##### Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---

Form 10-KSB



---

(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, 2005.



| ̈ | 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



---

MainStreet BankShares, Inc.

(Name of small business issuer in its charter)



---



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



---

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 whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. ̈

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
$9,879,438

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. $16,806,173 based on $13.30 per share.

(Applicable only to corporate registrants) State the number of shares outstanding of each of the issuers classes of common equity, as of the latest practicable date 1,573,569 shares outstanding as of
January 31, 2006.

Documents incorporated by reference. Portions of the Corporations 2006 Proxy Statement have been incorporated by
reference into Part III.

Transitional Small Business Disclosure Format:    Yes ̈No  x



---



---

##### 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; 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                                                                  |  | 46-47
|         |  |                                                                                                                
|Item 13  |  | Exhibits                                                                                                        |  | 47   
|         |  |                                                                                                                
|Item 14  |  | Principal Accountant Fees and Services                                                                          |  | 47   



---

##### 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. MainStreet has one wholly owned subsidiary bank, Franklin Community Bank, N.A. (Franklin
Bank).

MainStreet is authorized to engage in any lawful activity for a bank holding company. The holding company structure provides greater
flexibility than a bank standing alone has to expand and diversify business activities through newly formed subsidiaries or through acquisitions. MainStreets business is conducted through its subsidiary bank. MainStreet also provides
outsourced servicing to Smith River Community Bank, N.A. 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 2006. Franklin Banks primary service area is Franklin County, Town of Rocky Mount and surrounding areas.

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. Smith Rivers main office is
located at 730 East Church Street, Suite 31, Martinsville, Virginia. Smith River Bank also has branches at 380 Riverside Drive, Bassett, Virginia and at 105 Dobyns Road, Stuart, Virginia.

On January 13, 2005, MainStreet, Smith River Bank, and Argentum Capital Management, LLC, (Argentum), entered into an Agreement pursuant to which
MainStreet 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, 2005 was $641,087. 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.

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



1



---

##### Table of Contents

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.

Employees

The total number of full-time equivalent persons employed by MainStreet and its wholly owned subsidiary as of December 31, 2005 was 41. MainStreet believes its relationship with its employees is good and no employees are represented by
a labor union.



2



---

##### 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



|                                           |  |                 |             |   |          |   |             |  |      |                 |  |   |             |   |             |   |           |  |      |  
|------------------------------------------ |  | --------------- | ----------- | - | -------- | - | ----------- |  | ---- | --------------- |  | - | ----------- | - | ----------- | - | --------- |  | ---- | -
|                                           |  | 2005            |             |   | 2004     |  
|                                           |  | Average Balance |             |   | Interest |   | Yield/ Rate |  |      | Average Balance |  |   | Interest    |   | Yield/ Rate |  
|Loans, net of unearned                     |  | $               | 120,396,058 |   |          | $ | 8,496,725   |  | 7.06 | %               |  | $ | 65,754,464  |   |             | $ | 3,915,011 |  | 5.95 | %
|Securities available-for-sale              |  |                 | 2,686,752   |   |          |   | 96,218      |  | 3.58 |                 |  |   | 2,891,174   |   |             |   | 95,996    |  | 3.32 |  
|Restricted equity securities               |  |                 | 804,398     |   |          |   | 38,696      |  | 4.81 |                 |  |   | 258,947     |   |             |   | 12,800    |  | 4.94 |  
|Interest-bearing deposits in banks         |  |                 | 217,555     |   |          |   | 5,129       |  | 2.36 |                 |  |   | 206,613     |   |             |   | 2,699     |  | 1.31 |  
|Federal funds sold                         |  |                 | 4,156,068   |   |          |   | 139,144     |  | 3.35 |                 |  |   | 5,348,167   |   |             |   | 75,983    |  | 1.42 |  
|                                           |  |                 |             |   |          |   |             |  |      |                 |  |   |             |   |             |   |           |  |      |  
|Total Interest Earning Assets              |  |                 | 128,260,831 |   |          |   | 8,775,912   |  | 6.84 | %               |  |   | 74,459,365  |   |             |   | 4,102,489 |  | 5.51 | %
|Cash and due from banks                    |  |                 | 2,633,035   |   |          |   |             |  |      |                 |  |   | 1,742,032   |   |             |   |           |  |      |  
|Other assets                               |  |                 | 1,940,916   |   |          |   |             |  |      |                 |  |   | 1,008,555   |   |             |   |           |  |      |  
|Allowance for loan losses                  |  |                 | (1,475,410  | ) |          |   |             |  |      |                 |  |   | (788,128    | ) |             |   |           |  |      |  
|Assets held for sale                       |  |                 | 13,731,636  |   |          |   |             |  |      |                 |  |   | 58,839,936  |   |             |   |           |  |      |  
|                                           |  |                 |             |   |          |   |             |  |      |                 |  |   |             |   |             |   |           |  |      |  
|Total Assets                               |  | $               | 145,091,008 |   |          |   |             |  |      |                 |  | $ | 135,261,760 |   |             |   |           |  |      |  
|                                           |  |                 |             |   |          |   |             |  |      |                 |  |   |             |   |             |   |           |  |      |  
|Interest checking deposits                 |  | $               | 6,832,565   |   |          | $ | 105,248     |  | 1.54 | %               |  | $ | 3,522,204   |   |             | $ | 54,857    |  | 1.56 | %
|Money market deposits                      |  |                 | 10,489,281  |   |          |   | 198,387     |  | 1.89 |                 |  |   | 10,964,014  |   |             |   | 207,025   |  | 1.89 |  
|Savings deposits                           |  |                 | 20,018,301  |   |          |   | 395,035     |  | 1.97 |                 |  |   | 14,520,815  |   |             |   | 287,211   |  | 1.98 |  
|Time deposits $100,000 and over            |  |                 | 22,677,554  |   |          |   | 809,269     |  | 3.57 |                 |  |   | 11,577,522  |   |             |   | 309,707   |  | 2.68 |  
|Other time deposits                        |  |                 | 37,442,668  |   |          |   | 1,267,906   |  | 3.39 |                 |  |   | 21,463,349  |   |             |   | 565,907   |  | 2.64 |  
|Federal funds purchased                    |  |                 | 285,178     |   |          |   | 9,715       |  | 3.41 |                 |  |   | 258,664     |   |             |   | 3,190     |  | 1.23 |  
|Short-term borrowings                      |  |                 | 1,095,890   |   |          |   | 33,081      |  | 3.02 |                 |  |   |            |   |             |   |          |  |     |  
|Long-term borrowings                       |  |                 | 6,219,178   |   |          |   | 198,885     |  | 3.20 |                 |  |   |            |   |             |   |          |  |     |  
|                                           |  |                 |             |   |          |   |             |  |      |                 |  |   |             |   |             |   |           |  |      |  
|Total interest-bearing liabilities         |  |                 | 105,060,615 |   |          |   | 3,017,526   |  | 2.87 | %               |  |   | 62,306,568  |   |             |   | 1,427,897 |  | 2.29 | %
|Demand deposits                            |  |                 | 12,161,430  |   |          |   |             |  |      |                 |  |   | 7,678,001   |   |             |   |           |  |      |  
|Other liabilities                          |  |                 | 927,823     |   |          |   |             |  |      |                 |  |   | 317,750     |   |             |   |           |  |      |  
|Liabilities held for sale                  |  |                 | 12,698,731  |   |          |   |             |  |      |                 |  |   | 54,453,763  |   |             |   |           |  |      |  
|                                           |  |                 |             |   |          |   |             |  |      |                 |  |   |             |   |             |   |           |  |      |  
|Total Liabilities                          |  |                 | 130,848,599 |   |          |   |             |  |      |                 |  |   | 124,756,082 |   |             |   |           |  |      |  
|Shareholders Equity                       |  |                 | 14,242,409  |   |          |   |             |  |      |                 |  |   | 10,505,678  |   |             |   |           |  |      |  
|                                           |  |                 |             |   |          |   |             |  |      |                 |  |   |             |   |             |   |           |  |      |  
|Total Liabilities and Shareholders Equity |  | $               | 145,091,008 |   |          |   |             |  |      |                 |  | $ | 135,261,760 |   |             |   |           |  |      |  
|                                           |  |                 |             |   |          |   |             |  |      |                 |  |   |             |   |             |   |           |  |      |  
|Net Interest Earnings                      |  |                 |             |   |          | $ | 5,758,386   |  | 3.97 | %               |  |   |             |   |             | $ | 2,674,592 |  | 3.22 | %
|                                           |  |                 |             |   |          |   |             |  |      |                 |  |   |             |   |             |   |           |  |      |  
|Net Yield on Interest Earning Assets       |  |                 |             |   |          |   |             |  | 4.49 | %               |  |   |             |   |             |   |           |  | 3.59 | %
|                                           |  |                 |             |   |          |   |             |  |      |                 |  |   |             |   |             |   |           |  |      |  

Loan fees, net of costs, are included in total interest income. Gross loan fee income totaled $635,837 and
$450,499 as of December 31, 2005 and 2004, respectively. The average balance of nonaccrual assets is included in the calculation of asset yields.



