              |  |                  | (41,755     | ) |                  |   | (69,483     | )                 |  |   | (374,287   | )
|                                                                                      |  |                  |             |   |                  |   |             |                   |  |   |            |  
|Recoveries of loans previously charged off:                                           |  |                  |             |   |                  |   |             |                   |  |   |            |  
|Commercial, financial and agricultural                                                |  |                  | 10,179      |   |                  |   | 33,214      |                   |  |   |           |  
|Real estate- mortgage                                                                 |  |                  | 5,668       |   |                  |   |            |                   |  |   |           |  
|Consumer                                                                              |  |                  |            |   |                  |   |            |                   |  |   |           |  
|                                                                                      |  |                  |             |   |                  |   |             |                   |  |   |            |  
|Total recoveries:                                                                     |  |                  | 15,847      |   |                  |   | 33,214      |                   |  |   |           |  
|                                                                                      |  |                  |             |   |                  |   |             |                   |  |   |            |  
|Net loans charged off:                                                                |  |                  | (25,908     | ) |                  |   | (36,269     | )                 |  |   | (374,287   | )
|Additions to the allowance for loan losses                                            |  |                  | 191,344     |   |                  |   | 690,400     |                   |  |   | 956,900    |  
|                                                                                      |  |                  |             |   |                  |   |             |                   |  |   |            |  
|Balance of allowance for loan losses at end of year                                   |  | $                | 1,942,781   |   |                  | $ | 1,777,345   |                   |  | $ | 1,123,214  |  
|                                                                                      |  |                  |             |   |                  |   |             |                   |  |   |            |  
|Ratio of net charge offs during the period to average loans outstanding during period |  |                  | .02         | % |                  |   | .03         | %                 |  |   | .57        | %
|                                                                                      |  |                  |             |   |                  |   |             |                   |  |   |            |  

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 2006 |           |  | December 2005 |   |  | December 2004 |          
|Commercial, financial and agricultural |  | $             | 1,044,613 |  | 58.48         | % |  | $             | 1,144,900 |  | 56.28  | % |  | $ | 504,241   |  | 50.30  | %
|Real estate - mortgage                 |  |               | 463,640   |  | 16.18         |   |  |               | 255,924   |  | 19.41  |   |  |   | 143,799   |  | 22.95  |  
|Consumer                               |  |               | 434,528   |  | 25.34         |   |  |               | 376,521   |  | 24.31  |   |  |   | 160,803   |  | 26.75  |  
|Specific reserve                       |  |               |          |  |              |   |  |               |          |  |       |   |  |   |          |  |       |  
|Unallocated                            |  |               |          |  |              |   |  |               |          |  |       |   |  |   | 314,371   |  |       |  
|                                       |  |               |           |  |               |   |  |               |           |  |        |   |  |   |           |  |        |  
|Total                                  |  | $             | 1,942,781 |  | 100.00        | % |  | $             | 1,777,345 |  | 100.00 | % |  | $ | 1,123,214 |  | 100.00 | %
|                                       |  |               |           |  |               |   |  |               |           |  |        |   |  |   |           |  |        |  

DEPOSITS

Total deposits at December 31, 2006 and 2005 were $164,820,051 and $124,155,761, 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. The maturities of time deposits $100,000 and over and
other time deposits are presented in Part II, Item 7, Note 6.



6



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##### Table of Contents

RETURN ON EQUITY AND ASSETS

Certain ratios for equity and assets as of December 31, 2006 and December 31, 2005 are presented as follows:



|                                                                  |  |                   |   |  |                   |  
|----------------------------------------------------------------- |  | ----------------- | - |  | ----------------- | -
|                                                                  |  | December 31, 2006 |   |  | December 31, 2005 |  
|Return on average shareholders equity from continuing operations |  | 16.20             | % |  | 12.11             | %
|Return on average shareholders equity                            |  | 16.20             |   |  | 23.67             |  
|Return on average assets from continuing operations               |  | 1.66              |   |  | 1.19              |  
|Return on average assets                                          |  | 1.66              |   |  | 2.32              |  
|Dividend payout ratio                                             |  |                  |   |  |                  |  
|Average shareholders equity to average assets                    |  | 10.28             |   |  | 9.82              |  

SHORT-TERM BORROWINGS

The following table presents information on each category of MainStreets short-term borrowings.



|                                                              |  |                   |            |   |                   |   |           |  
|------------------------------------------------------------- |  | ----------------- | ---------- | - | ----------------- | - | --------- | -
|                                                              |  | December 31, 2006 |            |   | December 31, 2005 |  
|Short-term Federal Home Loan Bank advances                    |  |                   |            |   |                   |   |           |  
|Amount outstanding at period end                              |  | $                 | 10,000,000 |   |                   | $ |          |  
|Weighted average interest rate of period end                  |  |                   | 5.44       |   |                   |   |          |  
|Maximum amount outstanding at any month-end during the period |  | $                 | 15,000,000 |   |                   | $ | 4,000,000 |  
|Average amount outstanding during the period                  |  | $                 | 9,109,589  |   |                   | $ | 1,095,890 |  
|Weighted average interest rate during period                  |  |                   | 5.34       | % |                   |   | 3.02      | %
|                                                              |  |                  
|Federal funds purchased                                       |  |                   |            |   |                   |   |           |  
|Amount outstanding at period end                              |  | $                 |           |   |                   | $ | 2,025,000 |  
|Weighted average interest rate of period end                  |  |                   |           | % |                   |   | 4.20      | %
|Maximum amount outstanding at any month-end during the period |  | $                 | 1,000      |   |                   | $ | 2,025,000 |  
|Average amount outstanding during the period                  |  | $                 | 43,090     |   |                   | $ | 285,178   |  
|Weighted average interest rate during period                  |  |                   | 5.72       | % |                   |   | 3.41      | %



|Item 2. | Description of Property
|------- | -----------------------

At December 31, 2006 the Corporation
had one lease agreement for its facility 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. The lease does not have a renewal option.

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 on comparable market terms. Both the main office and the branch have a drive-up ATM.

Franklin Bank owns a lot adjacent to their Rocky Mount Office with a purchase price of $100,000. MainStreet executed a contract to purchase a lot in the Union Hall area of Franklin County that closed in January 2007.
The lot was purchased for the purpose of building an additional branch of Franklin Bank that is anticipated to open in the third quarter of 2007. The total cost for the land was $420,173. MainStreet has also executed a construction contract with
Frith Construction to build the bank building at an estimated cost of $874,293.

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



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##### Table of Contents

|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.

PART II



|Item 5. | Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities
|------- | --------------------------------------------------------------------------------------------------------------

MainStreet has 10,000,000 authorized shares of common stock, no par value, and had 1,763,853 shares of its common stock outstanding at January 31, 2007. In addition,
the initial organizers of MainStreet received 96,250 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 $9.09 per share. As of December 31, 2006,
83,416 warrants are vested and unexercised and 12,834 warrants have been forfeited and can no longer be exercised. In addition, MainStreet has issued options to present and former employees to purchase 155,367 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, 2006, 141,207 options had fully vested.

On the
opening day of Smith River Bank, C. R. McCullar, retired President and CEO, was granted 33,000 stock options at the then fair market value of $9.09. 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 11,000 options) and on each of the next two anniversaries (for each of the next two 11,000 option grants). All such options vested and were
exercised on May 3, 2006. Other options in the amount of 33,000 (included in the total 155,367 outstanding at year-end), of which all are vested and exercisable, have been granted at the then fair market value of $9.55 to former employees.

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 Options 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. Option awards are generally granted with an exercise price
equal to the market value of MainStreets stock at the date of grant. The options issued in 2006 have a vesting period of 3 years and have a ten year contractual term. The options issued in 2005 vested immediately upon grant and have a ten year
contractual term. All share awards provide for accelerated vesting if there is a change in control (as defined in the Plan). The maximum number of shares that may be issued under the Plan may not exceed 150,700. At December 31, 2006, granted
stock options totaled 122,367 under this plan and are included in the 155,367 total options outstanding at December 31, 2006.

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. There were no brokerage or underwriting
commissions. The offering terminated on January 31, 2005 having sold 220,859 shares. The total proceeds of the additional capital raised by this offering were used principally to aid in maintaining all regulatory capital ratios at the
adequately capitalized level. These shares were registered with the SEC effective December 8, 2006.

In connection with the offering of
MainStreets common stock to capitalize Franklin Bank in 2002, TCF Financial Corporation (TCF) purchased 149,539 shares of MainStreets common stock or 9.99% at the time of purchase. This purchase equates to 8.48% of common
stock outstanding at January 31, 2007, 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s application with the OTC Bulletin Board
(OTCBB) to enroll in their stock quotation service was effective



8



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##### Table of Contents

February 12, 2007. MainStreet must maintain at least one market maker and continue to submit its periodic reports to the Securities and Exchange
Commission (SEC) in a timely manner. MainStreet has been current on all periodic filings with the SEC and currently has three market makers. MainStreet is quoted under the symbol MREE.

There are approximately 1,748 shareholders of common stock as of December 31, 2006.

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. 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. MainStreet did
approve a share dividend that was payable December 15, 2006 to shareholders of record on November 30, 2006. Minimal cash for fractional shares was paid to shareholders by MainStreet.

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 ofOutstanding 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     |  | 122,367                                                                                 |  | $                                                                        | 12.63 |                                                                                                                                       | 28,333
|                                 |  |                                                                                         | 
|Equity compensation plans        |  |                                                                                         |  |                                                                          |       |                                                                                                                                       |       
|Not approved by security holders |  | 33,000                                                                                  |  |                                                                          | 9.55  |                                                                                                                                       |      
|                                 |  |                                                                                         |  |                                                                          |       |                                                                                                                                       |       
|Total                            |  | 155,367                                                                                 |  | $                                                                        | 11.98 |                                                                                                                                       | 28,333
|                                 |  |                                                                                         |  |                                                                          |       |                                                                                                                                       |       

Refer to Part II, Item 7, Note 13 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. (MainStreet, BankShares, or Corporation) 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.



9



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##### Table of Contents

General

MainStreet
was incorporated on January 14, 1999 in the Commonwealth of Virginia as 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 provides a wide variety of banking services through its one wholly-owned subsidiary bank, Franklin Bank. Franklin Bank has offices in Rocky Mount, Virginia and Hardy, Virginia. It is anticipated
that Franklin Bank will open an additional branch in the third quarter of 2007 in the Union Hall area of Franklin County. MainStreet purchased the land in January 2007 at a cost of $420,173. MainStreet has also executed a contract with Frith
Construction to construct the banking facility at an approximate cost of $874,293. MainStreet also has a wholly-owned real estate company, MainStreet RealEstate, Inc. formed for the sole purpose of owning the real estate of the Corporation.

On September 20, 2004, MainStreet commenced a private placement offering of its common stock to accredited investors and up to 35 non-accredited
investors under Rule 506 of the Securities and Exchange Act of 1933. There were no brokerage or underwriting commissions payable in the private placement. The offering terminated January 31, 2005 having sold 220,859 shares with total proceeds
of $1,807,101. The additional capital raised by this offering was used principally to aid in the growth of Franklin Bank and in maintaining all regulatory capital ratios at the adequately capitalized level. These shares were registered with the SEC
effective December 8, 2006.

On January 13, 2005, MainStreet, Smith River Community Bank, N.A. (Smith River) and Argentum Capital
Management, LLC (Argentum) entered into an Agreement pursuant to which MainStreet sold, and investors retained by Argentum purchased, all of the outstanding shares of the common stock of Smith River Bank for $6,500,000. The transaction
was consummated on March 23, 2005. As part of the transaction, MainStreet agreed to acquire specified loans from Smith River Bank under certain conditions after the closing. In the event Smith River determines it must charge off one of the
specified loans, (after pursuing normal collection efforts), MainStreet will acquire all of Banks rights, 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s out of pocket collection expenses. The outstanding principal balance of such loans at December 31, 2006 and 2005 was $152,747 and $641,087, respectively. MainStreet recorded a
contingent liability of $250,000 against such loans. MainStreet has paid Smith River $201,526 in 2006 to indemnify them for two such loans. The reserve against such loans was $48,474 and $250,000 at December 31, 2006 and 2005, respectively.
Also as part of the transaction, Smith River Bank agreed to outsource certain administrative and related activities to MainStreet for a period of three years following the closing for an annual fee of $505,000. Immediately following the sale of
Smith River Bank, MainStreet downstreamed $4,000,000 to Franklin Bank. MainStreet and Franklin Bank were well-capitalized at December 31, 2006 and 2005.

MainStreet filed a Form 8-K on March 8, 2006 reporting that it would restate its quarterly Form 10-QSB reports for the periods ending March 31, 2005, June 30, 2005, and September 30, 2005 to reflect the effect of
recent guidance at that time from its independent accountants concerning the tax expense incurred on the sale of a subsidiary on March 23, 2005. At the time of the sale, MainStreet recorded income tax expense of $562,466 related to the gain on
the sale. In turn, MainStreet reflected this tax expense on each of the quarterly Form 10-QSB reports that were restated. This expense was also taken into consideration in MainStreets earnings release on February 2, 2006 which disclosed
quarterly and year-to-date earnings and basic per share data along with total assets. Upon review of MainStreets income tax return for 2005, MainStreets independent accounting firm determined that MainStreet had no taxable gain on
the sale of the subsidiary and accordingly owed no tax expense. MainStreet was notified by the accounting firm of this determination on March 3, 2006 in a called meeting of its audit committee. The restated quarterly reports reflected that
MainStreet had incurred no tax expense in connection with the subsidiarys sale in accordance with the updated guidance. This Form 10-KSB and Annual Report reflects no tax expense in 2005 in connection with the transaction. MainStreet reviewed
the matter at the time in respect to its disclosure controls and believes that the restatement did not implicate its controls.

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.



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##### Table of Contents

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 are capable of estimation 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. With this information management then again utilizes the tools and analyzes the risk-rated loans, past dues, concentrations of credit, unsecured loans, and the
economic trend to further add to the allowance. 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. 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.

Overview

Total assets at December 31, 2006 were $195,295,354
compared to $153,343,670 at December 31, 2005, an increase of $41,951,684, or 27.36%. This increase in assets was primarily funded by an increase in deposits. The largest components of total assets at December 31, 2006 were net loans in
the amount of $154,552,846, securities available for sale in the amount of $20,076,311, federal funds sold in the amount of $12,884,000, and cash and due from banks in the amount of $3,581,616. Total deposits were $164,820,051 at December 31,
2006, an increase of $40,664,290 or 32.75% over December 31, 2005. Total shareholders equity at December 31, 2006 and 2005 was $19,189,456 and 15,983,181, respectively.

MainStreets net income for the twelve months ending December 31, 2006 and 2005 was $2,869,168 and $3,370,546, respectively. Basic earnings per share were $1.64 and $1.95 for 2006 and 2005, respectively.
Diluted earnings per share for 2006 and 2005 were $1.57 and $1.92, respectively. Return on average assets in 2006 and 2005 was 1.66% and 2.32%, respectively while return on average shareholders equity was 16.20% and 23.67% for 2006 and 2005,
respectively. Net income for the year ended 2005 included the gain on the sale of Smith River Bank in the amount of $1,406,165 (net of $212,527 cash expenses and $200,000 indemnity loan accrual), income from the discontinued operations of Smith
River Bank in the amount of $239,483, and income from continuing operations in the amount of $1,724,898 (net of tax). Also included in net income from continuing operations in 2005 was a $50,000 additional indemnity loan expense accrual recorded in
the third quarter of 2005.

Franklin Bank opened on September 16, 2002 and ended December 31, 2006 and 2005 with $195,088,107 and $152,486,195,
respectively, in total assets. Franklin Bank operates in a vibrant market which has a strong economy that provides a distinct advantage to MainStreet. Franklin Banks net income for calendar years 2006 and 2005 was $2,923,842 and $1,756,497,
respectively. Franklins net interest margin was 4.33% and 4.47% for the twelve-month periods ended December 31, 2006 and 2005, respectively. The decrease in net interest margin was primarily caused by an increase in the cost of funds.
Deposit volumes increased greater than loan volumes leaving funds to be invested in overnight federal funds and various available for sale investment instruments. These earn a lower interest rate than loans. Also, competition has caused Franklin
Bank to compete and raise short-term interest rates accordingly. The Federal Reserve raised short term interest rates four times in 2006 and eight times during 2005. Franklin Banks deposit rates were increased more in 2006 reflecting the short
term interest rate increases. The year ended with a prime rate of 8.25%.



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##### Table of Contents

The financial services industry is highly competitive. Competition continues to be strong in the Franklin market and
young financial institutions such as Franklin Bank must price new loans competitively. Also the ability for nonfinancial entities to provide financial services also increases competition. Franklin Banks growth is also quite dependent on
consumer and real estate based lending and there is concern over the sustainability of the substantial growth that has been occurring in real estate markets generally. Franklin Banks growth in the future may be negatively affected by interest
rate decreases and deterioration in the real estate market, if they occur.

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 2006 and 2005, net interest income
totaled $7,355,208 and $5,758,386, respectively, an increase of $1,596,822, or 27.73%. The total average interest-earning assets were $168,784,549 and $128,260,831 for the years ending December 31, 2006 and 2005, respectively, an increase of
$40,523,718, or 31.59%. The total average interest-bearing liabilities were $139,107,492 and $105,060,615 for the years ending December 31, 2006 and 2005, respectively, an increase of $34,046,877 or 32.41%. Volumes of earning assets have
continued to increase from year to year, especially loans, net of unearned deferred fees and costs. Average loans, net of unearned deferred fees and costs increased $33,973,090 in 2006 over 2005, or 28.22%. Average time deposits increased
$18,522,749 from 2005 to 2006 and average time deposits $100,000 and over increased $14,983,064 for the same time period. Average short and long-term borrowings increased $5,575,343 from 2005 to 2006. The net interest margin for MainStreet at
December 31, 2006 and 2005 was 4.37% and 4.49%, respectively, a decrease of 12 basis points. Overall, loans increased and interest income increased due to the volume and the increase in the prime rate. However, these loans were funded by
deposits primarily in the larger interest bearing categories. Along with this, there was a shift from Savings accounts into time deposits. Deposit rates were also increased to match the market and maintain the deposits. These things caused the
decline in the net interest margin.

The Federal Reserve raised short-term interest rates four times in 2006, eight times in 2005 and five times during
2004. The year ended with a prime rate of 8.25%. The prime rate, which is the basis for pricing many commercial and consumer loans, follows approximately 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, 2006 and 2005, the provision for loan losses was $191,344 and
$690,400, respectively. The 2006 expense was primarily due to loan growth as was the 2005 expense. The allowance for loan losses, or the reserve, was $1,942,781 and $1,777,345 at December 31, 2006 and 2005, respectively. This allowance equated
to 1.24% and 1.23% of loans, net of unearned income at December 31, 2006 and 2005, respectively. Net charge-offs were $25,908 and $36,269 for 2006 and 2005, respectively, or .02% and .03%, respectively, of average loans, net of unearned
deferred fees and costs. 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.



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##### Table of Contents

Noninterest Income

Noninterest income for the years ending December 31, 2006 and December 31, 2005 was $1,283,240 and
$1,103,526, respectively, an increase of $179,714, or 16.29%. Service charges on deposit accounts were $210,699 and $169,601 for the same time period, respectively, an increase of $41,098 or 24.23%. Mortgage brokerage income has provided a good base
of noninterest income, although dependent on the vibrancy of the real estate market. Mortgage brokerage income increased only slightly in 2006 compared to 2005 at $26,769. Franklin Bank has partnered with several different organizations in which the
bank originates mortgage loans, which for the most part, then close in the companies names. Franklin Bank receives mortgage brokerage fee income from the transactions. Servicing fee income increased $52,318 in 2006 over 2005 and was $569,416
for the year 2006. This income is primarily collected from Smith River Bank, per the Servicing Agreement (see General). River Bancorp, Inc. (the holding company for Smith River Bank) was formed in 2006. MainStreet also provides services
for the holding company which are usually nominal month end accounting entries. River Bancorp, Inc. also began a mortgage corporation in 2006 named 1stMedallion Mortgage Corporation. MainStreet also provides human resources and payroll services to this entity. MainStreet consolidates financials for River Bancorp, Inc. Affiliate fees paid by Smith
River Bank prior to the sale on March 23, 2005 were $127,488, and were included in the servicing fee category for 2005.

Noninterest Expense

Total noninterest expense for the years ending December 31, 2006 and December 31, 2005 was $4,260,208 and $3,561,508, respectively, an
increase of $698,700, or 19.62%. The following chart shows the noninterest expense by category for the years ending December 31, 2006 and 2005, the dollar change and the percentage change.



|                               |  |          |           |          |   |               |  |   |                   |   |  |       |  
|------------------------------ |  | -------- | --------- | -------- | - | ------------- |  | - | ----------------- | - |  | ----- | -
|Expense                        |  | 12-31-06 |           | 12-31-05 |   | Dollar Change |  |   | Percentage Change |  
|Salaries and employee benefits |  | $        | 2,225,784 |          | $ | 1,805,964     |  | $ | 419,820           |   |  | 23.25 | %
|Occupancy and equipment        |  |          | 574,557   |          |   | 522,209       |  |   | 52,348            |   |  | 10.02 |  
|Professional fees              |  |          | 259,244   |          |   | 265,091       |  |   | (5,847            | ) |  | (2.21 | )
|Advertising and promotion      |  |          | 111,651   |          |   | 83,848        |  |   | 27,803            |   |  | 33.16 |  
|Outside processing             |  |          | 319,554   |          |   | 275,045       |  |   | 44,509            |   |  | 16.18 |  
|Franchise tax                  |  |          | 169,914   |          |   | 136,000       |  |   | 33,914            |   |  | 24.94 |  
|Other expenses                 |  |          | 599,504   |          |   | 473,351       |  |   | 126,153           |   |  | 26.65 |  

As can be seen by the chart, the largest component of noninterest expense is salaries and employee benefits,
followed by other expenses, and occupancy and equipment costs. MainStreet employees are its most valuable resource and asset. The corporation added a few positions in late 2005 and in 2006 due to increases in volume generated. Also, under FAS 91,
Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases, requires that certain costs associated with originating loans be amortized over the life of the loan. These
costs begin as credits to salary expense and are brought back into the net interest margin over the life of the loan as a reduction. These credits to salary expense were $69,823 less in 2006 than 2005 causing an overall increase in salary expense.
Also, during 2006 an incentive program was implemented which added approximately $195,603 to salaries expense. 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, supplies, shareholder communications, telephone, postage, director fees, travel expense, meals and entertainment, subscriptions and dues, seminars and education, and contributions. Included in other expenses for 2006 was approximately
$34 thousand for a final expense of equipment paid to Smith River per the Purchase Agreement. Included in other expenses in 2005 is an additional $50,000 accrual recorded as a reserve for MainStreets indemnity obligations to Smith River Bank
under the Indemnity Agreement. The franchise tax expense is based on the total amount of capital; therefore, with the downstream of capital to Franklin Bank from the holding company in 2005, the capital level increased thus causing an increase in
the franchise tax.

Income Taxes

MainStreet is subject
to both federal and state income taxes. Franklin Bank is not subject to 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 income tax expense on income from
continuing operations in the amounts of $1,317,728 and $885,106 for the years ended December 31, 2006 and 2005, respectively. All operating loss carryforwards were utilized as of December 31, 2005.



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##### Table of Contents

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, mortgage backed securities, municipal securities, Federal Reserve Bank stock and Federal Home Loan Bank stock. 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, 2006 and December 31, 2005 and is carried at estimated fair value. Unrealized market valuation gains and losses, net of deferred taxes, 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 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, 2006 and 2005 the breakdown of gross loans in the loan portfolio was as follows:



|                        |  |      |             |  |        |   |  |   |             |  |        |  
|----------------------- |  | ---- | ----------- |  | ------ | - |  | - | ----------- |  | ------ | -
|                        |  | 2006 |             |  | 2005   |  
|Commercial              |  | $    | 91,439,663  |  | 58.48  | % |  | $ | 81,138,129  |  | 56.28  | %
|Residential real estate |  |      | 25,293,941  |  | 16.18  |   |  |   | 27,982,694  |  | 19.41  |  
|Consumer                |  |      | 39,614,458  |  | 25.34  |   |  |   | 35,056,410  |  | 24.31  |  
|                        |  |      |             |  |        |   |  |   |             |  |        |  
|Total                   |  | $    | 156,348,062 |  | 100.00 | % |  | $ | 144,177,233 |  | 100.00 | %
|                        |  |      |             |  |        |   |  |   |             |  |        |  

As can be seen by the loan portfolio dollars, MainStreet experienced loan growth in 2006 compared to 2005 with an
increase of $12,170,829 or 8.44% due to continuing loan demand. Average loan growth was much greater; however, the end of the year began to see some softening in loan demand along with some payoffs. Some loan growth is anticipated in 2007, but it
may be less due to the softer loan demand. There was no material change in the mix of loan types for the two periods. Commercial loans continue to be the primary source of lending. Residential real estate loans decreased as a percentage of total
loans from year end 2005 to year end 2006 while consumer loans increased slightly.

The commercial portfolio is diversified, but does have three areas
classified as concentrations of credit at December 31, 2006. The areas of concentrations of credits are in loans for real estate with an outstanding balance of $25,324,821; loans for construction of buildings with an outstanding balance of
$25,367,171; and loans for construction of heavy and civil engineering buildings with an outstanding balance of $13,946,896. In addition, we also consider our residential construction as a concentration of credit which totaled $26,329,540 at
December 31, 2006. At December 31, 2005 there were three areas classified as concentrations of credit which were loans for real estate with an outstanding balance of $21,295,282; loans for construction of buildings with an outstanding
balance of $20,834,734; and loans for construction of heavy and civil engineering buildings with an outstanding balance of $13,097,467.

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. Nonaccrual loans were $588,762 and $10,975 at December 31, 2006 and December 31, 2005, respectively. There were no loans past due more than 90
days at December 31, 2006 or 2005.



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##### Table of Contents

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 94.95% and 116.24% as of December 31, 2006 and 2005, respectively. The ratio of total time deposits to total
deposits was 69.25% and 61.04% at December 31, 2006 and 2005, respectively. Total deposits at December 31, 2006 and 2005 were $164,820,051 and $124,155,761, respectively. The deposit mix was as follows:



|                                |  |      |             |  |        |   |  |   |             |  |        |  
|------------------------------- |  | ---- | ----------- |  | ------ | - |  | - | ----------- |  | ------ | -
|                                |  | 2006 |             |  | 2005   |  
|Demand deposits                 |  | $    | 14,257,360  |  | 8.65   | % |  | $ | 13,053,658  |  | 10.51  | %
|Interest checking deposits      |  |      | 11,261,198  |  | 6.83   |   |  |   | 6,776,003   |  | 5.46   |  
|Money market deposits           |  |      | 13,088,848  |  | 7.94   |   |  |   | 9,342,298   |  | 7.53   |  
|Savings deposits                |  |      | 12,078,951  |  | 7.33   |   |  |   | 19,197,943  |  | 15.46  |  
|Time deposits $100,000 and over |  |      | 47,926,452  |  | 29.08  |   |  |   | 30,005,051  |  | 24.17  |  
|Other time deposits             |  |      | 66,207,242  |  | 40.17  |   |  |   | 45,780,808  |  | 36.87  |  
|                                |  |      |             |  |        |   |  |   |             |  |        |  
|Total                           |  | $    | 164,820,051 |  | 100.00 | % |  | $ | 124,155,761 |  | 100.00 | %
|                                |  |      |             |  |        |   |  |   |             |  |        |  

Total deposits increased $40,664,290, or 32.75% at year-end 2006 compared to year-end 2005. The chart reflects
that the largest increases as a percentage of total deposits were in other time deposits and time deposits $100,000 and over. As a percentage of total deposits demand deposits decreased somewhat while interest checking and money market accounts
increased nominally. Savings deposits decreased the most as a percentage of total deposits. The offset to these declines was an increase in the higher interest bearing deposit accounts. As interest rates continued to increase during 2006, customers
tended to take their funds and move them from the more liquid accounts into something more restrictive, but that paid higher interest rates. 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 for deposits 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 4.14% and 2.85% for 2006 and 2005, respectively. This increase of 129 basis points is reflective of the competition in the overall
market, the shifting of deposits into the higher interest bearing accounts, and the increase in the short-term interest rates.

Shareholders
Equity

Total shareholders equity was $19,189,456 and $15,983,181 at December 31, 2006 and 2005, 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. The private placement offering terminated January 31, 2005 having sold 220,859 shares with total proceeds of $1,807,101. Offering expenses of $79,603 were netted against equity.

The maintenance of appropriate levels of capital is a priority and is continually monitored. MainStreet 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 Franklin Bank 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 bank
to grow other assets. MainStreet and Franklin Bank were well-capitalized at December 31, 2006 and 2005. See Note No. 14 to the financial statements for capital ratios.