3



---

##### 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.



|                                          |  |                                                           |           |   |                                                           |   |         |                           |  |   |                |   |  |              |           |   |                           |   |         |   |  |   |           |  
|----------------------------------------- |  | --------------------------------------------------------- | --------- | - | --------------------------------------------------------- | - | ------- | ------------------------- |  | - | -------------- | - |  | ------------ | --------- | - | ------------------------- | - | ------- | - |  | - | --------- | -
|                                          |  | 2005 Compared to 2004 Increase(Decrease) Due to Change In |           |   | 2004 Compared to 2003 Increase(Decrease) Due to Change In |  
|                                          |  | Average Volume                                            |           |   | Average Rate                                              |   |         | Total Increase (Decrease) |  |   | Average Volume |   |  | Average Rate |           |   | Total Increase (Decrease) |  
|Interest Income:                          |  |                                                           |           |   |                                                           |   |         |                           |  |   |                |   |  |              |           |   |                           |   |         |   |  |   |           |  
|Loans, net of unearned                    |  | $                                                         | 3,746,302 |   |                                                           | $ | 835,412 |                           |  | $ | 4,581,714      |   |  | $            | 2,461,598 |   |                           | $ | 130,052 |   |  | $ | 2,591,650 |  
|Securities available-for-sale             |  |                                                           | (7,040    | ) |                                                           |   | 7,262   |                           |  |   | 222            |   |  |              | 61,123    |   |                           |   | 7,368   |   |  |   | 68,491    |  
|Restricted equity securities              |  |                                                           | 26,248    |   |                                                           |   | (352    | )                         |  |   | 25,896         |   |  |              | 4,293     |   |                           |   | (1,763  | ) |  |   | 2,530     |  
|Interest-bearing deposits in banks        |  |                                                           | 150       |   |                                                           |   | 2,280   |                           |  |   | 2,430          |   |  |              | (12,716   | ) |                           |   | (1,496  | ) |  |   | (14,212   | )
|Federal funds sold                        |  |                                                           | (20,179   | ) |                                                           |   | 83,340  |                           |  |   | 63,161         |   |  |              | 14,928    |   |                           |   | 18,041  |   |  |   | 32,969    |  
|                                          |  |                                                           |           |   |                                                           |   |         |                           |  |   |                |   |  |              |           |   |                           |   |         |   |  |   |           |  
|Total Interest Income                     |  | $                                                         | 3,745,481 |   |                                                           | $ | 927,942 |                           |  | $ | 4,673,423      |   |  | $            | 2,529,226 |   |                           | $ | 152,202 |   |  | $ | 2,681,428 |  
|                                          |  |                                                           |           |   |                                                           |  
|Interest Expense:                         |  |                                                           |           |   |                                                           |   |         |                           |  |   |                |   |  |              |           |   |                           |   |         |   |  |   |           |  
|Interest checking deposits                |  | $                                                         | 50,999    |   |                                                           | $ | (608    | )                         |  | $ | 50,391         |   |  | $            | 23,318    |   |                           | $ | (4,917  | ) |  | $ | 18,401    |  
|Money market deposits                     |  |                                                           | (8,978    | ) |                                                           |   | 340     |                           |  |   | (8,638         | ) |  |              | 76,936    |   |                           |   | (8,058  | ) |  |   | 68,878    |  
|Savings deposits                          |  |                                                           | 108,487   |   |                                                           |   | (663    | )                         |  |   | 107,824        |   |  |              | 234,323   |   |                           |   | 1,886   |   |  |   | 236,209   |  
|Certificates of deposit $100,000 and over |  |                                                           | 370,489   |   |                                                           |   | 129,073 |                           |  |   | 499,562        |   |  |              | 213,092   |   |                           |   | 6,944   |   |  |   | 220,036   |  
|Other time deposits                       |  |                                                           | 507,997   |   |                                                           |   | 194,002 |                           |  |   | 701,999        |   |  |              | 379,395   |   |                           |   | 3,019   |   |  |   | 382,414   |  
|Federal funds purchased                   |  |                                                           | 359       |   |                                                           |   | 6,166   |                           |  |   | 6,525          |   |  |              | 3,188     |   |                           |   | (2      | ) |  |   | 3,186     |  
|Short-term borrowings                     |  |                                                           | 33,081    |   |                                                           |   |        |                           |  |   | 33,081         |   |  |              |          |   |                           |   |        |   |  |   |          |  
|Long-term borrowings                      |  |                                                           | 198,885   |   |                                                           |   |        |                           |  |   | 198,885        |   |  |              |          |   |                           |   |        |   |  |   |          |  
|                                          |  |                                                           |           |   |                                                           |   |         |                           |  |   |                |   |  |              |           |   |                           |   |         |   |  |   |           |  
|Total Interest Expense                    |  | $                                                         | 1,261,319 |   |                                                           | $ | 328,310 |                           |  | $ | 1,589,629      |   |  | $            | 930,252   |   |                           | $ | (1,128  | ) |  | $ | 929,124   |  
|                                          |  |                                                           |           |   |                                                           |   |         |                           |  |   |                |   |  |              |           |   |                           |   |         |   |  |   |           |  
|Net Interest Income                       |  | $                                                         | 2,484,162 |   |                                                           | $ | 599,632 |                           |  | $ | 3,083,794      |   |  | $            | 1,598,974 |   |                           | $ | 153,330 |   |  | $ | 1,752,304 |  
|                                          |  |                                                           |           |   |                                                           |   |         |                           |  |   |                |   |  |              |           |   |                           |   |         |   |  |   |           |  

INVESTMENT PORTFOLIO

All securities at December 31, 2005 and December 31, 2004 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, 2005 and the weighted average yields of such securities. The weighted average yields are calculated on the basis of the cost and effective yields weighted for the scheduled maturity of each security.



|                          |  |                         |         |       |                       |   |        |                        |           |  |                    |        |  |       |   |  |        |   |       |   |   |  |   |   |  |   |          
|------------------------- |  | ----------------------- | ------- | ----- | --------------------- | - | ------ | ---------------------- | --------- |  | ------------------ | ------ |  | ----- | - |  | ------ | - | ----- | - | - |  | - | - |  | - | ---------
|                          |  | Due in One Year or Less |         |       | Due After 1  5 Years |   |        | Due After 5 - 10 Years |           |  | Due After 10 Years |        |  | Total
|                          |  | Amount                  |         | Yield |                       |   | Amount |                        | Yield     |  |                    | Amount |  | Yield |   |  | Amount |   | Yield |   |  
|U. S. government agencies |  | $                       |        |       |                      | % |        | $                      | 2,253,156 |  | 3.49               | %      |  | $     |  |  |       | % |       | $ |  |  |  | % |  | $ | 2,253,156
|Corporate securities      |  |                         | 300,627 |       | 6.50                  |   |        |                        |          |  |                   |        |  |       |  |  |       |   |       |   |  |  |  |   |  |   | 300,627  
|                          |  |                         |         |       |                       |   |        |                        |           |  |                    |        |  |       |   |  |        |   |       |   |   |  |   |   |  |   |          
|Total                     |  | $                       | 300,627 |       |                       |   |        | $                      | 2,253,156 |  |                    |        |  | $     |  |  |        |   |       | $ |  |  |   |   |  | $ | 2,553,783
|                          |  |                         |         |       |                       |   |        |                        |           |  |                    |        |  |       |   |  |        |   |       |   |   |  |   |   |  |   |          



4



---

##### 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 2005 |             |   | December 2004 |   |            | December 2003 | 
|Commercial, financial and agricultural          |  | $             | 81,138,129  |   |               | $ | 45,157,571 |               |  | $ | 24,593,797 |  
|Real estate-mortgage                            |  |               | 27,982,694  |   |               |   | 20,598,689 |               |  |   | 6,800,214  |  
|Consumer                                        |  |               | 35,056,410  |   |               |   | 24,014,637 |               |  |   | 10,112,506 |  
|                                                |  |               |             |   |               |   |            |               |  |   |            |  
|Gross Loans                                     |  |               | 144,177,233 |   |               |   | 89,770,897 |               |  |   | 41,506,517 |  
|Unearned income and deferred fees               |  |               | 139,449     |   |               |   | 180,898    |               |  |   | 77,850     |  
|                                                |  |               |             |   |               |   |            |               |  |   |            |  
|Loans, net of unearned income and deferred fees |  |               | 144,316,682 |   |               |   | 89,951,795 |               |  |   | 41,584,367 |  
|Less: Allowance for loan losses                 |  |               | (1,777,345  | ) |               |   | (1,123,214 | )             |  |   | (540,601   | )
|                                                |  |               |             |   |               |   |            |               |  |   |            |  
|Loans, net of unearned income                   |  | $             | 142,539,337 |   |               | $ | 88,828,581 |               |  | $ | 41,043,766 |  
|                                                |  |               |             |   |               |   |            |               |  |   |            |  

Virtually all of MainStreets business activity is with customers located in its primary market area.
Accordingly, operating results are closely correlated with the economic trends within the region and influenced by the significant industries in the region including furniture, pre-built housing, real estate development, agriculture, and resort and
leisure services. In addition, the ultimate collectibility of the loan portfolio is susceptible to changes in the market condition of the region. The commercial portfolio is diversified, but does have three areas classified as concentrations of
credit at December 31, 2005. The areas of concentrations of credits are in 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. At December 31, 2004 there were three areas classified as concentrations of credit which were loans for real estate with an outstanding balance of
$11,009,692; loans for construction of buildings with an outstanding balance of $10,507,422; and loans for construction of heavy and civil engineering buildings with an outstanding balance of $4,850,326. At December 31, 2003 there were two
areas classified as concentrations of credit which were loans for real estate with an outstanding balance of $7,836,471 and loans for construction of buildings with an outstanding balance of $3,517,369.

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

The following table shows the amount of commercial, financial, and agricultural loans outstanding at December 31, 2005 and their maturity distribution.



|                                          |  |                 |            |                                 |   |                  |  |       |           |  |   |           
|----------------------------------------- |  | --------------- | ---------- | ------------------------------- | - | ---------------- |  | ----- | --------- |  | - | ----------
|                                          |  | Within One Year |            | After One But Within Five
Years |   | After Five Years |  | Total
|Commercial, financial and agricultural    |  | $               | 36,503,111 |                                 | $ | 38,445,203       |  | $     | 6,189,815 |  | $ | 81,138,129
|Interest rates are floating or adjustable |  |                 | 31,133,310 |                                 |   | 13,134,138       |  |       | 2,995,862 |  |   | 47,263,310
|Interest rates are fixed or predetermined |  |                 | 5,369,801  |                                 |   | 25,311,065       |  |       | 3,193,953 |  |   | 33,874,819

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 $36,269, $374,287 and $0 for 2005, 2004 and 2003, respectively, equated to .03%, .57%
and 0%, 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, 2005, December 31, 2004 and December 31, 2003. Nonaccrual loans were
$10,975, $0 and $0 at December 31, 2005, December 31, 2004 and December 31, 2003, respectively. These loans are also considered impaired loans. Lost interest related to impaired loans as of December 31,
2005, December 31, 2004 and December 31, 2003 was $739, $0 and $0, respectively.