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 that were $35,702,962 and $42,625,299, respectively at
December 31, 2006 and 2005. 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 and short-term from the Federal Home



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##### Table of Contents

Loan Bank (FHLB). MainStreets ratio of liquid assets to total liabilities at December 31, 2006 and December 31, 2005 was 17.86%
and 1.94%, respectively. As can be seen from the ratios, liquidity has increased in 2006 primarily due to softer loan demand and repayments of loans. Deposits provide the basic core for liquidity; however, prior to 2006 deposits had not kept up with
the pace of loan demand and thus MainStreet has relied on alternative funding. MainStreet has short-term borrowings of $10,000,000 outstanding from FHLB at year end. MainStreet anticipates paying off this short-term borrowing when it matures in May
2007. MainStreet has policies in effect to monitor alternative funding and to limit it according to asset size.

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 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. MainStreet BankShares, Inc. has partnered with Compass Bank using the Sendero model to
help measure interest rate risk. The asset liability management process requires a number of key assumptions. Management determines the most likely outlook for the economy and interest rates measuring the effect on net interest income in a rising
and declining 100, 200, and 300 interest rate environment. With the change from level shock, net interest income is modeled assuming that interest rates move the full rate change in the first month. With the change from level ramp, net interest
income is modeled assuming rates move one quarter of the full rate change in each quarter. With this approach, management also reviews the economic value of equity that is the net present value of the balance sheets cash flows or the residual
value of future cash flows ultimately due to shareholders. The following table demonstrates the percentage change in net interest income from the current level prime rate of 8.25% in a rising and declining 100, 200, and 300 basis point interest rate
environment:

2006 Net Interest Income Percentage Change From Level Rates



|           |  |            |   |  |                        |   |  |                         |  
|---------- |  | ---------- | - |  | ---------------------- | - |  | ----------------------- | -
|Rate Shift |  | Prime Rate |   |  | Change From Level Ramp |   |  | Change from Level Shock |  
|+300 bp    |  | 11.25      | % |  | 20.63                  | % |  | 36.16                   | %
|+200 bp    |  | 10.25      |   |  | 14.69                  |   |  | 25.80                   |  
|+100 bp    |  | 9.25       |   |  | 7.12                   |   |  | 12.46                   |  
|-100 bp    |  | 7.25       |   |  | -7.87                  |   |  | -13.84                  |  
|-200 bp    |  | 6.25       |   |  | -14.20                 |   |  | -24.99                  |  
|-300 bp    |  | 5.25       |   |  | -16.26                 |   |  | -27.49                  |  

MainStreet is sensitive to change in the interest rate environment particularly due to the large percentage of
variable rate loans. In a rising rate environment, it is anticipated that the impact would be positive on the net interest margin. In a declining rate environment, MainStreet has significant exposure to the net interest margin. Management seeks to
lower the impact on the net interest margin. Conscious efforts will be made to originate or renew variable rate loans to a fixed rate status. Also, the possibility of off balance sheet instruments may be utilized to aid this initiative.

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

MainStreet provides certain services for its subsidiary bank. 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. Per the servicing agreement signed upon the 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 did not own any real property at December 31, 2006 and has a modest amount of fixed assets. MainStreet executed a contract to purchase a lot in the Union Hall
area of Franklin County that closed in January 2007. The lot was purchased for the purpose of building an additional branch of Franklin Bank. MainStreet also executed a construction contract with Frith Construction to build the bank building at an
approximate cost of $874,293. The affiliate fee paid by Franklin Bank and the servicing fee paid by Smith River Bank also provides for MainStreets cash requirements since most of the expenses are directly related to the banks. Dividends from
the Bank would also be a source of cash for MainStreet. However, Franklin Bank, in light of its projected growth and capital needs, is unlikely to be able to provide 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 cash dividends until it is deemed appropriate by management. MainStreet did approve a share dividend that was payable December 15, 2006 to shareholders of record on November 30, 2006. Minimal cash for fractional
shares was paid to shareholders 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 Obligations        |  |                                           
|Operating Leases                    |  | Footnote #12                              
|                                    | 
|Other Commitments                   |  |                                           
|Commitments to extend credit        |  | Footnote #16                              
|                                    | 
|Related Person Loans                |  | Footnote #4                               
|                                    | 
|Long-term and Short-term Borrowings |  | Footnote #7                               

Impact of Inflation

Most of 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 continually strives to manage the relationship between interest-sensitive assets and liabilities.

Stock Compensation Plans

BankShares approved the 2004 Key Employee
Stock Option Plan at its Annual Meeting of Shareholders, April 15, 2004. This plan permits the granting of Incentive and Non Qualified stock options as determined by BankShares Board of Directors. The maximum aggregate number of shares
that may be issued under this plan are 150,700. Currently there are 122,367 stock options that have been granted under this plan.

MainStreet adopted
Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS No. 123 (R)), on January 1, 2006 using the modified-prospective method, which requires the recognition of compensation
costs beginning with the effective date based on (a) the requirements of SFAS No. 123 (R) for all share-based awards granted after the effective date and (b) the requirements of SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123), for all awards granted to employees prior to the effective date of SFAS No. 123 (R) that remain unvested after the effective date. MainStreet recorded compensation cost in the amount of $950 for the
year ended December 31, 2006. Additional disclosures required by SFAS No. 123 (R) are included in Note 13 to the consolidated financial statements herein.

As permitted by SFAS No. 123, MainStreet accounted for share-based awards granted to employees prior to January 1, 2006 using the intrinsic value method prescribed by Accounting Principles Board No. 25
(APB 25), Accounting for Stock Issued to Employees, and related interpretations. Since the option price equaled the market price on the date of the grant for options awarded, compensation cost was not recognized for any of the periods
presented. All stock options granted under APB 25 were fully vested as of December 31, 2005.



17



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##### Table of Contents

|Item 7. | Financial Statements
|------- | --------------------

REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

MainStreet BankShares, Inc.

Martinsville, Virginia

We have audited the accompanying consolidated balance sheets of MainStreet BankShares, Inc. and Subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of income and comprehensive
income, changes in stockholders equity, and cash flows for the years then ended. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with 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 audits
proved 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 Subsidiary as of December 31, 2006 and 2005, and the consolidated results of their operations and cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.



BROWN EDWARDS & COMPANY, L.L.P.CERTIFIED PUBLIC ACCOUNTANTS


Bluefield, West Virginia

February 14, 2007



18



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##### Table of Contents

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets



|                                                                                                                                        |  |                   |             |   |                   |   |             |  
|--------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ----------- | - | ----------------- | - | ----------- | -
|                                                                                                                                        |  | December 31, 2006 |             |   | December 31, 2005 |  
|ASSETS                                                                                                                                  |  |                   |             |   |                   |   |             |  
|                                                                                                                                        |  |                  
|Cash and due from banks                                                                                                                 |  | $                 | 3,581,616   |   |                   | $ | 4,310,255   |  
|Interest-bearing deposits in other banks                                                                                                |  |                   | 255,780     |   |                   |   | 106,313     |  
|Federal funds sold                                                                                                                      |  |                   | 12,884,000  |   |                   |   |            |  
|Securities available-for-sale                                                                                                           |  |                   | 20,076,311  |   |                   |   | 2,553,783   |  
|Restricted equity securities                                                                                                            |  |                   | 1,145,100   |   |                   |   | 1,011,600   |  
|                                                                                                                                        |  |                  
|Loans:                                                                                                                                  |  |                   |             |   |                   |   |             |  
|Commercial loans                                                                                                                        |  |                   | 91,439,663  |   |                   |   | 81,138,129  |  
|Residential real estate loans                                                                                                           |  |                   | 25,293,941  |   |                   |   | 27,982,694  |  
|Consumer loans                                                                                                                          |  |                   | 39,614,458  |   |                   |   | 35,056,410  |  
|                                                                                                                                        |  |                   |             |   |                   |   |             |  
|Total Gross Loans                                                                                                                       |  |                   | 156,348,062 |   |                   |   | 144,177,233 |  
|Unearned deferred fees and costs, net                                                                                                   |  |                   | 147,565     |   |                   |   | 139,449     |  
|                                                                                                                                        |  |                   |             |   |                   |   |             |  
|Loans, net of unearned deferred fees and costs                                                                                          |  |                   | 156,495,627 |   |                   |   | 144,316,682 |  
|Less: Allowance for loan losses                                                                                                         |  |                   | (1,942,781  | ) |                   |   | (1,777,345  | )
|                                                                                                                                        |  |                   |             |   |                   |   |             |  
|Net Loans                                                                                                                               |  |                   | 154,552,846 |   |                   |   | 142,539,337 |  
|Furniture, fixtures and equipment, net                                                                                                  |  |                   | 739,957     |   |                   |   | 815,760     |  
|Accrued interest receivable                                                                                                             |  |                   | 872,210     |   |                   |   | 635,358     |  
|Other assets                                                                                                                            |  |                   | 1,187,534   |   |                   |   | 1,371,264   |  
|                                                                                                                                        |  |                   |             |   |                   |   |             |  
|Total Assets                                                                                                                            |  | $                 | 195,295,354 |   |                   | $ | 153,343,670 |  
|                                                                                                                                        |  |                   |             |   |                   |   |             |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                    |  |                   |             |   |                   |   |             |  
|                                                                                                                                        |  |                  
|Deposits:                                                                                                                               |  |                   |             |   |                   |   |             |  
|Non-interest bearing demand deposits                                                                                                    |  | $                 | 14,257,360  |   |                   | $ | 13,053,658  |  
|Interest checking deposits                                                                                                              |  |                   | 11,261,198  |   |                   |   | 6,776,003   |  
|Money market deposits                                                                                                                   |  |                   | 13,088,848  |   |                   |   | 9,342,298   |  
|Savings deposits                                                                                                                        |  |                   | 12,078,951  |   |                   |   | 19,197,943  |  
|Time deposits $100,000 and over                                                                                                         |  |                   | 47,926,452  |   |                   |   | 30,005,051  |  
|Other time deposits                                                                                                                     |  |                   | 66,207,242  |   |                   |   | 45,780,808  |  
|                                                                                                                                        |  |                   |             |   |                   |   |             |  
|Total Deposits                                                                                                                          |  |                   | 164,820,051 |   |                   |   | 124,155,761 |  
|Federal funds purchased                                                                                                                 |  |                   |            |   |                   |   | 2,025,000   |  
|Short-term borrowings                                                                                                                   |  |                   | 10,000,000  |   |                   |   |            |  
|Long-term borrowings                                                                                                                    |  |                   |            |   |                   |   | 10,000,000  |  
|Accrued interest payable and other liabilities                                                                                          |  |                   | 1,285,847   |   |                   |   | 1,179,728   |  
|                                                                                                                                        |  |                   |             |   |                   |   |             |  
|Total Liabilities                                                                                                                       |  |                   | 176,105,898 |   |                   |   | 137,360,489 |  
|                                                                                                                                        |  |                   |             |   |                   |   |             |  
|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 1,763,853 and 1,573,569 in 2006 and 2005,
respectively |  |                   | 18,576,739  |   |                   |   | 15,350,606  |  
|Accumulated retained earnings                                                                                                           |  |                   | 606,306     |   |                   |   | 663,531     |  
|Accumulated other comprehensive income (loss)                                                                                           |  |                   | 6,411       |   |                   |   | (30,956     | )
|                                                                                                                                        |  |                   |             |   |                   |   |             |  
|Total Shareholders Equity                                                                                                              |  |                   | 19,189,456  |   |                   |   | 15,983,181  |  
|                                                                                                                                        |  |                   |             |   |                   |   |             |  
|Total Liabilities and Shareholders Equity                                                                                              |  | $                 | 195,295,354 |   |                   | $ | 153,343,670 |  
|                                                                                                                                        |  |                   |             |   |                   |   |             |  

See accompanying notes to consolidated financial statements.



19



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##### Table of Contents

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Income



|                                                        |  |                             |            |                             |   |          
|------------------------------------------------------- |  | --------------------------- | ---------- | --------------------------- | - | ---------
|                                                        |  | Year EndedDecember 31, 2006 |            | Year EndedDecember 31, 2005
|Interest Income:                                        |  |                             |            |                             |   |          
|Interest and fees on loans                              |  | $                           | 12,533,784 |                             | $ | 8,496,725
|Interest on interest-bearing deposits                   |  |                             | 12,263     |                             |   | 5,129    
|Interest on federal funds sold                          |  |                             | 445,851    |                             |   | 139,144  
|Interest on securities available-for-sale               |  |                             | 162,011    |                             |   | 96,218   
|Dividends on restricted equity securities               |  |                             | 72,153     |                             |   | 38,696   
|                                                        |  |                             |            |                             |   |          
|Total Interest Income                                   |  |                             | 13,226,062 |                             |   | 8,775,912
|                                                        |  |                             |            |                             |   |          
|Interest Expense:                                       |  |                             |            |                             |   |          
|Interest on time deposits $100,000 and over             |  |                             | 1,776,864  |                             |   | 809,269  
|Interest on other deposits                              |  |                             | 3,446,204  |                             |   | 1,966,576
|Interest on federal funds purchased                     |  |                             | 2,466      |                             |   | 9,715    
|Interest on short-term borrowings                       |  |                             | 486,548    |                             |   | 33,081   
|Interest on long-term borrowings                        |  |                             | 158,772    |                             |   | 198,885  
|                                                        |  |                             |            |                             |   |          
|Total Interest Expense                                  |  |                             | 5,870,854  |                             |   | 3,017,526
|                                                        |  |                             |            |                             |   |          
|Net Interest Income                                     |  |                             | 7,355,208  |                             |   | 5,758,386
|Provision for loan losses                               |  |                             | 191,344    |                             |   | 690,400  
|                                                        |  |                             |            |                             |   |          
|Net Interest Income After Provision for Loan Losses     |  |                             | 7,163,864  |                             |   | 5,067,986
|                                                        |  |                             |            |                             |   |          
|Noninterest Income:                                     |  |                             |            |                             |   |          
|Service charges on deposit accounts                     |  |                             | 210,699    |                             |   | 169,601  
|Mortgage brokerage income                               |  |                             | 386,613    |                             |   | 359,844  
|Servicing fee income                                    |  |                             | 569,416    |                             |   | 517,098  
|Other fee income and miscellaneous income               |  |                             | 116,512    |                             |   | 56,983   
|                                                        |  |                             |            |                             |   |          
|Total Noninterest Income                                |  |                             | 1,283,240  |                             |   | 1,103,526
|                                                        |  |                             |            |                             |   |          
|Noninterest Expense:                                    |  |                             |            |                             |   |          
|Salaries and employee benefits                          |  |                             | 2,225,784  |                             |   | 1,805,964
|Occupancy and equipment expense                         |  |                             | 574,557    |                             |   | 522,209  
|Professional fees                                       |  |                             | 259,244    |                             |   | 265,091  
|Advertising and promotion                               |  |                             | 111,651    |                             |   | 83,848   
|Outside processing                                      |  |                             | 319,554    |                             |   | 275,045  
|Franchise tax                                           |  |                             | 169,914    |                             |   | 136,000  
|Other expenses                                          |  |                             | 599,504    |                             |   | 473,351  
|                                                        |  |                             |            |                             |   |          
|Total Noninterest Expense                               |  |                             | 4,260,208  |                             |   | 3,561,508
|                                                        |  |                             |            |                             |   |          
|Net Income From Continuing Operations Before Tax        |  | $                           | 4,186,896  |                             | $ | 2,610,004
|Income Tax Expense                                      |  |                             | 1,317,728  |                             |   | 885,106  
|                                                        |  |                             |            |                             |   |          
|Net Income From Continuing Operations                   |  |                             | 2,869,168  |                             |   | 1,724,898
|Discontinued Operations:                                |  |                             |            |                             |   |          
|Gain on sale of subsidiary, net of $0 tax               |  |                             |           |                             |   | 1,406,165
|Income from discontinued operations, net of $0 tax      |  |                             |           |                             |   | 239,483  
|                                                        |  |                             |            |                             |   |          
|Net Income From Discontinued Operations                 |  | $                           |           |                             | $ | 1,645,648
|                                                        |  |                            
|Net Income                                              |  | $                           | 2,869,168  |                             | $ | 3,370,546
|                                                        |  |                             |            |                             |   |          
|Basic Net Income Per Share From Continuing Operations   |  | $                           | 1.64       |                             | $ | 1.00     
|                                                        |  |                             |            |                             |   |          
|Basic Net Income Per Share                              |  | $                           | 1.64       |                             | $ | 1.95     
|                                                        |  |                             |            |                             |   |          
|Diluted Net Income Per Share From Continuing Operations |  | $                           | 1.57       |                             | $ | .98      
|                                                        |  |                             |            |                             |   |          
|Diluted Net Income Per Share                            |  | $                           | 1.57       |                             | $ | 1.92     
|                                                        |  |                             |            |                             |   |          

See accompanying notes to consolidated financial statements.



20



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##### Table of Contents

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders Equity



|                                                          |  |                        |  |             |            |   |                                      |   |            |                                            |  |   |                          |   |  |   |            |  
|--------------------------------------------------------- |  | ---------------------- |  | ----------- | ---------- | - | ------------------------------------ | - | ---------- | ------------------------------------------ |  | - | ------------------------ | - |  | - | ---------- | -
|                                                          |  | Number of CommonShares |  | CommonStock |            |   | AccumulatedRetainedEarnings(Deficit) |   |            | AccumulatedOtherComprehensiveIncome (Loss) |  |   | TotalShareholdersEquity |  
|Balance at December 31, 2004                              |  | 1,528,818              |  | $           | 14,949,509 |   |                                      | $ | (2,707,015 | )                                          |  | $ | 41,085                   |   |  | $ | 12,283,579 |  
|                                                          |  |                        |  |             |           
|Comprehensive Income:                                     |  |                        |  |             |            |   |                                      |   |            |                                            |  |   |                          |   |  |   |            |  
|                                                          |  |                        |  |             |           
|Net Income                                                |  |                       |  |             |           |   |                                      |   | 3,370,546  |                                            |  |   |                         |   |  |   | 3,370,546  |  
|                                                          |  |                        |  |             |           
|Accumulated other comprehensive income of subsidiary sold |  |                       |  |             |           |   |                                      |   |           |                                            |  |   | (35,679                  | ) |  |   | (35,679    | )
|                                                          |  |                        |  |             |           
|Net unrealized holding losses during the period           |  |                       |  |             |           |   |                                      |   |           |                                            |  |   | (55,094                  | ) |  |   | (55,094    | )
|                                                          |  |                        |  |             |           
|Deferred income tax benefit                               |  |                       |  |             |           |   |                                      |   |           |                                            |  |   | 18,732                   |   |  |   | 18,732     |  
|                                                          |  |                        |  |             |            |   |                                      |   |            |                                            |  |   |                          |   |  |   |            |  
|Total Comprehensive Income                                |  |                       |  |             |           |   |                                      |   | 3,370,546  |                                            |  |   | (72,041                  | ) |  |   | 3,298,505  |  
|                                                          |  |                        |  |             |           
|Issuance of common stock                                  |  | 44,751                 |  |             | 402,759    |   |                                      |   |           |                                            |  |   |                         |   |  |   | 402,759    |  
|                                                          |  |                        |  |             |           
|Stock issuance costs                                      |  |                       |  |             | (1,662     | ) |                                      |   |           |                                            |  |   |                         |   |  |   | (1,662     | )
|                                                          |  |                        |  |             |            |   |                                      |   |            |                                            |  |   |                          |   |  |   |            |  
|Balance at December 31, 2005                              |  | 1,573,569              |  | $           | 15,350,606 |   |                                      | $ | 663,531    |                                            |  | $ | (30,956                  | ) |  | $ | 15,983,181 |  
|                                                          |  |                        |  |             |           
|Comprehensive Income:                                     |  |                        |  |             |            |   |                                      |   |            |                                            |  |   |                          |   |  |   |            |  
|                                                          |  |                        |  |             |           
|Net Income                                                |  |                       |  |             |           |   |                                      |   | 2,869,168  |                                            |  |   |                         |   |  |   | 2,869,168  |  
|                                                          |  |                        |  |             |           
|Net unrealized holding gains during the period            |  |                       |  |             |           |   |                                      |   |           |                                            |  |   | 56,617                   |   |  |   | 56,617     |  
|                                                          |  |                        |  |             |           
|Deferred income tax expense                               |  |                       |  |             |           |   |                                      |   |           |                                            |  |   | (19,250                  | ) |  |   | (19,250    | )
|                                                          |  |                        |  |             |            |   |                                      |   |            |                                            |  |   |                          |   |  |   |            |  
|Total Comprehensive Income                                |  |                       |  |             |           |   |                                      |   | 2,869,168  |                                            |  |   | 37,367                   |   |  |   | 2,906,535  |  
|                                                          |  |                        |  |             |           
|Stock option exercise                                     |  | 30,000                 |  |             | 300,000    |   |                                      |   |           |                                            |  |   |                         |   |  |   | 300,000    |  
|                                                          |  |                        |  |             |           
|Share dividend                                            |  | 160,284                |  |             | 2,925,183  |   |                                      |   | (2,926,393 | )                                          |  |   |                         |   |  |   | (1,210     | )
|                                                          |  |                        |  |             |           
|Compensation costs                                        |  |                       |  |             | 950        |   |                                      |   |           |                                            |  |   |                         |   |  |   | 950        |  
|                                                          |  |                        |  |             |            |   |                                      |   |            |                                            |  |   |                          |   |  |   |            |  
|Balance at December 31, 2006                              |  | 1,763,853              |  | $           | 18,576,739 |   |                                      | $ | 606,306    |                                            |  | $ | 6,411                    |   |  | $ | 19,189,456 |  
|                                                          |  |                        |  |             |            |   |                                      |   |            |                                            |  |   |                          |   |  |   |            |  

See accompanying notes to consolidated financial statements.



21



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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows



|                                                                |  |                             |             |   |                             |   |             |  
|--------------------------------------------------------------- |  | --------------------------- | ----------- | - | --------------------------- | - | ----------- | -
|                                                                |  | Year EndedDecember 31, 2006 |             |   | Year EndedDecember 31, 2005 |  
|Cash Flows From Operating Activities:                           |  |                             |             |   |                             |   |             |  
|Net income from continuing operations                           |  | $                           | 2,869,168   |   |                             | $ | 1,724,898   |  
|Net income from discontinued operations                         |  |                             |            |   |                             |   | 1,645,648   |  
|Provision for loan losses                                       |  |                             | 191,344     |   |                             |   | 690,400     |  
|Gain on sale of subsidiary                                      |  |                             |            |   |                             |   | (1,606,165  | )
|Depreciation and amortization                                   |  |                             | 175,377     |   |                             |   | 154,153     |  
|Amortization of discounts and premiums, net                     |  |                             | (34,049     | ) |                             |   | 3,512       |  
|Stock option expense                                            |  |                             | 950         |   |                             |   |            |  
|Increase in accrued interest receivable                         |  |                             | (236,852    | ) |                             |   | (314,668    | )
|(Increase) decrease in other assets                             |  |                             | 164,480     |   |                             |   | (634,724    | )
|Increase in accrued interest payable and other liabilities      |  |                             | 106,119     |   |                             |   | 563,763     |  
|                                                                |  |                             |             |   |                             |   |             |  
|Net cash provided by operating activities                       |  |                             | 3,236,537   |   |                             |   | 2,226,817   |  
|                                                                |  |                             |             |   |                             |   |             |  
|Cash Flows From Investing Activities:                           |  |                             |             |   |                             |   |             |  
|(Increase) decrease in interest-bearing deposits in other banks |  |                             | (149,467    | ) |                             |   | 158,902     |  
|(Increase) decrease in federal funds sold                       |  |                             | (12,884,000 | ) |                             |   | 2,292,000   |  
|Purchases of furniture, fixtures, and equipment                 |  |                             | (99,574     | ) |                             |   | (263,608    | )
|Purchases of securities available-for-sale                      |  |                             | (28,611,989 | ) |                             |   | (8,496,771  | )
|Purchases of restricted equity securities                       |  |                             | (358,500    | ) |                             |   | (759,800    | )
|Calls/maturities/repayments of securities available-for-sale    |  |                             | 11,180,127  |   |                             |   | 9,500,000   |  
|Sales of restricted equity securities                           |  |                             | 225,000     |   |                             |   |            |  
|Loan originations and principal collections, net                |  |                             | (12,204,853 | ) |                             |   | (54,401,156 | )
|Proceeds from sale of subsidiary                                |  |                             |            |   |                             |   | 6,500,000   |  
|Costs of subsidiary sale                                        |  |                             |            |   |                             |   | (212,527    | )
|Increase in assets held for sale                                |  |                             |            |   |                             |   | (1,661,809  | )
|Increase in liabilities held for sale                           |  |                             |            |   |                             |   | 1,422,326   |  
|                                                                |  |                             |             |   |                             |   |             |  
|Net cash used in investing activities                           |  |                             | (42,903,256 | ) |                             |   | (45,922,443 | )
|                                                                |  |                             |             |   |                             |   |             |  
|Cash Flows From Financing Activities:                           |  |                             |             |   |                             |   |             |  
|Increase in time deposits $100,000 and over                     |  |                             | 17,921,401  |   |                             |   | 14,471,605  |  
|Increase in other time deposits                                 |  |                             | 20,426,434  |   |                             |   | 17,428,903  |  
|Increase in other deposits                                      |  |                             | 2,316,455   |   |                             |   | 1,816,803   |  
|Increase (decrease) in federal funds purchased                  |  |                             | (2,025,000  | ) |                             |   | 2,025,000   |  
|Proceeds from short-term borrowings                             |  |                             | 15,000,000  |   |                             |   | 4,000,000   |  
|Repayment of short-term borrowings                              |  |                             | (5,000,000  | ) |                             |   | (4,000,000  | )
|Proceeds from long-term borrowings                              |  |                             |            |   |                             |   | 10,000,000  |  
|Repayment of long-term borrowings                               |  |                             | (10,000,000 | ) |                             |   |            |  
|Proceeds from issuance of common stock                          |  |                             | 300,000     |   |                             |   | 402,759     |  
|Costs of stock issuance                                         |  |                             |            |   |                             |   | (1,662      | )
|Cash in lieu of fractional shares                               |  |                             | (1,210      | ) |                             |   |            |  
|                                                                |  |                             |             |   |                             |   |             |  
|Net cash provided by financing activities                       |  |                             | 38,938,080  |   |                             |   | 46,143,408  |  
|                                                                |  |                             |             |   |                             |   |             |  
|Net increase (decrease) in cash and cash equivalents            |  |                             | (728,639    | ) |                             |   | 2,447,782   |  
|Cash and cash equivalents at beginning of year                  |  | $                           | 4,310,255   |   |                             | $ | 1,862,473   |  
|                                                                |  |                             |             |   |                             |   |             |  
|Cash and cash equivalents at end of year                        |  | $                           | 3,581,616   |   |                             | $ | 4,310,255   |  
|                                                                |  |                             |             |   |                             |   |             |  
|Supplemental disclosure of cash flow information:               |  |                             |             |   |                             |   |             |  
|Cash paid during the year for interest                          |  | $                           | 5,809,810   |   |                             | $ | 2,782,450   |  
|                                                                |  |                             |             |   |                             |   |             |  
|Cash paid during the period for taxes                           |  | $                           | 813,000     |   |                             | $ | 1,512,320   |  
|                                                                |  |                             |             |   |                             |   |             |  
|Supplemental disclosure of noncash transactions:                |  |                             |             |   |                             |   |             |  
|Assets of subsidiary sold                                       |  | $                           |            |   |                             | $ | 61,108,248  |  
|                                                                |  |                             |             |   |                             |   |             |  
|Liabilities of subsidiary sold                                  |  | $                           |            |   |                             | $ | 56,426,941  |  
|                                                                |  |                             |             |   |                             |   |             |  

See accompanying notes to consolidated financial statements.



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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2006 and 2005



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. MainStreet has had two registered stock offerings since its inception raising a total of $14,029,501. The
Corporation was primarily organized to serve as a bank holding company. Currently, MainStreet has one wholly-owned bank subsidiary, Franklin Community Bank, National Association (Franklin Bank). MainStreet also has a wholly-owned real
estate company, MainStreet RealEstate, Inc. which was formed for the sole purpose of owning the real estate of the Corporation.

Franklin Bank was
organized as a nationally chartered commercial bank and member of the Federal Reserve Bank of Richmond. Franklin Bank opened for business on September 16, 2002. 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. Franklin Banks primary service area is Franklin County, Town of Rocky Mount and surrounding areas.

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 1933. The offering was for a target issuance of 201,667 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. The offering terminated January 31, 2005 having sold 220,859 shares with total proceeds of $1,807,101. The additional
capital raised by this offering was used principally to aid in maintaining all regulatory capital ratios at the adequately capitalized level. These shares were registered with the Securities and Exchange Commission effective December 8, 2006.