5



---

##### Table of Contents

At December 31, 2005, 2004 and 2003 MainStreet had $20,000, $0 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, 2005 |             |   | December 31, 2004 |   |            | December 31, 2003 | 
|Average amount of loans, net of unearned, outstanding during the year                 |  | $                 | 120,396,058 |   |                   | $ | 65,754,464 |                   |  | $ | 24,237,869 |  
|Balance of allowance for loan losses at beginning of year                             |  |                   | 1,123,214   |   |                   |   | 540,601    |                   |  |   | 130,700    |  
|Loans charged off:                                                                    |  |                   |             |   |                   |   |            |                   |  |   |            |  
|Commercial, financial and agricultural                                                |  |                   | (31,219     | ) |                   |   | (361,093   | )                 |  |   |           |  
|Real estate-mortgage                                                                  |  |                   | (22,000     | ) |                   |   |           |                   |  |   |           |  
|Consumer                                                                              |  |                   | (16,264     | ) |                   |   | (13,194    | )                 |  |   |           |  
|                                                                                      |  |                   |             |   |                   |   |            |                   |  |   |            |  
|Total loans charged off:                                                              |  |                   | (69,483     | ) |                   |   | (374,287   | )                 |  |   |           |  
|                                                                                      |  |                   |             |   |                   |   |            |                   |  |   |            |  
|Recoveries of loans previously charged off:                                           |  |                   |             |   |                   |   |            |                   |  |   |            |  
|Commercial, financial and agricultural                                                |  |                   | 33,214      |   |                   |   |           |                   |  |   |           |  
|Real estate- mortgage                                                                 |  |                   |            |   |                   |   |           |                   |  |   |           |  
|Consumer                                                                              |  |                   |            |   |                   |   |           |                   |  |   |           |  
|                                                                                      |  |                   |             |   |                   |   |            |                   |  |   |            |  
|Total recoveries:                                                                     |  |                   | 33,214      |   |                   |   |           |                   |  |   |           |  
|                                                                                      |  |                   |             |   |                   |   |            |                   |  |   |            |  
|Net loans charged off:                                                                |  |                   | (36,269     | ) |                   |   | (374,287   | )                 |  |   |           |  
|Additions to the allowance for loan losses                                            |  |                   | 690,400     |   |                   |   | 956,900    |                   |  |   | 409,901    |  
|                                                                                      |  |                   |             |   |                   |   |            |                   |  |   |            |  
|Balance of allowance for loan losses at end of year                                   |  | $                 | 1,777,345   |   |                   | $ | 1,123,214  |                   |  | $ | 540,601    |  
|                                                                                      |  |                   |             |   |                   |   |            |                   |  |   |            |  
|Ratio of net charge offs during the period to average loans outstanding during period |  |                   | .03         | % |                   |   | .57        | %                 |  |   | .00        | %
|                                                                                      |  |                   |             |   |                   |   |            |                   |  |   |            |  

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 2005 |           |  | December 2004 |   |  | December 2003 |          
|Commercial, financial and agricultural |  | $             | 1,144,900 |  | 56.28         | % |  | $             | 504,241   |  | 50.30  | % |  | $ | 219,562 |  | 59.25  | %
|Real estate  mortgage                 |  |               | 255,924   |  | 19.41         |   |  |               | 143,799   |  | 22.95  |   |  |   | 49,994  |  | 16.38  |  
|Consumer                               |  |               | 376,521   |  | 24.31         |   |  |               | 160,803   |  | 26.75  |   |  |   | 74,144  |  | 24.37  |  
|Specific reserve                       |  |               |          |  |              |   |  |               |          |  |       |   |  |   |        |  |       |  
|Unallocated                            |  |               |          |  |              |   |  |               | 314,371   |  |       |   |  |   | 196,901 |  |       |  
|                                       |  |               |           |  |               |   |  |               |           |  |        |   |  |   |         |  |        |  
|Total                                  |  | $             | 1,777,345 |  | 100.00        | % |  | $             | 1,123,214 |  | 100.00 | % |  | $ | 540,601 |  | 100.00 | %
|                                       |  |               |           |  |               |   |  |               |           |  |        |   |  |   |         |  |        |  

DEPOSITS

Total deposits at December 31, 2005 and 2004 were $124,155,761 and $90,438,450, respectively. See Managements Discussion and Analysis for the major classifications of deposits along with their percentage to total deposits. The
average amount and rate of these deposits can be found in Part I, Item 1, in the Distribution of Assets, Liabilities, and Shareholders Equity: Interest Rate and Interest Differentials table found on page 3 of this document. The maturities of
time deposits $100,000 and over and other time deposits are presented in Part II, Item 7, Note 6.



6



---

##### Table of Contents

RETURN ON EQUITY AND ASSETS

Certain ratios for equity and assets as of December 31, 2005 and December 31, 2004 are presented as follows:



|                                                                  |  |                   |   |  |                   |  
|----------------------------------------------------------------- |  | ----------------- | - |  | ----------------- | -
|                                                                  |  | December 31, 2005 |   |  | December 31, 2004 |  
|Return on average shareholders equity from continuing operations |  | 12.11             | % |  | 5.51              | %
|Return on average shareholders equity                            |  | 23.67             |   |  | 7.38              |  
|Return on average assets from continuing operations               |  | 1.19              |   |  | .43               |  
|Return on average assets                                          |  | 2.32              |   |  | .57               |  
|Dividend payout ratio                                             |  |                  |   |  |                  |  
|Average shareholders equity to average assets                    |  | 9.82              |   |  | 7.77              |  

SHORT-TERM BORROWINGS

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



|                                                              |  |   |           |   |  |   |           |  
|------------------------------------------------------------- |  | - | --------- | - |  | - | --------- | -
|Short-term Federal Home Loan Bank advances                    |  |   |           |   |  |   |           |  
|Amount outstanding at period end                              |  | $ |          |   |  | $ |          |  
|Weighted average interest rate of period end                  |  |   |          |   |  |   |          |  
|Maximum amount outstanding at any month-end during the period |  | $ | 4,000,000 |   |  |   |          |  
|Average amount outstanding during the period                  |  | $ | 1,095,890 |   |  |   |          |  
|Weighted average interest rate during period                  |  |   | 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 |  | $ | 2,025,000 |   |  | $ | 2,550,000 |  
|Average amount outstanding during the period                  |  | $ | 285,178   |   |  | $ | 258,664   |  
|Weighted average interest rate during period                  |  |   | 3.41      | % |  |   | 1.23      | %

Item 2. Description of Property

At December 31, 2005 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. No other real property is owned by MainStreet or the Bank.

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



7



---

##### 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 and 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 1,573,569 shares of its common stock outstanding at January 31, 2006. In addition, the initial organizers of MainStreet received 87,500 warrants in
connection with the initial public offering. Each warrant provides the holder with the right to buy one share of stock at a price of $10.00 per share. As of December 31, 2005, 75,833 warrants are vested and unexercised and 11,667 warrants have
been forfeited and can no longer be exercised. In addition, MainStreet has issued options to present and former employees to purchase 158,377 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, 2005, 158,377 options had fully vested and none had been exercised.

On the opening day of Smith River Bank, C.
R. McCullar, President and CEO, was granted 30,000 stock options at the then fair market value of $10.00. The stock options became exercisable if Mr. McCullar was employed as President and CEO of MainStreet and Smith River Bank on the first
anniversary of the day the bank opened for business (the first 10,000 options) and on each of the next two anniversaries (for each of the next two 10,000 option grants). All such options are now vested and exercisable. Each of the options has a
ten-year term from the date of grant and will expire 30 days after employment is terminated. None of these options have been exercised and are included in the total 158,377 options outstanding at December 31, 2005. Other options in the amount
of 30,000 (also included in the total 158,377 outstanding at year-end), of which all are vested and exercisable, have been granted at the then fair market value of $10.50 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. The maximum number of shares that may be issued under the Plan may not
exceed 137,000. At December 31, 2005, granted stock options totaled 98,377 under this plan and are included in the 158,377 total options outstanding at December 31, 2005.

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 200,789 shares with total proceeds of the additional capital raised by this offering was used principally to aid in
maintaining all regulatory capital ratios at the adequately capitalized level.

In connection with the offering of MainStreets common stock to
capitalize Franklin Bank in 2002, TCF Financial Corporation (TCF) purchased 135,945 shares of MainStreets common stock or 9.99%. This purchase equates to 8.64% of common stock outstanding at February 28, 2006, 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 common stock is currently not being traded actively. At some point in the future, it may investigate trading on the
over-the-counter market or on an established exchange. Before it can do that it will have to find licensed investment banking firms willing to make a market in the stock. There is no trading market in the common stock; therefore, the company has no
information related to high/low bids of the common stock.



8



---

##### Table of Contents

There are approximately 1,781 shareholders of common stock as of December 31, 2005.

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.

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



|                                                           |  |                                                                                             |  |                                                                             |       |                                                                                                                                            |       
|---------------------------------------------------------- |  | ------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- | ----- | ------------------------------------------------------------------------------------------------------------------------------------------ | ------
|Plan Category                                              |  | Number of Securities To be Issued Upon Exercise
of Outstanding Options, Warrants and Rights |  | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights |       | Number of Securities Remaining Available For Future
Issuance Under Equity Compensation Plans (Excluding SecuritiesReflected in Column (a))
|                                                           |  | (a)                                                                                         |  | (b)                                                                         |       | (c)                                                                                                                                       
|Equity compensation plans Approved by security holders     |  | 128,377                                                                                     |  | $                                                                           | 12.53 |                                                                                                                                            | 38,623
|                                                           |  |                                                                                             | 
|Equity compensation plans Not approved by security holders |  | 30,000                                                                                      |  |                                                                             | 10.50 |                                                                                                                                            |      
|                                                           |  |                                                                                             |  |                                                                             |       |                                                                                                                                            |       
|Total                                                      |  | 158,377                                                                                     |  | $                                                                           | 12.14 |                                                                                                                                            | 38,623
|                                                           |  |                                                                                             |  |                                                                             |       |                                                                                                                                            |       

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. on a consolidated basis. This discussion and analysis should be read in conjunction with BankShares consolidated financial statements and related notes
included in Item 7 of this report on Form 10-KSB.

Forward-Looking Statements

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

General

MainStreet was incorporated on January 14, 1999 in 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, Franklin Bank. Franklin Bank has offices in Rocky Mount, Virginia and Hardy, Virginia.



9



---

##### Table of Contents

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 200,789
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.

On January 13, 2005, MainStreet, Smith River Bank and 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, 2005 was $641,087 and MainStreet recorded a contingent liability of $250,000 against such loans. To date, MainStreet has not been required to repurchase any of the loans. 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, 2005.

MainStreet filed a Form 8-K on March 8, 2006
reporting that it will 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 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 now being 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 a very recent review of MainStreets income tax return, 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 will reflect that MainStreet has incurred no tax expense in connection with the
subsidiarys sale in accordance with the updated guidance. This Form 10-KSB and Annual Report reflect no tax expense in connection with the transaction. MainStreet has reviewed the matter in respect to its disclosure controls and believes that
the restatement does 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.