On January 13, 2005, MainStreet, Smith River Bank Community Bank, N.A. (Smith River) and Argentum Capital Management, LLC (Smith
River) entered into an Agreement pursuant to which MainStreet agreed to sell, and Argentum or its assigns agreed to purchase, all of the outstanding shares of the common stock of Smith River Bank for $6,500,000. As part of the transaction,
MainStreet agreed 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 at December 31, 2006 and 2005 was $152,647 and $641,087, respectively. MainStreet recorded an initial contingent liability of $250,000 against such loans.
MainStreet has paid Smith River $201,526 in 2006 to indemnify them for two such loans. The reserve against such loans was $48,474 and $250,000 at December 31, 2006 and 2005, respectively. Also as part of the transaction, Smith River Bank agreed
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. MainStreet downstreamed $4,000,000 to Franklin Bank immediately following the sale of Smith River
Bank. MainStreet and Franklin Bank were well-capitalized at December 31, 2006 and 2005.

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.



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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2006 and 2005



Smith River Bank was sold on March 23, 2005. The assets and liabilities as of the sale date March 23, 2005
are shown below.

Smith River Community Bank, N.A.

Condensed Balance Sheet



|                                                        |  |                |            |  
|------------------------------------------------------- |  | -------------- | ---------- | -
|                                                        |  | March 23, 2005 |           
|Assets                                                  |  |                |            |  
|                                                        | 
|Cash and due from banks                                 |  | $              | 1,422,050  |  
|Interest-bearing deposits in other banks                |  |                | 77,807     |  
|Federal funds sold                                      |  |                | 3,011,000  |  
|Securities available-for-sale and restricted securities |  |                | 4,594,077  |  
|Gross loans                                             |  |                | 51,743,570 |  
|Unearned deferred fees and costs, net                   |  |                | 169,184    |  
|                                                        |  |                |            |  
|Loans, net of unearned deferred fees and costs          |  |                | 51,912,754 |  
|Allowance for loan losses                               |  |                | (667,695   | )
|                                                        |  |                |            |  
|Net loans                                               |  |                | 51,245,059 |  
|Other Assets                                            |  |                | 768,011    |  
|                                                        |  |                |            |  
|Total Assets                                            |  | $              | 61,118,004 |  
|                                                        |  |                |            |  
|Liabilities and Shareholders Equity                    |  |                |            |  
|                                                        | 
|Deposits                                                |  | $              | 56,184,856 |  
|Accrued interest payable and other liabilities          |  |                | 242,085    |  
|                                                        |  |                |            |  
|Total Liabilities                                       |  |                | 56,426,941 |  
|Shareholders Equity                                    |  |                |            |  
|                                                        | 
|Common shareholders equity                             |  |                | 4,691,063  |  
|                                                        |  |                |            |  
|Total Liabilities and Shareholders Equity              |  | $              | 61,118,004 |  
|                                                        |  |                |            |  

Due to the sale of Smith River Bank on March 23, 2005, the affiliate fee income and the servicing fee income
received monthly since the sale are both shown in servicing fee income. The net income of the bank is shown as income from discontinued operations on the consolidated income statement for 2005. Following is a condensed breakdown of the specific
categories.



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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2006 and 2005



Smith River Community Bank, N. A.

Condensed Income Statement



|                                                    |  |                              |        
|--------------------------------------------------- |  | ---------------------------- | -------
|                                                    |  | Year Ended December 31, 2005
|Interest Income                                     |  | $                            | 823,586
|Interest Expense                                    |  |                              | 268,853
|                                                    |  |                              |        
|Net Interest Income                                 |  |                              | 554,733
|Provision for Loan Losses                           |  |                              |       
|                                                    |  |                              |        
|Net Interest Income After Provision for Loan Losses |  |                              | 554,733
|Noninterest Income                                  |  |                              | 143,362
|Noninterest Expense                                 |  |                              | 458,612
|                                                    |  |                              |        
|Net Income                                          |  | $                            | 239,483
|                                                    |  |                              |        

(b) Principles of Consolidation

The consolidated financial statements include the accounts of MainStreet and its wholly-owned bank subsidiary, Franklin Bank. The net income of Smith River Bank is shown as income from discontinued 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
discontinued operations. The affiliate fee paid to MainStreet from Smith River Bank for 2005 in the amount of $127,488 has not been eliminated. Due from accounts in the amount of $53,228 for 2005 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



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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2006 and 2005



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.

(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 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 are capable of estimation 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 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. With this information, management
then again utilizes the tools and analyzes the risk-rated loans, past dues, concentrations of credit, unsecured loans, and the economic trend to further add to the allowance. 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. 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 is comprised of 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 expense. While management uses
available information to recognize losses on other real estate, additional write-downs may be necessary based on changes in economic conditions.



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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2006 and 2005



(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

MainStreet adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS No. 123 (R)), on
January 1, 2006 using the modified-prospective method, which requires the recognition of compensation costs beginning with the effective date based on (a) the requirements of SFAS No. 123 (R) for all share-based awards granted
after the effective date and (b) the requirements of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), for all awards granted to employees prior to the effective date of SFAS No. 123 (R) that
remain unvested after the effective date. MainStreet recorded compensation cost in the amount of $950 for the year ended December 31, 2006. Additional disclosures required by SFAS No. 123 (R) are included in Note 13 to the
consolidated financial statements herein.

As permitted by SFAS No. 123, MainStreet accounted for share-based awards granted to employees prior to
January 1, 2006 using the intrinsic value method prescribed by Accounting Principles Board No. 25 (APB 25), Accounting for Stock Issued to Employees, and related interpretations. Since the option price equaled the market price
on the date of the grant for options awarded, compensation cost was not recognized for any of the periods presented.

The following table illustrates the
effect on net income and net income per share if the corporation had applied the fair value recognition provisions of FASB Statement No. 123 to its stock options and warrants:



|                                                                                                               |  |                |           |  
|-------------------------------------------------------------------------------------------------------------- |  | -------------- | --------- | -
|                                                                                                               |  | Year Ended2005 |          
|Net income as reported                                                                                         |  | $              | 3,370,546 |  
|Deduct total stock-based employee compensation expense determined under fair value based method for all awards |  |                | (470,192  | )
|                                                                                                               |  |                |           |  
|Proforma net income                                                                                            |  | $              | 2,900,354 |  
|                                                                                                               | 
|Net income per share:                                                                                          |  |                |           |  
|Basic-as reported                                                                                              |  | $              | 1.95      |  
|Basic-proforma                                                                                                 |  | $              | 1.68      |  
|                                                                                                               | 
|Diluted-as reported                                                                                            |  | $              | 1.92      |  
|Diluted-proforma                                                                                               |  | $              | 1.65      |  

(l) Advertising Costs

Advertising costs are expensed as incurred.



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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2006 and 2005



(m) Income Taxes

The
Corporation is subject to federal and state 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 quarterly 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 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 the weighted average number of shares of common stock outstanding during each
period adjusted to reflect the dilutive effect of all potential common shares that were outstanding during the period. For the year ending December 31, 2006 basic income per share and average shares outstanding were $1.64 and 1,752,823. Diluted
income per share and average shares outstanding were $1.57 and 1,827,113. For the year ending December 31, 2005 basic income per share and average shares outstanding were $1.95 and 1,728,202. Diluted income per share and average shares
outstanding were $1.92 and 1,751,203. At December 31, 2006 and December 31, 2005, there were 83,416 warrants outstanding. At December 31, 2006 and 2005, there were 155,367 and 174,207 options, respectively, that were outstanding.

(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, 2006 and 2005 are shown in the following
tables. The entire investment portfolio is classified as available-for-sale to preserve maximum liquidity for funding needs.



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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2006 and 2005



|                                    |  |               |            |                       |   |                        |  |   |                         |   |  |   |           
|----------------------------------- |  | ------------- | ---------- | --------------------- | - | ---------------------- |  | - | ----------------------- | - |  | - | ----------
|                                    |  | 2006         
|                                    |  | AmortizedCost |            | Gross UnrealizedGains |   | Gross UnrealizedLosses |  |   | ApproximateMarket Value
|U. S. government agencies           |  | $             | 14,296,667 |                       | $ |                       |  | $ | (39,705                 | ) |  | $ | 14,256,962
|Mortgage backed securities          |  |               | 4,006,411  |                       |   | 51,922                 |  |   | (12,641                 | ) |  |   | 4,045,692 
|Municipal bonds                     |  |               | 1,763,520  |                       |   | 17,874                 |  |   | (7,737                  | ) |  |   | 1,773,657 
|                                    |  |               |            |                       |   |                        |  |   |                         |   |  |   |           
|Total securities available-for-sale |  | $             | 20,066,598 |                       | $ | 69,796                 |  | $ | (60,083                 | ) |  | $ | 20,076,311
|                                    |  |               |            |                       |   |                        |  |   |                         |   |  |   |           
|                                    | 
|                                    |  | 2005         
|                                    |  | AmortizedCost |            | Gross UnrealizedGains |   | Gross UnrealizedLosses |  |   | ApproximateMarket Value
|U.S. government agencies            |  | $             | 2,300,000  |                       | $ |                       |  | $ | (46,844                 | ) |  | $ | 2,253,156 
|Corporate bonds                     |  |               | 300,686    |                       |   |                       |  |   | (59                     | ) |  |   | 300,627   
|                                    |  |               |            |                       |   |                        |  |   |                         |   |  |   |           
|Total securities available-for-sale |  | $             | 2,600,686  |                       | $ |                       |  | $ | (46,903                 | ) |  | $ | 2,553,783 
|                                    |  |               |            |                       |   |                        |  |   |                         |   |  |   |           

The amortized costs and market values of securities available-for-sale at December 31, 2006, 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                   |  | $             | 14,296,667 |                         | $ | 14,256,962
|Due after one year but within five years  |  |               |           |                         |   |          
|Due after five years but within ten years |  |               |           |                         |   |          
|Due after ten years                       |  |               | 5,769,931  |                         |   | 5,819,349 
|                                          |  |               |            |                         |   |           
|                                          |  | $             | 20,066,598 |                         | $ | 20,076,311
|                                          |  |               |            |                         |   |           

There were no gains or losses realized on sales and calls of securities available-for-sale in 2006 and 2005,
respectively. Securities available-for-sale with carrying values approximating $3,732,599 and $2,300,000 at December 31, 2006 and December 31, 2005, respectively, were pledged to secure public deposits and for other purposes as required or
permitted by law. There were no securities at December 31, 2006 or December 31, 2005 that have been in an impaired position for greater than twelve months; however, there were ten securities with an unrealized loss at December 31,
2006 and four securities with an unrealized loss at December 31, 2005.

Federal reserve bank stock is included in restricted equity securities and
totaled $390,100 at December 31, 2006 and $366,100 at December 31, 2005.

Note 3  Allowance for Loan Losses

Changes in the allowance for loan losses for the years ended December 31, 2006 and 2005 are as follows:



|                                 |  |      |           |   |      |   |           |  
|-------------------------------- |  | ---- | --------- | - | ---- | - | --------- | -
|                                 |  | 2006 |           |   | 2005 |  
|Balance at beginning of year     |  | $    | 1,777,345 |   |      | $ | 1,123,214 |  
|Provision for loan losses        |  |      | 191,344   |   |      |   | 690,400   |  
|Losses charged to allowance      |  |      | (41,755   | ) |      |   | (69,483   | )
|Recoveries credited to allowance |  |      | 15,847    |   |      |   | 33,214    |  
|                                 |  |      |           |   |      |   |           |  
|Balance at end of year           |  | $    | 1,942,781 |   |      | $ | 1,777,345 |  
|                                 |  |      |           |   |      |   |           |  



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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2006 and 2005



Net charge-offs of $25,908 and $36,269 for 2006 and 2005, respectively, equated to .02% and .03%, respectively, of
average loans outstanding, net of unearned deferred fees and costs. The loan loss reserve at December 31, 2006 and 2005 was $1,942,781 and $1,777,345, respectively, or 1.24% and 1.23%, respectively, of loans, net of unearned deferred fees and
costs. There were no loans past due more than 90 days at December 31, 2006 and December 31, 2005. Nonaccrual loans were $588,762 and $10,975 at December 31, 2006 and December 31, 2005, respectively. These loans are also
considered impaired loans. Lost interest related to impaired loans as of December 31, 2006 and December 31, 2005 was $21,804 and $739, respectively. The average balance during 2006 and 2005 for impaired loans was approximately $355,563 and
$15,955, respectively. Interest income reflected in the 2006 and 2005 income statements related to impaired loans was $26,395 and $1,579, respectively.

Overdrafts reclassified to loans at December 31, 2006 and 2005 were $107,591 and $38,250, respectively.

At December 31, 2006 and 2005
the balance of other real estate was $310,772 and $20,000, respectively.

Note 4  Related Person 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, 2006 and 2005 for all such loans are summarized below:



|                             |  |      |            |   |      |   |            |  
|---------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                             |  | 2006 |            |   | 2005 |  
|Balance at beginning of year |  | $    | 5,086,732  |   |      | $ | 3,935,617  |  
|Additions                    |  |      | 10,498,404 |   |      |   | 7,334,165  |  
|Payments                     |  |      | (7,938,666 | ) |      |   | (6,183,050 | )
|                             |  |      |            |   |      |   |            |  
|Balance at end of year       |  | $    | 7,646,470  |   |      | $ | 5,086,732  |  
|                             |  |      |            |   |      |   |            |  

These loans, in the opinion of management, were made in the ordinary course of business on substantially the same
terms, including interest rates and collateral, as those prevailing at the time for comparable loans with persons not related to the lender and did not involve more than the normal risk of collectibility or present other unfavorable features. Total
unfunded commitments were $3,609,288 and $3,905,572 at December 31, 2006 and 2005, respectively.