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



10



---

##### Table of Contents

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, 2005 were $153,343,670 compared to $158,342,609 at December 31, 2004, a decline of $4,998,939. This decline resulted from the
divestiture of Smith River Bank during the first quarter of 2005, whose assets were $59,482,118 at December 31, 2004. Assets from continuing operations offset this decline by increasing $54,483,179, or 55.11% from year-end 2004. The largest
components of total assets at December 31, 2005 were net loans in the amount of $142,539,337, cash and due from banks in the amount of $4,310,255 and securities available for sale in the amount of $2,553,783. Total deposits were $124,155,761 at
December 31, 2005, an increase of $33,717,311 or 37.28% over December 31, 2004. Total shareholders equity at December 31, 2005 and 2004 was $15,983,181 and $12,283,579, respectively.

MainStreets net income for the twelve months ending December 31, 2005 and 2004 was $3,370,546 and $775,198, respectively. Basic earnings per share was $2.15
and $.55 for 2005 and 2004, respectively. Diluted earnings per share for 2005 and 2004 were $2.11 and $.55, respectively. Return on average assets in 2005 and 2004 was 2.32% and .57%, respectively while return on average shareholders equity
was 23.67% and 7.38% for 2005 and 2004, respectively. Net income for the year ended 2005 includes 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). Included in net income from continuing operations is a $50,000 additional indemnity loan
expense accrual recorded in the third quarter of 2005. Net income from continuing operations for the year ended 2004 was $579,063 and included an additional $230,000 loan loss provision to cover a commercial loan charge-off in the amount of $334,500
and a reversal of the valuation reserve of the deferred tax asset which added $477,359 to net income as an income tax benefit. Income from the discontinued operations of Smith River Bank was $196,135 for the year ended December 31, 2004.

Franklin Bank opened on September 16, 2002 and ended December 31, 2005 with $152,486,195 in total assets. Franklin Bank operates in a vibrant
market which has a strong economy that provides a distinct advantage to MainStreet. Franklin Bank showed net income for calendar years 2005 and 2004 in the amounts of $1,756,497 (net of tax) and $531,959, respectively. Income in calendar year 2004
included a change in the valuation reserve of the deferred tax asset which added $428,994 to net income as an income tax benefit. In June 2004 Franklin experienced a commercial loan charge-off in the amount of $334,500, which was a participation
loan from Smith River Bank. As a result, an additional $230,000 loan loss provision was recorded in the second quarter of 2004. Franklins net interest margin was 4.47% and 3.61% for the twelve-month periods ended December 31, 2005 and
2004, respectively. The increase in net interest margin is due to a substantial increase in interest income, contributed by both increases in volumes and rates and loan fee income, combined with controlled interest rates on deposit accounts along
with increases in the short-term federal funds rate. Franklins assets repriced faster than their deposits. The Federal Reserve raised short-term interest rates eight times in 2005 and five times during 2004. The year ended with a prime rate of
7.25%. The prime rate, which is the basis for pricing many commercial and consumer loans, follows the short-term interest rate established by the Federal Reserve.

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 increases and deterioration in the real estate market, if it occurs.



11



---

##### Table of Contents

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 2005, net interest income totaled
$5,758,386 compared to $2,674,592 for 2004. The total average interest-earning assets were $128,260,831 and $74,459,365 for the years ending December 31, 2005 and 2004, respectively, an increase of $53,801,466, or 72.26%. The total average
interest-bearing liabilities were $105,060,615 and $62,306,568 for the years ending December 31, 2005 and 2004, respectively, an increase of $42,754,047 or 68.62%. 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 $54,641,594 in 2005 over 2004, or 83.10%. Average time deposits increased $27,079,351 from 2004 to 2005. Average short and
long-term borrowings increased $7,315,068 from 2004 to 2005. The net interest margin for MainStreet at December 31, 2005 and 2004 was 4.49% and 3.59%, respectively, an increase of 90 basis points. The increase in net interest margin is due to a
substantial increase in interest income, contributed by both increases in volumes and rates and loan fee income, combined with controlled interest rates on deposit accounts along with increases in the short-term federal funds rate.

The Federal Reserve raised short-term interest rates eight times in 2005 and five times during 2004. The year ended with a prime rate of 7.25%. The prime rate, which is
the basis for pricing many commercial and consumer loans, follows the short-term interest rate established by the Federal Reserve.

Provision for Loan Losses

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

For the year-to-date periods ending December 31, 2005 and 2004, the provision for loan losses was $690,400 and $956,900, respectively. During the second quarter of
2004 MainStreet recorded a total of $230,000 in loan provisions to cover $334,500 in commercial loan charge-offs, almost all of which was a participation loan at Franklin Bank from Smith River Bank. Strong period over period loan growth at Franklin
Bank also contributed to the loan provision during 2005. The allowance for loan losses, or the reserve, was $1,777,345 and $1,123,214 at December 31, 2005 and 2004, respectively. This allowance equated to 1.23% and 1.25% of loans, net of
unearned income at December 31, 2005 and 2004, respectively. Net charge-offs were $36,269 and $374,287 for 2005 and 2004, respectively, or .03% and .57%, 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.

Noninterest Income

Noninterest income for the years ending December 31, 2005 and December 31, 2004 was $1,103,526 and $1,003,963, respectively, an increase of $99,563, or 9.92%. Service charges on deposit accounts were
$169,601 and $122,416 for the above-referenced time periods, respectively, an increase of $47,185 or 38.54%. NSF charges, net of waives and charge-offs primarily contributed to this increase in service charges on deposit accounts, increasing by
$37,296 or 40.52%. The number of checking accounts are increasing and thereby increasing net NSF income. The addition of Franklins second branch,



12



---

##### Table of Contents

Westlake Branch, on April 9, 2004 also contributed to the increase. Mortgage brokerage income has provided a good
base of noninterest income, although dependent on the health of the real estate market. Mortgage brokerage income increased $120,404 or 50.29% for 2005 as compared to 2004. Franklin Bank has partnered with several different organizations in which
the banks originate mortgage loans, which for the most part, then close in the companies names. Franklin Bank receives fee income from the transactions. Servicing fees collected from Smith River Bank, per the agreement (see
General), were $389,610 for the year ended December 31, 2005. In addition, 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. Affiliate
fees charged to Smith River Bank during the year ended 2004 were $603,769, which also were included in the servicing fee category the 2004 period. MainStreet continues to provide various services to Smith River Bank, per the Servicing Agreement, but
reduced compared to services performed prior to the sale.

Noninterest Expense

Total noninterest expense for the years ending December 31, 2005 and December 31, 2004 was $3,561,508 and $2,619,951, respectively, an increase of $941,557, or
35.94%. The 2005 results contain twelve months of operations of the new Westlake branch of Franklin Bank, which opened on April 9, 2004. The following chart shows the noninterest expense by category for the years ending December 31, 2005
and 2004, the dollar change and the percentage change.



|                               |  |          |           |          |   |               |  |                   |         |  |        |  
|------------------------------ |  | -------- | --------- | -------- | - | ------------- |  | ----------------- | ------- |  | ------ | -
|Expense                        |  | 12-31-05 |           | 12-31-04 |   | Dollar Change |  | Percentage Change |        
|Salaries and employee benefits |  | $        | 1,805,964 |          | $ | 1,291,072     |  | $                 | 514,892 |  | 39.88  | %
|Occupancy and equipment        |  |          | 522,209   |          |   | 451,310       |  |                   | 70,899  |  | 15.71  |  
|Professional fees              |  |          | 265,091   |          |   | 202,592       |  |                   | 62,499  |  | 30.85  |  
|Advertising and promotion      |  |          | 83,848    |          |   | 67,810        |  |                   | 16,038  |  | 23.65  |  
|Outside processing             |  |          | 275,045   |          |   | 194,303       |  |                   | 80,742  |  | 41.55  |  
|Franchise tax                  |  |          | 136,000   |          |   | 61,005        |  |                   | 74,995  |  | 122.93 |  
|Other expenses                 |  |          | 473,351   |          |   | 351,859       |  |                   | 121,492 |  | 34.53  |  

As can be seen by the chart, the largest component of noninterest expense is salaries and employee benefits,
followed by occupancy and equipment costs, and other expenses. MainStreet employees are its most valuable resource and asset. Occupancy and equipment costs include rent, utilities, janitorial service, repairs and maintenance, real estate taxes,
service maintenance contracts and depreciation expense. Professional fees include fees for audit, legal, and other. Outside processing primarily includes data processing, payroll processing, check clearings, and insurance. Other expenses include OCC
assessments, FDIC assessments, supplies, shareholder communications, telephone, postage, director fees, travel expense, meals and entertainment, subscriptions and dues, seminars and education, and contributions. Included in other expenses is an
additional $50,000 accrual recorded in September 2005 as a reserve for MainStreets indemnity obligations to Smith River Bank under the Indemnity Agreement. All categories of noninterest expense as of December 31, 2005 include expense
associated with the Westlake branch of Franklin Bank which opened on April 9, 2004 and direct growth and expansion. The opening of the Westlake branch increased salaries and employee benefits expense, which is already our largest expense. It
also increased occupancy expenses as detailed above. 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, 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 (benefit) on income from continuing operations in the amounts of $885,106 and $(477,359) for the years ended December 31, 2005 and 2004, respectively. Due to the profitability of MainStreet in 2004, the
valuation allowance against the deferred tax asset was reversed which added $477,359 to net income as an income tax benefit. All operating loss carryforwards have been utilized as of December 31, 2005.

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.
| | -- | -------------------------------------------



13



---

##### Table of Contents

Funds not utilized for capital expenditures or lending are invested in overnight federal funds, securities of the U.S.
Government and its agencies, mortgage-backed securities, municipal bonds, and certain other debt and equity securities. Currently, the Corporation has invested in U.S. Agencies, Federal Reserve Bank Stock, Federal Home Loan Bank Stock and corporate
securities. MainStreets policy is not to invest in derivatives or other high-risk instruments at this time. The entire securities portfolio was categorized as available-for-sale at December 31, 2005 and December 31, 2004 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, 2005 and 2004 the breakdown of gross loans in the loan portfolio was as follows:



|                        |  |      |             |  |        |   |  |   |            |  |        |  
|----------------------- |  | ---- | ----------- |  | ------ | - |  | - | ---------- |  | ------ | -
|                        |  | 2005 |             |  | 2004   |  
|Commercial              |  | $    | 81,138,129  |  | 56.28  | % |  | $ | 45,157,571 |  | 50.30  | %
|Residential real estate |  |      | 27,982,694  |  | 19.41  |   |  |   | 20,598,689 |  | 22.95  |  
|Consumer                |  |      | 35,056,410  |  | 24.31  |   |  |   | 24,014,637 |  | 26.75  |  
|                        |  |      |             |  |        |   |  |   |            |  |        |  
|Total                   |  | $    | 144,177,233 |  | 100.00 | % |  | $ | 89,770,897 |  | 100.00 | %
|                        |  |      |             |  |        |   |  |   |            |  |        |  

As can be seen by the loan portfolio dollars, MainStreet experienced substantial loan growth in 2005 compared to
2004 with an increase of $54,406,336 or 60.61% due to continuing loan demand. Although some loan growth for Franklin Bank is anticipated, it is unlikely that the current level of loan growth will continue. 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 and consumer loans each decreased as a percentage of total loans from year end 2004 to year end 2005.

The commercial portfolio is diversified, but does have three areas classified as concentrations of credit at December 31, 2005. The areas of concentrations of
credits are in loans for real estate with an outstanding balance of $21,295,282; loans for construction of heavy and civil engineering buildings with an outstanding balance of $13,097,467; and loans for construction of buildings with an outstanding
balance of $20,834,734. At December 31, 2004, there were three areas classified as concentrations of credit. The areas of concentrations of credits were in loans for real estate with an outstanding balance of $11,009,692; loans for construction
of heavy and civil engineering buildings with an outstanding balance of $4,850,326; and loans for construction of buildings with an outstanding balance of $10,507,422.

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 $10,975 and $0 at December 31, 2005 and December 31, 2004, respectively.
There were no loans past due more than 90 days at December 31, 2005 or 2004.

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 116.24% and 99.46% as of
December 31, 2005 and 2004, respectively. The ratio of total time deposits to total deposits was 61.04% and 48.53% at December 31, 2005 and 2004, respectively. Total deposits at December 31, 2005 and 2004 were $124,155,761 and
$90,438,450, respectively. The deposit mix was as follows:



|                                |  |      |             |  |        |   |  |   |            |  |        |  
|------------------------------- |  | ---- | ----------- |  | ------ | - |  | - | ---------- |  | ------ | -
|                                |  | 2005 |             |  | 2004   |  
|Demand deposits                 |  | $    | 13,053,658  |  | 10.51  | % |  | $ | 8,983,120  |  | 9.93   | %
|Interest checking deposits      |  |      | 6,776,003   |  | 5.46   |   |  |   | 4,544,443  |  | 5.02   |  
|Money market deposits           |  |      | 9,342,298   |  | 7.53   |   |  |   | 12,023,169 |  | 13.30  |  
|Savings deposits                |  |      | 19,197,943  |  | 15.46  |   |  |   | 21,002,367 |  | 23.22  |  
|Time deposits $100,000 and over |  |      | 30,005,051  |  | 24.17  |   |  |   | 15,533,446 |  | 17.18  |  
|Other time deposits             |  |      | 45,780,808  |  | 36.87  |   |  |   | 28,351,905 |  | 31.35  |  
|                                |  |      |             |  |        |   |  |   |            |  |        |  
|Total                           |  | $    | 124,155,761 |  | 100.00 | % |  | $ | 90,438,450 |  | 100.00 | %
|                                |  |      |             |  |        |   |  |   |            |  |        |  



14



---

##### Table of Contents

Total deposits increased $33,717,311, or 37.28% at year-end 2005 compared to year-end 2004. The chart reflects that the
largest increases as a percentage of total deposits were in time deposits $100,000 and over and other time deposits. Demand deposits and interest checking deposits, as a percentage of total deposits, increased in 2005 in comparison to 2004 but at a
slower rate than time deposits. Money market deposits and savings deposits, as a percentage of total deposits, decreased in 2005 in comparison to the prior year. The levels and mix of deposits are influenced by such factors as customer service,
interest rates paid, service charges, and the convenience of banking locations. Competition is fierce from other depository institutions in our market. Management attempts to identify and implement the pricing and marketing strategies that will help
control the overall cost of deposits and to maintain a stable deposit mix. The overall yield on interest bearing deposits was 2.85% and 2.30% for 2005 and 2004, respectively. This increase of 55 basis points is reflective of the competition in the
overall market and the commitment to control funding costs during 2005 even with the short-term interest rate increases. Rate increases in 2005 on savings, interest checking and money market deposit rates were minimal due to the higher rates paid on
2004 for these deposits.

Shareholders Equity

Total shareholders equity was $15,983,181 and $12,283,579 at December 31, 2005 and 2004, 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 200,789 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, 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 which were $42,625,299 at December 31, 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 Loan Bank (FHLB). MainStreets ratio of liquid assets to total liabilities (exclusive of assets and liabilities held for sale) at December 31, 2005 and
December 31, 2004 was 1.94% and 6.78%, respectively. As can be seen from the ratios, liquidity is a concern for management. Deposits provide the basic core for liquidity; however; deposits have not kept up with the pace of loan demand and thus
MainStreet has relied on alternative funding. MainStreet has borrowings of $10,000,000 outstanding from FHLB at year end along with $2,025,000 in overnight borrowings from our correspondent bank. MainStreet may be required to increase interest rates
to obtain additional core funding. If core funding cannot be increased, additional alternative funding may be increased or loan growth restricted. MainStreet has policies in effect to monitor alternative funding and to limit it according to asset
size.



15



---

##### Table of Contents

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. The following table shows the sensitivity of MainStreets balance sheet at December 31, 2005, but is not necessarily indicative of the position on other
dates.



|                                                             |  |                      |            |   |                                    |   |             |                     |  |   |                            |    |  |       |            |   |  |   |             |  
|------------------------------------------------------------ |  | -------------------- | ---------- | - | ---------------------------------- | - | ----------- | ------------------- |  | - | -------------------------- | -- |  | ----- | ---------- | - |  | - | ----------- | -
|                                                             |  | Three Months or Less |            |   | Greater than ThreeTo Twelve Months |   |             | Cumulative One Year |  |   | Greater than Twelve Months |    |  | Total |           
|Rate Sensitive Assets:                                       |  |                      |            |   |                                    |   |             |                     |  |   |                            |    |  |       |            |   |  |   |             |  
|Time Balances                                                |  | $                    | 106,313    |   |                                    | $ |            |                     |  | $ | 106,313                    |    |  | $     |           |   |  | $ | 106,313     |  
|Federal Funds Sold                                           |  |                      |           |   |                                    |   |            |                     |  |   |                           |    |  |       |           |   |  |   |            |  
|Investments                                                  |  |                      | 300,627    |   |                                    |   |            |                     |  |   | 300,627                    |    |  |       | 2,253,156  |   |  |   | 2,553,783   |  
|Restricted Equity Securities                                 |  |                      |           |   |                                    |   |            |                     |  |   |                           |    |  |       | 1,011,600  |   |  |   | 1,011,600   |  
|Gross Loans                                                  |  |                      |            |   |                                    |   |             |                     |  |   |                            |    |  |       |            |   |  |   |             |  
|Commercial  Secured by Real Estate                          |  |                      | 27,516,277 |   |                                    |   | 3,854,408   |                     |  |   | 31,370,685                 |    |  |       | 29,860,993 |   |  |   | 61,231,678  |  
|Retail  Secured by Real Estate                              |  |                      | 49,148,631 |   |                                    |   | 4,544,287   |                     |  |   | 53,692,918                 |    |  |       | 15,481,244 |   |  |   | 69,174,162  |  
|Commercial  Other                                           |  |                      | 5,762,193  |   |                                    |   | 131,776     |                     |  |   | 5,893,969                  |    |  |       | 4,815,104  |   |  |   | 10,709,073  |  
|Other Retail Loans                                           |  |                      | 1,514,186  |   |                                    |   | 277,109     |                     |  |   | 1,791,295                  |    |  |       | 1,271,025  |   |  |   | 3,062,320   |  
|                                                             |  |                      |            |   |                                    |   |             |                     |  |   |                            |    |  |       |            |   |  |   |             |  
|Total Rate Sensitive Assets                                  |  | $                    | 84,348,227 |   |                                    | $ | 8,807,580   |                     |  | $ | 93,155,807                 |    |  | $     | 54,693,122 |   |  | $ | 147,848,929 |  
|                                                             |  |                      |            |   |                                   
|Rate Sensitive Liabilities:                                  |  |                      |            |   |                                    |   |             |                     |  |   |                            |    |  |       |            |   |  |   |             |  
|Interest Checking                                            |  | $                    | 6,776,003  |   |                                    | $ |            |                     |  | $ | 6,776,003                  |    |  | $     |           |   |  |   | 6,776,003   |  
|Money Markets                                                |  |                      | 9,342,298  |   |                                    |   |            |                     |  |   | 9,342,298                  |    |  |       |           |   |  |   | 9,342,298   |  
|Savings                                                      |  |                      | 19,197,943 |   |                                    |   |            |                     |  |   | 19,197,943                 |    |  |       |           |   |  |   | 19,197,943  |  
|Time Deposits $100,000 and over                              |  |                      | 7,595,789  |   |                                    |   | 14,350,495  |                     |  |   | 21,946,284                 |    |  |       | 8,058,767  |   |  |   | 30,005,051  |  
|Other Time Deposits                                          |  |                      | 11,559,545 |   |                                    |   | 24,182,582  |                     |  |   | 35,742,127                 |    |  |       | 10,038,681 |   |  |   | 45,780,808  |  
|Federal funds purchased                                      |  |                      | 2,025,000  |   |                                    |   |            |                     |  |   | 2,025,000                  |    |  |       |           |   |  |   | 2,025,000   |  
|Long-term borrowings                                         |  |                      | 10,000,000 |   |                                    |   |            |                     |  |   | 10,000,000                 |    |  |       |           |   |  |   | 10,000,000  |  
|                                                             |  |                      |            |   |                                    |   |             |                     |  |   |                            |    |  |       |            |   |  |   |             |  
|Total Rate Sensitive Liabilities                             |  | $                    | 66,496,578 |   |                                    | $ | 38,533,077  |                     |  | $ | 105,029,655                |    |  | $     | 18,097,448 |   |  | $ | 123,127,103 |  
|Interest Rate Sensitivity Gap                                |  | $                    | 17,851,649 |   |                                    | $ | (29,725,497 | )                   |  | $ | (11,873,848                | )  |  | $     | 36,595,674 |   |  | $ | 24,721,826  |  
|                                                             |  |                      |            |   |                                   
|Cumulative interest sensitivity gap                          |  | $                    | 17,851,649 |   |                                    | $ | (11,873,848 | )                   |  | $ |                           |    |  | $     | 24,721,826 |   |  |   |            |  
|Ratio of sensitivity gap to rate sensitive assets            |  |                      | 12.07      | % |                                    |   | (20.10      | )%                  |  |   | (8.03                      | )% |  |       | 24.75      | % |  |   | 16.72       | %
|Cumulative ratio of sensitivity gap to rate sensitive assets |  |                      | 12.07      | % |                                    |   | (8.03       | )%                  |  |   |                           |    |  |       | 16.72      | % |  |   |            |  

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 does not own any real property and has a modest amount of fixed assets. The affiliate fee paid by Franklin Bank and the
servicing fee paid by Smith River 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.