Note 5  Furniture, Fixtures and Equipment

Furniture, fixtures and equipment at December 31, 2006 and 2005 are as follows:



|                                          |  |      |           |   |      |   |           |  
|----------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | -
|                                          |  | 2006 |           |   | 2005 |  
|Furniture and equipment                   |  | $    | 772,462   |   |      | $ | 735,655   |  
|Computer software                         |  |      | 133,442   |   |      |   | 90,635    |  
|Leasehold improvements                    |  |      | 307,476   |   |      |   | 307,476   |  
|Automobiles                               |  |      | 19,885    |   |      |   |          |  
|                                          |  |      |           |   |      |   |           |  
|                                          |  |      | 1,233,265 |   |      |   | 1,133,766 |  
|Accumulated depreciation and amortization |  |      | (493,308  | ) |      |   | (318,006  | )
|                                          |  |      |           |   |      |   |           |  
|Furniture, fixtures and equipment, net    |  | $    | 739,957   |   |      | $ | 815,760   |  
|                                          |  |      |           |   |      |   |           |  



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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2006 and 2005



Note 6  Deposits

The maturities of time deposits $100,000 and over and other time deposits at December 31, 2006 and 2005 are as follows:



|                         |  |                                |            |                     |   |           
|------------------------ |  | ------------------------------ | ---------- | ------------------- | - | ----------
|                         |  | 2006                          
|                         |  | Time Deposits$100,000 and Over |            | Other Time Deposits
|Three months or less     |  | $                              | 10,920,856 |                     | $ | 15,555,930
|Over 3 through 6 months  |  |                                | 7,755,555  |                     |   | 12,258,890
|Over 6 through 12 months |  |                                | 22,665,410 |                     |   | 31,082,425
|Over 12 months           |  |                                | 6,584,631  |                     |   | 7,309,997 
|                         |  |                                |            |                     |   |           
|Total                    |  | $                              | 47,926,452 |                     | $ | 66,207,242
|                         |  |                                |            |                     |   |           
|                         | 
|                         |  | 2005                          
|                         |  | Time Deposits$100,000 and Over |            | Other Time Deposits
|Three months or less     |  | $                              | 7,595,789  |                     | $ | 11,559,545
|Over 3 through 6 months  |  |                                | 2,353,962  |                     |   | 4,046,775 
|Over 6 through 12 months |  |                                | 11,996,533 |                     |   | 20,135,807
|Over 12 months           |  |                                | 8,058,767  |                     |   | 10,038,681
|                         |  |                                |            |                     |   |           
|Total                    |  | $                              | 30,005,051 |                     | $ | 45,780,808
|                         |  |                                |            |                     |   |           

Total deposit dollars from executive officers, directors, and their related interests at December 31, 2006
and 2005 were $6,287,622 and $3,214,968, respectively.

Note 7  Long-term and short-term borrowings

Long-term borrowings as of December 31, 2005 consisted of a Federal Home Loan Bank of Atlanta (FHLB) advance in the amount of $10,000,000. Interest was
paid monthly on the convertible advance. The advance floated at one month LIBOR minus 50 bps for the first year. The rate repriced monthly on the interest payment due date. The rate at December 31, 2005 was 3.87%. The maturity date was
May 19, 2010. The advance was callable once on May 19, 2006. FHLB could convert the advance, with at least two business days prior notice, into a one month LIBOR-based floating rate advance (ARC) at the then ARC spread for a similar
advance. If the advance was not converted on May 19, 2006, the advance could flip to a fixed rate of 3.83% until the final maturity date. As collateral for the long-term borrowing, FHLB holds a blanket lien on loans secured by commercial real
estate and loans secured by 1-4 family first liens, second liens, and equity lines. FHLB called the advance on May 19, 2006 with notice. MainStreet converted this long-term advance into a short-term advance on that date in the same amount of
$10,000,000 which was the balance at December 31, 2006. This short term advance is a prime rate based advance with interest paid monthly at prime minus 2.81%. The interest rate at December 31, 2006 was 5.44%. Early repayment of the advance
is subject to a .25% fee of the advance amount being repaid. The maturity date is May 18, 2007.

Short-term borrowings in the amount of $2,025,000
consisted of federal funds purchased at December 31, 2005.

Note 8  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
quarterly for differences between the financial statement and tax bases of assets and liabilities that will



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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2006 and 2005



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:



|                                 |  |      |           |      |   |         |  
|-------------------------------- |  | ---- | --------- | ---- | - | ------- | -
|                                 |  | 2006 |           | 2005 |  
|Current                          |  | $    | 1,294,859 |      | $ | 960,013 |  
|Deferred tax provision (benefit) |  |      | 22,869    |      |   | (74,907 | )
|                                 |  |      |           |      |   |         |  
|Income Tax Expense               |  | $    | 1,317,728 |      | $ | 885,106 |  
|                                 |  |      |           |      |   |         |  

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



|                                        |  |      |           |   |      |   |         |  
|--------------------------------------- |  | ---- | --------- | - | ---- | - | ------- | -
|                                        |  | 2006 |           |   | 2005 |  
|Computed at the expected statutory rate |  | $    | 1,323,429 |   |      | $ | 887,401 |  
|Nondeductible meals & entertainment     |  |      | 816       |   |      |   | 852     |  
|Tax-exempt municipal interest           |  |      | (8,454    | ) |      |   |        |  
|Interest disallowance                   |  |      | 1,478     |   |      |   |        |  
|Other                                   |  |      | 459       |   |      |   | (3,147  | )
|                                        |  |      |           |   |      |   |         |  
|Income Tax Expense                      |  | $    | 1,317,728 |   |      | $ | 885,106 |  
|                                        |  |      |           |   |      |   |         |  

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



|                                                 |  |      |         |      |   |        
|------------------------------------------------ |  | ---- | ------- | ---- | - | -------
|                                                 |  | 2006 |         | 2005
|Allowance for loan losses                        |  | $    | 586,620 |      | $ | 521,563
|Unrealized loss on securities available for sale |  |      |        |      |   | 15,947 
|Indemnity loan accrual                           |  |      | 16,481  |      |   | 100,000
|Other                                            |  |      | 39,477  |      |   | 258    
|Organizational costs                             |  |      | 19,806  |      |   | 46,491 
|                                                 |  |      |         |      |   |        
|Deferred tax assets                              |  |      | 662,384 |      |   | 684,259
|                                                 |  |      |         |      |   |        
|Prepaid service contracts and insurance          |  |      | 36,568  |      |   | 37,249 
|Depreciation and amortization                    |  |      | 89,829  |      |   | 78,797 
|Unrealized gain on securities available-for-sale |  |      | 3,303   |      |   |       
|Other                                            |  |      | 6,590   |      |   |       
|                                                 |  |      |         |      |   |        
|Deferred tax liabilities                         |  |      | 136,290 |      |   | 116,046
|                                                 |  |      |         |      |   |        
|Net deferred tax assets                          |  | $    | 526,094 |      | $ | 568,213
|                                                 |  |      |         |      |   |        



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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2006 and 2005



Note 9  Net Income Per Share



|                                                    |  |                              |           |                    |           |                  |   |     
|--------------------------------------------------- |  | ---------------------------- | --------- | ------------------ | --------- | ---------------- | - | ----
|                                                    |  | Year Ended December 31, 2006
|                                                    |  | Income Numerator             |           | Shares Denominator |           | Per Share Amount
|Basic EPS                                           |  |                              |           |                    |           |                  |   |     
|                                                    |  |                              |          
|Net income from continuing operations, net of tax   |  | $                            | 2,869,168 |                    | 1,752,823 |                  | $ | 1.64
|                                                    |  |                              |          
|Net income from discontinued operations, net of tax |  |                              |          |                    |          |                  |   |    
|                                                    |  |                              |          
|Net income available to common shareholders         |  | $                            | 2,869,168 |                    | 1,752,823 |                  | $ | 1.64
|                                                    |  |                              |          
|Diluted EPS                                         |  |                              |           |                    |           |                  |   |     
|                                                    |  |                              |          
|Net income from continuing operations, net of tax   |  | $                            | 2,869,168 |                    | 1,827,113 |                  | $ | 1.57
|                                                    |  |                              |          
|Net income from discontinued operations, net of tax |  |                              |          |                    |          |                  |   |    
|                                                    |  |                              |          
|Net income available to common shareholders         |  | $                            | 2,869,168 |                    | 1,827,113 |                  | $ | 1.57



|                                                    |  |                              |           |                    |           |                  |   |     
|--------------------------------------------------- |  | ---------------------------- | --------- | ------------------ | --------- | ---------------- | - | ----
|                                                    |  | Year Ended December 31, 2005
|                                                    |  | Income Numerator             |           | Shares Denominator |           | Per Share Amount
|Basic EPS                                           |  |                              |           |                    |           |                  |   |     
|                                                    |  |                              |          
|Net income from continuing operations, net of tax   |  | $                            | 1,724,898 |                    | 1,728,202 |                  | $ | 1.00
|                                                    |  |                              |          
|Net income from discontinued operations, net of tax |  | $                            | 1,645,648 |                    | 1,728,202 |                  | $ | .95 
|                                                    |  |                              |          
|Net income available to common shareholders         |  | $                            | 3,370,546 |                    | 1,728,202 |                  | $ | 1.95
|                                                    |  |                              |          
|Diluted EPS                                         |  |                              |           |                    |           |                  |   |     
|                                                    |  |                              |          
|Net income from continuing operations, net of tax   |  | $                            | 1,724,898 |                    | 1,751,203 |                  | $ | .98 
|                                                    |  |                              |          
|Net income from discontinued operations, net of tax |  | $                            | 1,645,648 |                    | 1,751,203 |                  | $ | .94 
|                                                    |  |                              |          
|Net income available to common shareholders         |  | $                            | 3,370,546 |                    | 1,751,203 |                  | $ | 1.92

Note 10  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 (loss) on the balance sheet as of December 31,
2006 and 2005.



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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2006 and 2005



|                                                                   |  |                            |         |   |                            |   |         |  
|------------------------------------------------------------------ |  | -------------------------- | ------- | - | -------------------------- | - | ------- | -
|                                                                   |  | Year EndedDecember 31,2006 |         |   | Year EndedDecember 31,2005 |  
|Net unrealized holding gains (losses) during the year              |  | $                          | 56,617  |   |                            | $ | (55,094 | )
|Accumulated other comprehensive income of subsidiary sold          |  |                            |        |   |                            |   | (35,679 | )
|Less reclassification adjustments for gains included in net income |  |                            |        |   |                            |   |        |  
|Income tax benefit (expense)                                       |  |                            | (19,250 | ) |                            |   | 18,732  |  
|                                                                   |  |                            |         |   |                            |   |         |  
|Change in Accumulated Other Comprehensive Income (Loss)            |  | $                          | 37,367  |   |                            | $ | (72,041 | )
|                                                                   |  |                            |         |   |                            |   |         |  

Note 11  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 began a matching contribution in the second quarter of 2005. Total 401-K match expense was $38,978 and $24,417 for the years ended December 31, 2006 and 2005, respectively.

Note 12  Leases and Commitments

At December 31, 2006 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 $208,000 and $208,000 for the
years ended December 31, 2006 and 2005, respectively. Future rental payments under non-cancelable operating leases approximate $280,000, $280,000, $261,000, $253,000 and $253,000 for the years ended December 31, 2007, 2008, 2009, 2010 and
2011, respectively. The total aggregate of lease payments after 2011 total $1,711,886.

Franklin Bank owns a lot adjacent to their Rocky Mount Office with
a purchase price of $100,000. MainStreet executed a contract to purchase a lot in the Union Hall area of Franklin County that closed in January 2007. The lot was purchased for the purpose of building an additional branch of Franklin Bank that is
anticipated to open in the third quarter of 2007. The total cost for the land was $420,173. MainStreet has also executed a construction contract with Frith Construction to build the bank building at an approximate cost of $874,293.

The Corporation and Franklin Bank have an employment agreement with Larry A. Heaton, President and Chief Executive Officer. This agreement has a rolling one year term
that unless terminated 90 days prior to each anniversary date, is extended automatically for



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Notes to Consolidated Financial Statements

December 31, 2006 and 2005



an additional year. The Corporation also has an employment contract with its Executive Vice President and Chief Financial Officer. This agreement has a
three-year term and is automatically extended by one year if not terminated at least 90 days prior to each anniversary. The Corporation also has an agreement with Mr. McCullar, retired President and Chief Executive Officer. Under the terms of
the agreement, Mr. McCullar will continue in a consulting capacity until July 13, 2007.

Note 13  Stock Options and Warrants

On the opening date of Smith River Bank, July 24, 2000, now retired President and CEO, Mr. McCullar, was granted 33,000 stock options at the
then fair market value of $9.09. 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 11,000
options) and on each of the next two anniversaries (for each of the next two 11,000 option grants). All such options have vested and were exercised on May 3, 2006. Other options in the amount of 33,000, of which all are vested and exercisable,
have been granted at the then fair market value of $9.55 to former 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 96,250 warrants. Each warrant entitles the organizer/director to purchase, at anytime within ten years from the date of grant, an additional share
at $9.09 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, 83,416 are fully vested and 12,834 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. Option awards are generally granted with an exercise price equal to the market value of MainStreets stock at the date of grant. The options issued in 2006 have a vesting period of 3 years and have a ten year
contractual term. The options issued in 2005 vested immediately upon grant and have a ten year contractual term. All share awards provide for accelerated vesting if there is a change in control (as defined in the Plan). The maximum number of shares
that may be issued under the Plan may not exceed 150,700. As of December 31, 2006, there were 122,367 options granted under this Plan.

The
Corporation has reserved 267,116 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 granted during 2006 and 2005 was $4.29 and $4.35, respectively on the date of grant utilizing the Black-Scholes option-pricing model with the following assumptions:



|                                      |  |             |   |  |             |  
|------------------------------------- |  | ----------- | - |  | ----------- | -
|                                      |  | 2006 Grants |   |  | 2005 Grants |  
|Risk-free interest rate               |  | 4.60        | % |  | 4.51        | %
|Expected life of options and warrants |  | 6.5 years   |   |  | 10 years    |  
|Expected volatility of stock price    |  | 27          | % |  | 31          | %
|Expected dividend yield               |  | 0           | % |  | 0           | %



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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2006 and 2005



Expected volatilities are based on the historical volatility of MainStreets stock. All options are included in
the calculation of compensation cost. The risk-free rate for the period within the contractual life of the option is based upon the ten year Treasury rate at the date of the grant.

MainStreet recorded $950 in equity-based compensation during the year ended December 31, 2006.

Following is a status
and summary of changes of options and warrants during the year ended December 31, 2006:



|                                 |  |                |   |  |                              |       |                                         |      |                         |   |          
|-------------------------------- |  | -------------- | - |  | ---------------------------- | ----- | --------------------------------------- | ---- | ----------------------- | - | ---------
|                                 |  | Year Ended2006 |   |  | WeightedAverageExercisePrice |       | WeightedAverageRemainingContractualTerm |      | AggregateIntrinsicValue
|Outstanding at Beginning of year |  | 257,623        |   |  | $                            | 10.41 |                                         |      |                         |   |          
|Granted                          |  | 14,160         |   |  |                              | 16.75 |                                         |      |                         |   |          
|Exercised                        |  | (33,000        | ) |  |                              | 9.09  |                                         |      |                         |   |          
|Forfeited                        |  |               |   |  |                              |      |                                         |      |                         |   |          
|                                 |  |                |   |  |                              |       |                                         |      |                         |   |          
|Outstanding at year-end          |  | 238,783        |   |  | $                            | 10.97 |                                         | 6.79 |                         | $ | 1,380,166
|                                 |  |                |   |  |                              |       |                                         |      |                         |   |          
|Exercisable at year-end          |  | 224,623        |   |  | $                            | 10.60 |                                         | 6.59 |                         | $ | 1,381,431
|                                 |  |                |   |  |                              |       |                                         |      |                         |   |          

The total intrinsic value of options exercised during the years ended December 31, 2006 and 2005 was $104,940
and $0, respectively.