16



---

##### Table of Contents

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 dividends until it is deemed appropriate by management. No dividends to date have been paid by MainStreet.

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 Party Transactions Related Party Transactions |  | Footnote #4                                                             
|Long-term Borrowings                                  |  | Footnote #7                                                             

Impact of Inflation

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

Recent Accounting Developments

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



17



---

##### 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, VA

We have audited the accompanying
consolidated balance sheets of MainStreet BankShares, Inc. as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in stockholders equity, and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the companys internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MainStreet BankShares, Inc. as of December 31, 2005 and 2004, and the results of its operations
and its cash flows for each of 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, WV

March 3, 2006



18



---

##### Table of Contents

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets



|                                                                                                                                           |  |                  |             |   |                  |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------- | ----------- | - | ---------------- | - | ----------- | -
|                                                                                                                                           |  | December 31,2005 |             |   | December 31,2004 |  
|ASSETS                                                                                                                                     |  |                  |             |   |                  |   |             |  
|                                                                                                                                           |  |                 
|Cash and due from banks                                                                                                                    |  | $                | 4,310,255   |   |                  | $ | 1,862,473   |  
|Interest-bearing deposits in other banks                                                                                                   |  |                  | 106,313     |   |                  |   | 265,215     |  
|Federal funds sold                                                                                                                         |  |                  |            |   |                  |   | 2,292,000   |  
|Securities available-for-sale                                                                                                              |  |                  | 2,553,783   |   |                  |   | 3,615,619   |  
|Restricted equity securities                                                                                                               |  |                  | 1,011,600   |   |                  |   | 251,800     |  
|                                                                                                                                           |  |                 
|Loans:                                                                                                                                     |  |                  |             |   |                  |   |             |  
|Commercial loans                                                                                                                           |  |                  | 81,138,129  |   |                  |   | 45,157,571  |  
|Residential real estate loans                                                                                                              |  |                  | 27,982,694  |   |                  |   | 20,598,689  |  
|Consumer loans                                                                                                                             |  |                  | 35,056,410  |   |                  |   | 24,014,637  |  
|                                                                                                                                           |  |                  |             |   |                  |   |             |  
|Total Gross Loans                                                                                                                          |  |                  | 144,177,233 |   |                  |   | 89,770,897  |  
|Unearned deferred fees and costs, net                                                                                                      |  |                  | 139,449     |   |                  |   | 180,898     |  
|                                                                                                                                           |  |                  |             |   |                  |   |             |  
|Loans, net of unearned deferred fees and costs                                                                                             |  |                  | 144,316,682 |   |                  |   | 89,951,795  |  
|Less: Allowance for loan losses                                                                                                            |  |                  | (1,777,345  | ) |                  |   | (1,123,214  | )
|                                                                                                                                           |  |                  |             |   |                  |   |             |  
|Net Loans                                                                                                                                  |  |                  | 142,539,337 |   |                  |   | 88,828,581  |  
|Furniture, fixtures and equipment, net                                                                                                     |  |                  | 815,760     |   |                  |   | 706,305     |  
|Accrued interest receivable                                                                                                                |  |                  | 635,358     |   |                  |   | 320,690     |  
|Other assets                                                                                                                               |  |                  | 1,371,264   |   |                  |   | 717,808     |  
|Assets held for sale                                                                                                                       |  |                  |            |   |                  |   | 59,482,118  |  
|                                                                                                                                           |  |                  |             |   |                  |   |             |  
|Total Assets                                                                                                                               |  | $                | 153,343,670 |   |                  | $ | 158,342,609 |  
|                                                                                                                                           |  |                  |             |   |                  |   |             |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                       |  |                  |             |   |                  |   |             |  
|                                                                                                                                           |  |                 
|Deposits:                                                                                                                                  |  |                  |             |   |                  |   |             |  
|Non-interest bearing demand deposits                                                                                                       |  | $                | 13,053,658  |   |                  | $ | 8,983,120   |  
|Interest checking deposits                                                                                                                 |  |                  | 6,776,003   |   |                  |   | 4,544,443   |  
|Money market deposits                                                                                                                      |  |                  | 9,342,298   |   |                  |   | 12,023,169  |  
|Savings deposits                                                                                                                           |  |                  | 19,197,943  |   |                  |   | 21,002,367  |  
|Time deposits $100,000 and over                                                                                                            |  |                  | 30,005,051  |   |                  |   | 15,533,446  |  
|Other time deposits                                                                                                                        |  |                  | 45,780,808  |   |                  |   | 28,351,905  |  
|                                                                                                                                           |  |                  |             |   |                  |   |             |  
|Total Deposits                                                                                                                             |  |                  | 124,155,761 |   |                  |   | 90,438,450  |  
|                                                                                                                                           |  |                 
|Federal funds purchased                                                                                                                    |  |                  | 2,025,000   |   |                  |   |            |  
|Long-term borrowings                                                                                                                       |  |                  | 10,000,000  |   |                  |   |            |  
|Accrued interest payable and other liabilities                                                                                             |  |                  | 1,179,728   |   |                  |   | 615,965     |  
|Liabilities held for sale                                                                                                                  |  |                  |            |   |                  |   | 55,004,615  |  
|                                                                                                                                           |  |                  |             |   |                  |   |             |  
|Total Liabilities                                                                                                                          |  |                  | 137,360,489 |   |                  |   | 146,059,030 |  
|                                                                                                                                           |  |                  |             |   |                  |   |             |  
|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 1,573,569 and 1,528,818 in 2005 and in 2004,
respectively |  |                  | 15,350,606  |   |                  |   | 14,949,509  |  
|Accumulated retained earnings (deficit)                                                                                                    |  |                  | 663,531     |   |                  |   | (2,707,015  | )
|Accumulated other comprehensive income (loss)                                                                                              |  |                  | (30,956     | ) |                  |   | 41,085      |  
|                                                                                                                                           |  |                  |             |   |                  |   |             |  
|Total Shareholders Equity                                                                                                                 |  |                  | 15,983,181  |   |                  |   | 12,283,579  |  
|                                                                                                                                           |  |                  |             |   |                  |   |             |  
|Total Liabilities and Shareholders Equity                                                                                                 |  | $                | 153,343,670 |   |                  | $ | 158,342,609 |  
|                                                                                                                                           |  |                  |             |   |                  |   |             |  

See accompanying notes to consolidated financial statements.



19



---

##### Table of Contents

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Income



|                                                        |  |                              |           |                              |   |           |  
|------------------------------------------------------- |  | ---------------------------- | --------- | ---------------------------- | - | --------- | -
|                                                        |  | Year Ended December 31, 2005 |           | Year Ended December 31, 2004 |  
|Interest Income:                                        |  |                              |           |                              |   |           |  
|Interest and fees on loans                              |  | $                            | 8,496,725 |                              | $ | 3,915,011 |  
|Interest on interest-bearing deposits                   |  |                              | 5,129     |                              |   | 2,699     |  
|Interest on federal funds sold                          |  |                              | 139,144   |                              |   | 75,983    |  
|Interest on securities available-for-sale               |  |                              | 96,218    |                              |   | 95,996    |  
|Dividends on restricted equity securities               |  |                              | 38,696    |                              |   | 12,800    |  
|                                                        |  |                              |           |                              |   |           |  
|Total Interest Income                                   |  |                              | 8,775,912 |                              |   | 4,102,489 |  
|                                                        |  |                              |           |                              |   |           |  
|Interest Expense:                                       |  |                              |           |                              |   |           |  
|Interest on time deposits $100,000 and over             |  |                              | 809,269   |                              |   | 309,707   |  
|Interest on other deposits                              |  |                              | 1,966,576 |                              |   | 1,115,000 |  
|Interest on federal funds purchased                     |  |                              | 9,715     |                              |   | 3,190     |  
|Interest on short-term borrowings                       |  |                              | 33,081    |                              |   |          |  
|Interest on long-term borrowings                        |  |                              | 198,885   |                              |   |          |  
|                                                        |  |                              |           |                              |   |           |  
|Total Interest Expense                                  |  |                              | 3,017,526 |                              |   | 1,427,897 |  
|                                                        |  |                              |           |                              |   |           |  
|Net Interest Income                                     |  |                              | 5,758,386 |                              |   | 2,674,592 |  
|Provision for loan losses                               |  |                              | 690,400   |                              |   | 956,900   |  
|                                                        |  |                              |           |                              |   |           |  
|Net Interest Income After Provision for Loan Losses     |  |                              | 5,067,986 |                              |   | 1,717,692 |  
|                                                        |  |                              |           |                              |   |           |  
|Noninterest Income:                                     |  |                              |           |                              |   |           |  
|Service charges on deposit accounts                     |  |                              | 169,601   |                              |   | 122,416   |  
|Mortgage brokerage income                               |  |                              | 359,844   |                              |   | 239,440   |  
|Servicing fee income                                    |  |                              | 517,098   |                              |   | 603,769   |  
|Other fee income and miscellaneous income               |  |                              | 56,983    |                              |   | 38,338    |  
|                                                        |  |                              |           |                              |   |           |  
|Total Noninterest Income                                |  |                              | 1,103,526 |                              |   | 1,003,963 |  
|                                                        |  |                              |           |                              |   |           |  
|Noninterest Expense:                                    |  |                              |           |                              |   |           |  
|Salaries and employee benefits                          |  |                              | 1,805,964 |                              |   | 1,291,072 |  
|Occupancy and equipment expense                         |  |                              | 522,209   |                              |   | 451,310   |  
|Professional fees                                       |  |                              | 265,091   |                              |   | 202,592   |  
|Advertising and promotion                               |  |                              | 83,848    |                              |   | 67,810    |  
|Outside processing                                      |  |                              | 275,045   |                              |   | 194,303   |  
|Franchise tax                                           |  |                              | 136,000   |                              |   | 61,005    |  
|Other expenses                                          |  |                              | 473,351   |                              |   | 351,859   |  
|                                                        |  |                              |           |                              |   |           |  
|Total Noninterest Expense                               |  |                              | 3,561,508 |                              |   | 2,619,951 |  
|                                                        |  |                              |           |                              |   |           |  
|Net Income From Continuing Operations Before Tax        |  | $                            | 2,610,004 |                              | $ | 101,704   |  
|Income Tax Expense (Benefit)                            |  |                              | 885,106   |                              |   | (477,359  | )
|                                                        |  |                              |           |                              |   |           |  
|Net Income From Continuing Operations                   |  |                              | 1,724,898 |                              |   | 579,063   |  
|Discontinued Operations:                                |  |                              |           |                              |   |           |  
|Gain on sale of subsidiary, net of $0 tax               |  |                              | 1,406,165 |                              |   |          |  
|Income from discontinued operations, net of $0 tax      |  |                              | 239,483   |                              |   | 196,135   |  
|                                                        |  |                              |           |                              |   |           |  
|Net Income From Discontinued Operations                 |  | $                            | 1,645,648 |                              | $ | 196,135   |  
|                                                        |  |                             
|Net Income                                              |  | $                            | 3,370,546 |                              | $ | 775,198   |  
|                                                        |  |                              |           |                              |   |           |  
|Basic Net Income Per Share From Continuing Operations   |  | $                            | 1.10      |                              | $ | .41       |  
|                                                        |  |                              |           |                              |   |           |  
|Basic Net Income Per Share                              |  | $                            | 2.15      |                              | $ | .55       |  
|                                                        |  |                              |           |                              |   |           |  
|Diluted Net Income Per Share From Continuing Operations |  | $                            | 1.08      |                              | $ | .41       |  
|                                                        |  |                              |           |                              |   |           |  
|Diluted Net Income Per Share                            |  | $                            | 2.11      |                              | $ | .55       |  
|                                                        |  |                              |           |                              |   |           |  