MainStreet received $300,000 in cash from the exercise of incentive stock options during 2006. There was no tax benefit realized
from this exercise.

Following is a status and summary of changes of nonvested options and warrants during the year ended December 31, 2006:



|                                 |  |        |  |                                       |      
|-------------------------------- |  | ------ |  | ------------------------------------- | -----
|                                 |  | 2006   |  | Weighted-AverageGrant-Date Fair Value
|Outstanding at beginning of year |  |       |  |                                       |     
|Granted                          |  | 14,160 |  | $                                     | 16.75
|Vested                           |  |       |  |                                       |     
|Forfeited                        |  |       |  |                                       |     
|                                 |  |        |  |                                       |      
|Outstanding at year-end          |  | 14,160 |  | $                                     | 16.75
|                                 |  |        |  |                                       |      

As of December 31, 2006, there was $59,797 of total unrecognized compensation cost related to nonvested
share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 3.0 years. The total fair value of shares vested (using the grant date exercise price) during the years ended
December 31, 2006 and 2005 was $0 and $1,308,321, respectively. This amount differs in 2005 from the grant date fair value using Black-Scholes in the amount of $470,192.

The exercise price of the outstanding stock options and warrants have a range of $9.09-$16.75 and $9.09-$12.09 at December 31, 2006 and 2005, respectively. At December 31, 2006 there were 141,207 options and
83,416 warrants exercisable at a weighted average price of $10.60. At December 31, 2005 there were 174,207 options and 83,416 warrants exercisable at a weighted average price of $10.41.



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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2006 and 2005



Note 14  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 cash dividends until it is deemed appropriate by management. MainStreet did approve a share dividend that was payable
December 15, 2006 to shareholders of record on November 30, 2006. Minimal cash for fractional shares was paid shareholders by MainStreet.

Franklin Bank is a member of the Federal Reserve System; however, Franklin Bank processes daily through a correspondent bank, Community Bankers Bank. Franklin Bank must currently maintain a reserve balance of $250,000 with its
correspondent bank and $49,000 with the Federal Reserve 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 maintain minimum capital ratios. MainStreet and Franklin Bank were well-capitalized at
December 31, 2006 and 2005.

Actual capital amounts and ratios for MainStreet at December 31, 2006 and 2005 are presented in the following table:



|                                         |  |        |            |       |                      |   |        |                        |            |  |      |        |  |       |            |  |       |  
|---------------------------------------- |  | ------ | ---------- | ----- | -------------------- | - | ------ | ---------------------- | ---------- |  | ---- | ------ |  | ----- | ---------- |  | ----- | -
|                                         |  | Actual |            |       | For Capital Adequacy |   |        | To Be Well Capitalized |           
|As of December 31, 2006                  |  | Amount |            | Ratio |                      |   | Amount |                        | Ratio      |  |      | Amount |  | Ratio |           
|Total capital (to risk weighted assets)  |  | $      | 21,125,826 |       | 13.18                | % |        | $                      | 12,822,000 |  | 8.00 | %      |  | $     | 16,028,000 |  | 10.00 | %
|                                         |  |        |            |       |                      |  
|Tier I capital (to risk weighted assets) |  |        | 19,183,045 |       | 11.97                |   |        |                        | 6,411,000  |  | 4.00 |        |  |       | 9,617,000  |  | 6.00  |  
|                                         |  |        |            |       |                      |  
|Tier I capital (to average assets)       |  |        | 19,183,045 |       | 10.26                |   |        |                        | 7,476,000  |  | 4.00 |        |  |       | 9,345,000  |  | 5.00  |  



|                                         |  |        |            |       |                      |   |        |                        |            |  |      |        |  |       |            |  |       |  
|---------------------------------------- |  | ------ | ---------- | ----- | -------------------- | - | ------ | ---------------------- | ---------- |  | ---- | ------ |  | ----- | ---------- |  | ----- | -
|                                         |  | Actual |            |       | For Capital Adequacy |   |        | To Be Well Capitalized |           
|As of December 31, 2005                  |  | Amount |            | Ratio |                      |   | Amount |                        | Ratio      |  |      | Amount |  | Ratio |           
|Total capital (to risk weighted assets)  |  | $      | 17,786,137 |       | 12.55                | % |        | $                      | 11,342,000 |  | 8.00 | %      |  | $     | 14,177,000 |  | 10.00 | %
|                                         |  |        |            |       |                      |  
|Tier I capital (to risk weighted assets) |  |        | 16,014,137 |       | 11.30                |   |        |                        | 5,671,000  |  | 4.00 |        |  |       | 8,506,000  |  | 6.00  |  
|                                         |  |        |            |       |                      |  
|Tier I capital (to average assets)       |  |        | 16,014,137 |       | 10.48                |   |        |                        | 6,114,000  |  | 4.00 |        |  |       | 7,643,000  |  | 5.00  |  

Actual capital amounts and ratios for Franklin Bank at December 31, 2006 and 2005 are presented in the
following table:



|                                         |  |        |            |       |                      |   |        |                                                                |            |  |      |        |  |       |            |  |       |  
|---------------------------------------- |  | ------ | ---------- | ----- | -------------------- | - | ------ | -------------------------------------------------------------- | ---------- |  | ---- | ------ |  | ----- | ---------- |  | ----- | -
|                                         |  | Actual |            |       | For Capital Adequacy |   |        | To Be Well CapitalizedUnder Prompt CorrectiveAction Provisions |           
|As of December 31, 2006                  |  | Amount |            | Ratio |                      |   | Amount |                                                                | Ratio      |  |      | Amount |  | Ratio |           
|Total capital (to risk weighted assets)  |  | $      | 18,912,359 |       | 11.81                | % |        | $                                                              | 12,807,000 |  | 8.00 | %      |  | $     | 16,009,000 |  | 10.00 | %
|                                         |  |        |            |       |                      |  
|Tier I capital (to risk weighted assets) |  |        | 16,969,578 |       | 10.60                |   |        |                                                                | 6,403,000  |  | 4.00 |        |  |       | 9,605,000  |  | 6.00  |  
|                                         |  |        |            |       |                      |  
|Tier I capital (to average assets)       |  |        | 16,969,578 |       | 9.09                 |   |        |                                                                | 7,467,000  |  | 4.00 |        |  |       | 9,334,000  |  | 5.00  |  



37



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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2006 and 2005



|                                         |  |        |            |       |                      |   |        |                                                                |            |  |      |        |  |       |            |  |       |  
|---------------------------------------- |  | ------ | ---------- | ----- | -------------------- | - | ------ | -------------------------------------------------------------- | ---------- |  | ---- | ------ |  | ----- | ---------- |  | ----- | -
|                                         |  | Actual |            |       | For Capital Adequacy |   |        | To Be Well CapitalizedUnder Prompt CorrectiveAction Provisions |           
|As of December 31, 2005                  |  | Amount |            | Ratio |                      |   | Amount |                                                                | Ratio      |  |      | Amount |  | Ratio |           
|Total capital (to risk weighted assets)  |  | $      | 15,507,736 |       | 11.00                | % |        | $                                                              | 11,276,000 |  | 8.00 | %      |  | $     | 14,096,000 |  | 10.00 | %
|                                         |  |        |            |       |                      |  
|Tier I capital (to risk weighted assets) |  |        | 13,745,736 |       | 9.75                 |   |        |                                                                | 5,638,000  |  | 4.00 |        |  |       | 8,457,000  |  | 6.00  |  
|                                         |  |        |            |       |                      |  
|Tier I capital (to average assets)       |  |        | 13,745,736 |       | 9.01                 |   |        |                                                                | 6,101,000  |  | 4.00 |        |  |       | 7,626,000  |  | 5.00  |  

Note 15  Parent Company Financial Information

CONDENSED BALANCE SHEETS



|                                               |  |                   |            |                   |   |           
|---------------------------------------------- |  | ----------------- | ---------- | ----------------- | - | ----------
|                                               |  | December 31, 2006 |            | December 31, 2005
|Assets                                         |  |                   |            |                   |   |           
|                                               |  |                  
|Cash and due from banks                        |  | $                 | 95,122     |                   | $ | 198,372   
|Interest-bearing deposits in other banks       |  |                   | 2,176,625  |                   |   | 1,596,672 
|Furniture, fixtures and equipment, net         |  |                   | 127,471    |                   |   | 110,332   
|Other assets                                   |  |                   | 60,311     |                   |   | 708,122   
|Investment in subsidiary bank                  |  |                   | 16,975,989 |                   |   | 13,714,780
|                                               |  |                   |            |                   |   |           
|Total Assets                                   |  | $                 | 19,435,518 |                   | $ | 16,328,278
|                                               |  |                   |            |                   |   |           
|Liabilities and Shareholders Equity           |  |                   |            |                   |   |           
|                                               |  |                  
|Accrued interest payable and other liabilities |  | $                 | 246,062    |                   | $ | 345,097   
|                                               |  |                  
|Shareholders Equity                           |  |                   |            |                   |   |           
|                                               |  |                  
|Common shareholders equity                    |  |                   | 19,189,456 |                   |   | 15,983,181
|                                               |  |                   |            |                   |   |           
|Total Liabilities and Shareholders Equity     |  | $                 | 19,435,518 |                   | $ | 16,328,278
|                                               |  |                   |            |                   |   |           



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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2006 and 2005



CONDENSED STATEMENTS OF INCOME



|                                                  |  |                              |           |                              |   |           |  
|------------------------------------------------- |  | ---------------------------- | --------- | ---------------------------- | - | --------- | -
|                                                  |  |                              |           |                              |  
|                                                  |  | Year Ended December 31, 2006 |           | Year Ended December 31, 2005 |  
|Income                                            |  |                              |           |                              |   |           |  
|Equity in undistributed income of subsidiary bank |  | $                            | 2,923,842 |                              | $ | 1,756,498 |  
|Equity in undistributed income of assets sold     |  |                              |          |                              |   | 239,483   |  
|Gain on sale of subsidiary                        |  |                              |          |                              |   | 1,606,165 |  
|Interest income                                   |  |                              | 71,425    |                              |   | 34,480    |  
|Other income                                      |  |                              | 2,867     |                              |   | 2,862     |  
|Servicing fee income                              |  |                              | 569,416   |                              |   | 517,098   |  
|Affiliate fee income                              |  |                              | 832,057   |                              |   | 815,917   |  
|                                                  |  |                              |           |                              |   |           |  
|Total Income                                      |  |                              | 4,399,607 |                              |   | 4,972,503 |  
|                                                  |  |                             
|Expenses                                          |  |                              |           |                              |   |           |  
|Salaries and employee benefits                    |  |                              | 807,478   |                              |   | 797,554   |  
|Occupancy and equipment expense                   |  |                              | 112,170   |                              |   | 104,713   |  
|Professional fees                                 |  |                              | 244,604   |                              |   | 224,322   |  
|Outside processing                                |  |                              | 74,009    |                              |   | 92,763    |  
|Indemnity loan accrual                            |  |                              |          |                              |   | 250,000   |  
|Other expenses                                    |  |                              | 279,842   |                              |   | 153,590   |  
|                                                  |  |                              |           |                              |   |           |  
|Total Expenses                                    |  |                              | 1,518,103 |                              |   | 1,622,942 |  
|                                                  |  |                              |           |                              |   |           |  
|Net Income Before Tax                             |  |                              | 2,881,504 |                              |   | 3,349,561 |  
|Income Tax Expense (Benefit)                      |  |                              | 12,336    |                              |   | (20,985   | )
|                                                  |  |                              |           |                              |   |           |  
|Net Income                                        |  | $                            | 2,869,168 |                              | $ | 3,370,546 |  
|                                                  |  |                              |           |                              |   |           |  



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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2006 and 2005



CONDENSED STATEMENTS OF CASH FLOWS



|                                                                 |  |                             |            |   |                             |   |            |  
|---------------------------------------------------------------- |  | --------------------------- | ---------- | - | --------------------------- | - | ---------- | -
|                                                                 |  | Year EndedDecember 31, 2006 |            |   | Year EndedDecember 31, 2005 |  
|Cash Flows From Operating Activities:                            |  |                             |            |   |                             |   |            |  
|Net income from continuing operations                            |  | $                           | 2,869,168  |   |                             | $ | 1,724,898  |  
|Net income from discontinued operations                          |  |                             |           |   |                             |   | 1,645,648  |  
|Adjustments to reconcile net income to net cash from operations: |  |                             |            |   |                             |   |            |  
|Gain on sale of subsidiary                                       |  |                             |           |   |                             |   | (1,606,165 | )
|Depreciation                                                     |  |                             | 29,180     |   |                             |   | 23,753     |  
|Stock option expense                                             |  |                             | 950        |   |                             |   |           |  
|Equity in undistributed income of subsidiary bank                |  |                             | (2,923,842 | ) |                             |   | (1,756,498 | )
|Equity in assets sold                                            |  |                             |           |   |                             |   | (239,483   | )
|(Increase) decrease in other assets                              |  |                             | 647,811    |   |                             |   | (543,350   | )
|Increase (decrease) in other liabilities                         |  |                             | (99,035    | ) |                             |   | 265,550    |  
|                                                                 |  |                             |            |   |                             |   |            |  
|Net Cash Provided by (Used in) Operating Activities              |  |                             | 524,232    |   |                             |   | (485,647   | )
|                                                                 |  |                             |            |   |                             |   |            |  
|Cash Flows From Investing Activities:                            |  |                             |            |   |                             |   |            |  
|Increase in interest-bearing deposits                            |  |                             | (879,953   | ) |                             |   | (1,373,020 | )
|Purchases of furniture and equipment                             |  |                             | (46,319    | ) |                             |   | (37,303    | )
|Proceeds from sale of subsidiary                                 |  |                             |           |   |                             |   | 6,500,000  |  
|Costs of subsidiary sale                                         |  |                             |           |   |                             |   | (212,527   | )
|Capital contributed to subsidiary banks                          |  |                             |           |   |                             |   | (4,700,000 | )
|                                                                 |  |                             |            |   |                             |   |            |  
|Net Cash Provided by (Used in) Investing Activities              |  |                             | (926,272   | ) |                             |   | 177,150    |  
|                                                                 |  |                             |            |   |                             |   |            |  
|Cash Flows from Financing Activities:                            |  |                             |            |   |                             |   |            |  
|Proceeds from issuance of common stock                           |  |                             | 300,000    |   |                             |   | 402,759    |  
|Costs of stock issuance                                          |  |                             |           |   |                             |   | (1,662     | )
|Cash in lieu of fractional shares                                |  |                             | (1,210     | ) |                             |   |           |  
|                                                                 |  |                             |            |   |                             |   |            |  
|Net Cash Provided By Financing Activities                        |  |                             | 298,790    |   |                             |   | 401,097    |  
|                                                                 |  |                             |            |   |                             |   |            |  
|Net Increase (Decrease) in Cash                                  |  |                             | (103,250   | ) |                             |   | 92,600     |  
|Cash at Beginning of Year                                        |  |                             | 198,372    |   |                             |   | 105,772    |  
|                                                                 |  |                             |            |   |                             |   |            |  
|Cash at End of Year                                              |  | $                           | 95,122     |   |                             | $ | 198,372    |  
|                                                                 |  |                             |            |   |                             |   |            |  

Note 16  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, 2006 and 2005 outstanding commitments to extend credit were $35,702,962 and
$42,625,299 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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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2006 and 2005



Note 17  Concentrations of Credit Risk

For the most part, 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, 2006. The areas of concentrations of credits are in loans for real
estate with an outstanding balance of $25,324,821; loans for construction of buildings with an outstanding balance of $25,367,171; and loans for construction of heavy and civil engineering buildings with an outstanding balance of $13,946,896. In
addition, we also consider our residential construction as a concentration of credit which totaled $26,329,540 at December 31, 2006. At December 31, 2005, there were also three areas classified as concentrations of credit which were loans
for real estate with an outstanding balance of $21,295,282, loans for construction of buildings with an outstanding balance of $20,834,734; and loans for construction of heavy and civil engineering buildings with an outstanding balance of
$13,097,467.