See accompanying notes to consolidated financial statements.



20



---

##### Table of Contents

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders Equity



|                                                          |  |                         |  |              |            |   |                                         |   |            |                                               |  |   |                            |   |  |   |            |  
|--------------------------------------------------------- |  | ----------------------- |  | ------------ | ---------- | - | --------------------------------------- | - | ---------- | --------------------------------------------- |  | - | -------------------------- | - |  | - | ---------- | -
|                                                          |  | Number of Common Shares |  | Common Stock |            |   | Accumulated Retained Earnings (Deficit) |   |            | Accumulated Other Comprehensive Income (Loss) |  |   | Total Shareholders Equity |  
|Balance at December 31, 2003                              |  | 1,368,970               |  | $            | 13,583,103 |   |                                         | $ | (3,482,213 | )                                             |  | $ | 119,573                    |   |  | $ | 10,220,463 |  
|Comprehensive Income:                                     |  |                         |  |              |            |   |                                         |   |            |                                               |  |   |                            |   |  |   |            |  
|Net income                                                |  |                        |  |              |           |   |                                         |   | 775,198    |                                               |  |   |                           |   |  |   | 775,198    |  
|Net unrealized holding losses during the period           |  |                        |  |              |           |   |                                         |   |           |                                               |  |   | (75,703                    | ) |  |   | (75,703    | )
|Deferred income tax expense                               |  |                        |  |              |           |   |                                         |   |           |                                               |  |   | (2,785                     | ) |  |   | (2,785     | )
|                                                          |  |                         |  |              |            |   |                                         |   |            |                                               |  |   |                            |   |  |   |            |  
|Total Comprehensive Income                                |  |                        |  |              |           |   |                                         |   | 775,198    |                                               |  |   | (78,488                    | ) |  |   | 696,710    |  
|Issuance of common stock                                  |  | 159,848                 |  |              | 1,444,347  |   |                                         |   |           |                                               |  |   |                           |   |  |   | 1,444,347  |  
|Stock issuance costs                                      |  |                        |  |              | (77,941    | ) |                                         |   |           |                                               |  |   |                           |   |  |   | (77,941    | )
|                                                          |  |                         |  |              |            |   |                                         |   |            |                                               |  |   |                            |   |  |   |            |  
|Balance at December 31, 2004                              |  | 1,528,818               |  | $            | 14,949,509 |   |                                         | $ | (2,707,015 | )                                             |  | $ | 41,085                     |   |  | $ | 12,283,579 |  
|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 |  
|                                                          |  |                         |  |              |            |   |                                         |   |            |                                               |  |   |                            |   |  |   |            |  

See accompanying notes to consolidated financial statements.



21



---

##### Table of Contents

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows



|                                                           |  |                              |             |   |                              |   |             |  
|---------------------------------------------------------- |  | ---------------------------- | ----------- | - | ---------------------------- | - | ----------- | -
|                                                           |  | Year Ended December 31, 2005 |             |   | Year Ended December 31, 2004 |  
|Cash Flows From Operating Activities:                      |  |                              |             |   |                              |   |             |  
|                                                           |  |                             
|Net income from continuing operations                      |  | $                            | 1,724,898   |   |                              | $ | 579,063     |  
|Net income from discontinued operations                    |  |                              | 1,645,648   |   |                              |   | 196,135     |  
|Provision for loan losses                                  |  |                              | 690,400     |   |                              |   | 956,900     |  
|Gain on sale of subsidiary                                 |  |                              | (1,606,165  | ) |                              |   |            |  
|Depreciation and amortization                              |  |                              | 154,153     |   |                              |   | 114,478     |  
|Amortization of discounts and premiums, net                |  |                              | 3,512       |   |                              |   | 3,084       |  
|Increase in accrued interest receivable                    |  |                              | (314,668    | ) |                              |   | (181,552    | )
|Increase in other assets                                   |  |                              | (634,724    | ) |                              |   | (632,935    | )
|Increase in accrued interest payable and other liabilities |  |                              | 563,763     |   |                              |   | 467,678     |  
|                                                           |  |                              |             |   |                              |   |             |  
|Net cash provided by operating activities                  |  |                              | 2,226,817   |   |                              |   | 1,502,851   |  
|                                                           |  |                              |             |   |                              |   |             |  
|Cash Flows From Investing Activities:                      |  |                              |             |   |                              |   |             |  
|                                                           |  |                             
|Decrease in interest-bearing deposits in other banks       |  |                              | 158,902     |   |                              |   | 883,083     |  
|(Increase) decrease in federal funds sold                  |  |                              | 2,292,000   |   |                              |   | (858,000    | )
|Purchases of furniture, fixtures, and equipment            |  |                              | (263,608    | ) |                              |   | (319,646    | )
|Purchases of securities available-for-sale                 |  |                              | (8,496,771  | ) |                              |   | (13,296,157 | )
|Purchases of restricted equity securities                  |  |                              | (759,800    | ) |                              |   | (101,900    | )
|Calls/maturities of securities available-for-sale          |  |                              | 9,500,000   |   |                              |   | 14,300,000  |  
|Sales of restricted equity securities                      |  |                              |            |   |                              |   | 33,000      |  
|Loan originations and principal collections, net           |  |                              | (54,401,156 | ) |                              |   | (48,741,715 | )
|Proceeds from sale of subsidiary                           |  |                              | 6,500,000   |   |                              |   |            |  
|Costs of subsidiary sale                                   |  |                              | (212,527    | ) |                              |   |            |  
|Increase in assets held for sale                           |  |                              | (1,661,809  | ) |                              |   | (4,609,499  | )
|Increase in liabilities held for sale                      |  |                              | 1,422,326   |   |                              |   | 4,373,359   |  
|                                                           |  |                              |             |   |                              |   |             |  
|Net cash used in investing activities                      |  |                              | (45,922,443 | ) |                              |   | (48,337,475 | )
|                                                           |  |                              |             |   |                              |   |             |  
|Cash Flows From Financing Activities:                      |  |                              |             |   |                              |   |             |  
|                                                           |  |                             
|Increase in time deposits $100,000 and over                |  |                              | 14,471,605  |   |                              |   | 10,057,900  |  
|Increase in other time deposits                            |  |                              | 17,428,903  |   |                              |   | 16,527,535  |  
|Increase in other deposits                                 |  |                              | 1,816,803   |   |                              |   | 19,272,986  |  
|Increase in federal funds purchased                        |  |                              | 2,025,000   |   |                              |   |            |  
|Proceeds from short-term borrowings                        |  |                              | 4,000,000   |   |                              |   |            |  
|Repayment of short-term borrowings                         |  |                              | (4,000,000  | ) |                              |   |            |  
|Proceeds from long-term borrowings                         |  |                              | 10,000,000  |   |                              |   |            |  
|Proceeds from issuance of common stock                     |  |                              | 402,759     |   |                              |   | 1,444,347   |  
|Costs of stock issuance                                    |  |                              | (1,662      | ) |                              |   | (77,941     | )
|                                                           |  |                              |             |   |                              |   |             |  
|Net cash provided by financing activities                  |  |                              | 46,143,408  |   |                              |   | 47,224,827  |  
|                                                           |  |                              |             |   |                              |   |             |  
|Net increase in cash and cash equivalents                  |  |                              | 2,447,782   |   |                              |   | 390,203     |  
|Cash and cash equivalents at beginning of year             |  | $                            | 1,862,473   |   |                              | $ | 1,472,270   |  
|                                                           |  |                              |             |   |                              |   |             |  
|Cash and cash equivalents at end of year                   |  | $                            | 4,310,255   |   |                              | $ | 1,862,473   |  
|                                                           |  |                              |             |   |                              |   |             |  
|Supplemental disclosure of cash flow information:          |  |                              |             |   |                              |   |             |  
|Cash paid during the year for interest                     |  | $                            | 2,782,450   |   |                              | $ | 1,036,146   |  
|                                                           |  |                              |             |   |                              |   |             |  
|Cash paid during the period for taxes                      |  | $                            | 1,512,320   |   |                              | $ |            |  
|                                                           |  |                              |             |   |                              |   |             |  
|Supplemental disclosure of noncash transactions:           |  |                              |             |   |                              |   |             |  
|Assets of subsidiary sold                                  |  | $                            | 61,108,248  |   |                              | $ |            |  
|                                                           |  |                              |             |   |                              |   |             |  
|Liabilities of subsidiary sold                             |  | $                            | 56,426,941  |   |                              | $ |            |  
|                                                           |  |                              |             |   |                              |   |             |  
|Transfer of loans to foreclosed property                   |  | $                            | 20,000      |   |                              | $ |            |  
|                                                           |  |                              |             |   |                              |   |             |  

See accompanying notes to consolidated financial statements.



22



---

##### Table of Contents

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

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 subsidiary, Franklin Community Bank, National Association (Franklin Bank).