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 18  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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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2006 and 2005



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.) | Long-term Borrowings
|---- | --------------------

The fair value of
long-term borrowings is estimated using a discounted cash flow calculation that applies contracted interest rates being paid on the debt to the current market interest rate of similar debt.



|(g.) | 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, 2006 are as follows:



|                                               |  |                |             |            |   |            
|---------------------------------------------- |  | -------------- | ----------- | ---------- | - | -----------
|                                               |  | Carrying Value |             | Fair Value
|FINANCIAL ASSETS:                              |  |                |             |            |   |            
|                                               |  |               
|Cash and due from banks                        |  | $              | 3,581,616   |            | $ | 3,581,616  
|Interest-bearing deposits in other banks       |  |                | 255,780     |            |   | 255,780    
|Federal funds sold                             |  |                | 12,884,000  |            |   | 12,884,000 
|Securities available-for-sale                  |  |                | 20,076,311  |            |   | 20,076,311 
|Restricted equity securities                   |  |                | 1,145,100   |            |   | 1,145,100  
|Loans, net of unearned deferred fees and costs |  |                | 156,495,627 |            |   | 155,359,625
|                                               |  |                |             |            |   |            
|Total Financial Assets                         |  | $              | 194,438,434 |            | $ | 193,302,432
|                                               |  |                |             |            |   |            
|FINANCIAL LIABILITIES:                         |  |                |             |            |   |            
|                                               |  |               
|Deposits:                                      |  |                |             |            |   |            
|Non-interest bearing demand deposits           |  | $              | 14,257,360  |            | $ | 14,257,360 
|Interest checking deposits                     |  |                | 11,261,198  |            |   | 11,261,198 
|Money market deposits                          |  |                | 13,088,848  |            |   | 13,088,848 
|Savings deposits                               |  |                | 12,078,951  |            |   | 12,078,951 
|Time deposits $100,000 and over                |  |                | 47,926,452  |            |   | 47,886,877 
|Other time deposits                            |  |                | 66,207,242  |            |   | 66,206,692 
|Short-term borrowings                          |  |                | 10,000,000  |            |   | 10,000,000 
|                                               |  |                |             |            |   |            
|Total Financial Liabilities                    |  | $              | 174,820,051 |            | $ | 174,779,926
|                                               |  |                |             |            |   |            



42



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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2006 and 2005



The estimated fair values of financial instruments at December 31, 2005 are as follows:



|                                               |  |                |             |            |   |            
|---------------------------------------------- |  | -------------- | ----------- | ---------- | - | -----------
|                                               |  | Carrying Value |             | Fair Value
|FINANCIAL ASSETS:                              |  |                |             |            |   |            
|                                               |  |               
|Cash and due from banks                        |  | $              | 4,310,255   |            | $ | 4,310,255  
|Interest-bearing deposits in other banks       |  |                | 106,313     |            |   | 106,313    
|Federal funds sold                             |  |                |            |            |   |           
|Securities available-for-sale                  |  |                | 2,553,783   |            |   | 2,553,783  
|Restricted equity securities                   |  |                | 1,011,600   |            |   | 1,011,600  
|Loans, net of unearned deferred fees and costs |  |                | 144,316,682 |            |   | 142,395,327
|                                               |  |                |             |            |   |            
|Total Financial Assets                         |  | $              | 152,298,633 |            | $ | 150,377,278
|                                               |  |                |             |            |   |            
|FINANCIAL LIABILITIES:                         |  |                |             |            |   |            
|                                               |  |               
|Deposits:                                      |  |                |             |            |   |            
|Non-interest bearing demand deposits           |  | $              | 13,053,658  |            | $ | 13,053,658 
|Interest checking deposits                     |  |                | 6,776,003   |            |   | 6,776,003  
|Money market deposits                          |  |                | 9,342,298   |            |   | 9,342,298  
|Savings deposits                               |  |                | 19,197,943  |            |   | 19,197,943 
|Time deposits $100,000 and over                |  |                | 30,005,051  |            |   | 29,997,812 
|Other time deposits                            |  |                | 45,780,808  |            |   | 45,807,103 
|Federal funds purchased                        |  |                | 2,025,000   |            |   | 2,025,000  
|Long-term borrowings                           |  |                | 10,000,000  |            |   | 10,022,379 
|                                               |  |                |             |            |   |            
|Total Financial Liabilities                    |  | $              | 136,180,761 |            | $ | 136,222,196
|                                               |  |                |             |            |   |            

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 19  Contingencies and Other Matters

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

Note 20  Share Dividend

The Board of Directors of MainStreet approved a share dividend of one share for every ten shares to shareholders of record on November 30, 2006, payable
December 15, 2006. Fractional shares were paid in cash. All share data has been restated to reflect this share dividend.



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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, and Corporate Governance; 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 2008, the term of the Class B Directors expires in 2009, 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 2008 
|                                       | 
|Larry A. Heaton (49)                   |  | Director since October 2002 President/CEO of MainStreet
BankShares, Inc. since May 2006. Also President/CEO/Chairman of Franklin Bank since October 2002.
|                                       | 
|Morton W. Lester (73)                  |  | Director since January 1999                                                                                                                              
|                                       | 
|Michael A. Turner (53)                 |  | Director since December 2002                                                                                                                             
|                                      
|Class B Directors  Term Expires 2009 
|                                       | 
|Joseph F. Clark (44)                   |  | Director since July 2001                                                                                                                                 
|                                       | 
|Charles L. Dalton (43)                 |  | Director since July 2001                                                                                                                                 
|                                       | 
|Joel R. Shepherd (43)                  |  | Director since December 2002                                                                                                                             
|                                      
|Class C Directors  Terms Expires 2007
|                                       | 
|William L. Cooper, III (53)            |  | Nominated for Director 2007, Approved by Board of Directors February 21, 2007                                                                            
|                                       | 
|John M. Deekens (59)                   |  | Director since July 2001                                                                                                                                 
|                                       | 
|Danny M. Perdue (61)                   |  | Director since December 2002                                                                                                                             
|                                       | 
|Milford A. Weaver (81)                 |  | Director since July 1999                                                                                                                                 



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##### Table of Contents

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 member and partial owner of CBC, LLC, a management business. He is a member and partial owner of Highland Park, LLC and Fairview Group, LLC.

William L. Cooper, III is currently the President of Cooper Wood Products, Inc. and Cooper Classics, Inc., both in Rocky Mount, Virginia. He is a past director of the BB&T Corporate Virginia State Board.
Mr. Cooper is Vice President of the Rocky Mount Historical Foundation. He is also Chairman of the Franklin County Electoral Board and has been active with the Franklin County Boy Scouts.

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

John M. Deekens is currently the Plant Manager for Stuart Forest Products in Stuart, Virginia. Prior to that, he was the Quality Improvement Manager for Hooker Furniture
Corporation in Martinsville, Virginia.

Larry A. Heaton was appointed President and CEO of MainStreet BankShares, where he also serves as a director, upon
the retirement of Cecil R. McCullar in May 2006. Mr. Heaton is also the 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 is also a member of the Rocky Mount Rotary Club and Blue Ridge Foundation.

Morton W. Lester is President of The Lester Corporation, a real estate investment and property management company, and Vice President of Motor Imports, Inc.

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

Joel R. Shepherd is the President and partial owner of Virginia Home Furnishings,
Inc., Blue Ridge Antique Center, Inc., and 220 Self Storage, Inc. He is also a partial owner and member of Shepherd Properties, LLC, Orient Bay, LLC and Wirtz Properties, 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 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 partial 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. Mr. Weaver will not stand for re-election as a director in 2007 due to the age requirement for director retirement.

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 (47) |  | Executive Vice President Chief Financial
Officer Corporate Secretary |  | 8/99                       



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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 without charge upon request by writing to Brenda H. Smith, Executive Vice President, 730 East Church Street, Suite 30, Martinsville, Virginia, 24112.

Other information required by Item 9 of Form 10-KSB appears on page 15 of the Corporations 2007 Proxy Statement and is incorporated herein by reference.



|Item 10. | Executive Compensation
|-------- | ----------------------

The information required by Item 10 of
Form 10-KSB appears on pages 11 through 15 of the Corporations 2007 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 7 through 9 of the Corporations 2007 Proxy Statement and is incorporated herein by reference.



|Item 12. | Certain Relationships and Related Transactions, and Director Independence
|-------- | -------------------------------------------------------------------------

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 Franklin
Bank and prior to its divestiture, Smith River Bank. 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.

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. Franklin Bank also leases a billboard for advertisement from a director of MainStreet that is also a director of Franklin Bank.

The information required by Item 12 of Form 10-KSB concerning director independence appears on page 15 of the Corporations 2007 Proxy Statement and is incorporated herein by reference.



|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 in the Corporations 2007 Proxy Statement under the Audit Committee Report and is incorporated herein by reference.



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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/Larry A. Heaton                                    
|                            |  | Larry A. Heaton, 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/ Larry A. Heaton   |  |  |  | President and Chief Executive Officer, Director, |  |  |  | 03/06/07
|Larry A. Heaton       |  |  |  | President/CEO of Franklin Community Bank, N.A.   |  |  |  | Date    
|                      |  |  |  |                                                 
|/s/ Brenda H. Smith   |  |  |  | Executive Vice President                         |  |  |  | 03/06/07
|Brenda H. Smith       |  |  |  | Chief Financial Officer Corporate
Secretary      |  |  |  | Date    
|                      |  |  |  |                                                 
|/s/ Joseph F. Clark   |  |  |  | Director                                         |  |  |  | 03/06/07
|Joseph F. Clark       |  |  |  |                                                  |  |  |  | Date    
|                      |  |  |  |                                                 
|/s/ Charles L. Dalton |  |  |  | Director                                         |  |  |  | 03/06/07
|Charles L. Dalton     |  |  |  |                                                  |  |  |  | Date    
|                      |  |  |  |                                                 
|/s/ John M. Deekens   |  |  |  | Director                                         |  |  |  | 03/06/07
|John M. Deekens       |  |  |  |                                                  |  |  |  | Date    
|                      |  |  |  |                                                 
|/s/ Morton W. Lester  |  |  |  | Director                                         |  |  |  | 03/06/07
|Morton W. Lester      |  |  |  |                                                  |  |  |  | Date    
|                      |  |  |  |                                                 
|/s/ Danny M. Perdue   |  |  |  | Director                                         |  |  |  | 03/06/07
|Danny M. Perdue       |  |  |  |                                                  |  |  |  | Date    
|                      |  |  |  |                                                 
|/s/ Joel R. Shepherd  |  |  |  | Chairman of the Board                            |  |  |  | 03/06/07
|Joel R. Shepherd      |  |  |  |                                                  |  |  |  | Date    
|                      |  |  |  |                                                 
|/s/ Michael A. Turner |  |  |  | Director                                         |  |  |  | 03/06/07
|Michael A. Turner     |  |  |  |                                                  |  |  |  | Date    
|                      |  |  |  |                                                 
|/s/ Milford A. Weaver |  |  |  | Director                                         |  |  |  | 03/06/07
|Milford A. Weaver     |  |  |  |                                                  |  |  |  | Date    



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##### 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; amended October 16, 2002; amended September 17, 2003; and amended July 13, 2005 and filed on form 10-QSB on August 10,
2005 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*    |  | Employment Agreement with President and CEO, Cecil R. McCullar, dated as of June 1, 1999. Amendment to employment agreement filed with the Corporations Quarterly Form 10-QSB on May 11,
2005 and herein incorporated by reference.                                                      
|         | 
|10.2     |  | Employment Agreement by and between MainStreet, Franklin Bank, and Larry A. Heaton (President and CEO of Franklin Bank) dated December 30, 2005 incorporated by reference to the
Corporations Form 8-K filed January 4, 2006.                                                            
|         | 
|10.3     |  | Stock Purchase Agreement By and Among Argentum Capital Management, LLC, and Assigns; MainStreet BankShares, Inc., and Smith River Community Bank, N.A. dated January 13, 2005 filed on Form 8-K on
January 14, 2005, and herein incorporated by reference.                                
|         | 
|10.4     |  | Administrative Services Agreement with Smith River Community Bank, N.A. incorporated by reference to the Corporations Form 8-K filed March 28, 2005.                                                                                                                                     
|         | 
|10.5     |  | Indemnity Agreement with Smith River Community Bank, N.A. incorporated by reference to the Corporations Form 8-K filed March 28, 2005.                                                                                                                                                   
|         | 
|14       |  | Code of Ethics filed March 13, 2006 on Form 10-KSB and herein incorporated by reference.                                                                                                                                                                                                  
|         | 
|21       |  | Subsidiaries of the small business issuer.                                                                                                                                                                                                                                                
|         | 
|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.)
|--- | ---------------------------------------------------------------------------------------------------



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