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 183,334 shares of common stock. The offering was set
to terminate on October 31, 2004, but the Board of Directors of BankShares extended the offering until January 31, 2005. There were no brokerage or underwriting commissions payable in the private placement. The offering terminated
January 31, 2005 having sold 200,789 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.

On January 13, 2005, MainStreet, Smith River Community Bank N.A. (Smith River Bank), and Argentum Capital Management, LLC
(Argentum) 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, MainSteet 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, 2005 was $641,087 and MainStreet recorded a contingent liability of $250,000 against such loans. 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, 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.



23



---

##### Table of Contents

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

Due to the sale of Smith River Bank on March 23, 2005, the assets and liabilities of Smith River Bank
are shown as assets and liabilities held for sale on the consolidated balance sheet at December 31, 2004 and are shown below. The assets and liabilities as of the sale date March 23, 2005 are also shown below.

Smith River Community Bank, N.A.

Condensed
Balance Sheets



|                                                        |  |               |            |   |                  |   |            |  
|------------------------------------------------------- |  | ------------- | ---------- | - | ---------------- | - | ---------- | -
|                                                        |  | March 23,2005 |            |   | December 31,2004 |  
|Assets                                                  |  |               |            |   |                  |   |            |  
|                                                        |  |              
|Cash and due from banks                                 |  | $             | 1,422,050  |   |                  | $ | 1,337,869  |  
|Interest-bearing deposits in other banks                |  |               | 77,807     |   |                  |   | 76,148     |  
|Federal funds sold                                      |  |               | 3,011,000  |   |                  |   | 1,239,000  |  
|Securities available-for-sale and restricted securities |  |               | 4,594,077  |   |                  |   | 6,236,419  |  
|Gross loans                                             |  |               | 51,743,570 |   |                  |   | 50,283,233 |  
|Unearned deferred fees and costs, net                   |  |               | 169,184    |   |                  |   | 163,312    |  
|                                                        |  |               |            |   |                  |   |            |  
|Loans, net of unearned deferred fees and costs          |  |               | 51,912,754 |   |                  |   | 50,446,545 |  
|Allowance for loan losses                               |  |               | (667,695   | ) |                  |   | (645,115   | )
|                                                        |  |               |            |   |                  |   |            |  
|Net loans                                               |  |               | 51,245,059 |   |                  |   | 49,801,430 |  
|Other Assets                                            |  |               | 768,011    |   |                  |   | 791,252    |  
|                                                        |  |               |            |   |                  |   |            |  
|Total Assets                                            |  | $             | 61,118,004 |   |                  | $ | 59,482,118 |  
|                                                        |  |               |            |   |                  |   |            |  
|Liabilities and Shareholders Equity                    |  |               |            |   |                  |   |            |  
|                                                        |  |              
|Deposits                                                |  | $             | 56,184,856 |   |                  | $ | 54,834,754 |  
|Accrued interest payable and other liabilities          |  |               | 242,085    |   |                  |   | 169,861    |  
|                                                        |  |               |            |   |                  |   |            |  
|Total Liabilities                                       |  |               | 56,426,941 |   |                  |   | 55,004,615 |  
|                                                        |  |              
|Shareholders Equity                                    |  |               |            |   |                  |   |            |  
|Common shareholders equity                             |  |               | 4,691,063  |   |                  |   | 4,477,503  |  
|                                                        |  |               |            |   |                  |   |            |  
|Total Liabilities and Shareholders Equity              |  | $             | 61,118,004 |   |                  | $ | 59,482,118 |  
|                                                        |  |               |            |   |                  |   |            |  

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. Following is a condensed breakdown of the specific categories.



24



---

##### Table of Contents

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

Smith River Community Bank, N. A.

Condensed Income Statements



|                                                    |  |                              |         |                              |   |          
|--------------------------------------------------- |  | ---------------------------- | ------- | ---------------------------- | - | ---------
|                                                    |  | Year Ended December 31, 2005 |         | Year Ended December 31, 2004
|Interest Income                                     |  | $                            | 823,586 |                              | $ | 3,152,753
|Interest Expense                                    |  |                              | 268,853 |                              |   | 1,059,290
|                                                    |  |                              |         |                              |   |          
|Net Interest Income                                 |  |                              | 554,733 |                              |   | 2,093,463
|Provision for Loan Losses                           |  |                              |        |                              |   | 522,300  
|                                                    |  |                              |         |                              |   |          
|Net Interest Income After Provision for Loan Losses |  |                              | 554,733 |                              |   | 1,571,163
|Noninterest Income                                  |  |                              | 143,362 |                              |   | 483,949  
|Noninterest Expense                                 |  |                              | 458,612 |                              |   | 1,858,977
|                                                    |  |                              |         |                              |   |          
|Net Income                                          |  | $                            | 239,483 |                              | $ | 196,135  
|                                                    |  |                              |         |                              |   |          

(b) Principles of Consolidation

The consolidated financial statements include the accounts of MainStreet and its wholly-owned 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 and 2004 in the amount of $127,488 and $603,769, respectively, has not been eliminated. Due from accounts in the
amount of $53,228 and $105,772 for 2005 and 2004, respectively have not been eliminated. Interest-bearing deposit accounts in the amount of $0 and $223,652 for 2005 and 2004, respectively, have 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



25



---

##### Table of Contents

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

unable to collect all amounts due according to the contractual terms of the loan agreement.
BankShares impaired loans include nonaccrual loans, troubled debt restructurings, and certain other nonperforming loans. For collateral dependent loans, BankShares bases the measurement of these impaired loans on the fair value of the
loans collateral properties. For all other loans, BankShares uses the measurement of these impaired loans on the more readily determinable of the present value of expected future cash flows discounted at the loans effective interest rate
or the observable market price. Impairment losses are recognized through an increase in the allowance for loan losses and a corresponding charge to the provision for loan losses. Adjustments to impairment losses due to changes in the fair value of
impaired loans collateral properties are included in the provision for loan losses.

(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.



26



---

##### Table of Contents

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

(i) Furniture, Fixtures and Equipment

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

(j) Organizational Costs

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

(k) Stock Options and Warrants

As
permitted by Statement of Financial Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, the Corporation accounts for its stock options and warrants using the intrinsic value method prescribed in Accounting Principles
Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees. APB No. 25 requires compensation expense to be recorded on the date of grant only if the current market value price of the underlying stock exceeds the
exercise price. Proforma information is presented as if net income had been determined under the fair value based method as prescribed by SFAS No. 123.

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



|                                                                                                               |  |                 |           |   |                |   |        
|-------------------------------------------------------------------------------------------------------------- |  | --------------- | --------- | - | -------------- | - | -------
|                                                                                                               |  | Year Ended 2005 |           |   | Year Ended2004
|Net income as reported                                                                                         |  | $               | 3,370,546 |   |                | $ | 775,198
|Deduct total stock-based employee compensation expense determined under fair value based method for all awards |  |                 | (470,192  | ) |                |   |       
|                                                                                                               |  |                 |           |   |                |   |        
|Proforma net income                                                                                            |  | $               | 2,900,354 |   |                | $ | 775,198
|                                                                                                               |  |                
|Net income per share:                                                                                          |  |                 |           |   |                |   |        
|Basic-as reported                                                                                              |  | $               | 2.15      |   |                | $ | .55    
|Basic-proforma                                                                                                 |  | $               | 1.85      |   |                | $ | .55    
|                                                                                                               |  |                
|Diluted-as reported                                                                                            |  | $               | 2.11      |   |                | $ | .55    
|Diluted-proforma                                                                                               |  | $               | 1.82      |   |                | $ | .55    

(l) Advertising Costs

Advertising costs are expensed as incurred.



27



---

##### Table of Contents

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

(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, 2005 basic income per share and average shares outstanding were $2.15 and 1,571,093. Diluted income per share and average shares outstanding were $2.11 and 1,592,003. For the year ending December 31, 2004 basic income per
share and average shares outstanding were $.55 and 1,401,303. Diluted income per share and average shares outstanding were $.55 and 1,401,960.

At
December 31, 2005 and December 31, 2004, there were 75,833 warrants outstanding and exercisable. At December 31, 2005 and 2004, there were 158,377 and 60,000 options, respectively, that were outstanding and exercisable.

(o) Use of Estimates

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

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

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

While management uses available information to recognize losses on loans, further reductions in the carrying
amounts of loans may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans. Such agencies may require the
Corporation to recognize additional losses based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the estimated losses on loans may change materially in
the near term. However, the amount of the change that is reasonably possible cannot be estimated.

Note 2  Securities

The carrying values, unrealized gains and losses and approximate market values of investment securities at December 31, 2005 and 2004 are shown in the following
tables. The entire investment portfolio is classified as available-for-sale to preserve maximum liquidity for funding needs.



28



---

##### Table of Contents

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2005 and 2004



|                                    |  |                |           |                        |   |                         |  |   |                          |   |  |   |          
|----------------------------------- |  | -------------- | --------- | ---------------------- | - | ----------------------- |  | - | ------------------------ | - |  | - | ---------
|                                    |  | 2005          
|                                    |  | Amortized Cost |           | Gross Unrealized Gains |   | Gross Unrealized Losses |  |   | Approximate Market 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
|                                    |  |                |           |                        |   |                         |  |   |                          |   |  |   |          
|                                    | 
|                                    |  | 2004          
|                                    |  | Amortized Cost |           | Gross Unrealized Gains |   | Gross Unrealized Losses |  |   | Approximate Market Value
|U.S. government agencies            |  | $              | 3,299,880 |                        | $ | 8,871                   |  | $ | (3,938                   | ) |  | $ | 3,304,813
|Corporate bonds                     |  |                | 307,548   |                        |   | 3,258                   |  |   |                         |   |  |   | 310,806  
|                                    |  |                |           |                        |   |                         |  |   |                          |   |  |   |          
|Total securities available-for-sale |  | $              | 3,607,428 |                        | $ | 12,129                  |  | $ | (3,938                   | ) |  | $ | 3,615,619
|                                    |  |                |           |                        |   |                         |  |   |                          |   |  |   |          

The amortized costs and market values of securities available-for-sale at December 31, 2005, 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.



|                                          |  |                |           |                          |   |          
|----------------------------------------- |  | -------------- | --------- | ------------------------ | - | ---------
|                                          |  | Amortized Cost |           | Approximate Market Value
|Due in one year or less                   |  | $              | 300,686   |                          | $ | 300,627  
|Due after one year but within five years  |  |                | 2,300,000 |                          |   | 2,253,156
|Due after five years but within ten years |  |                |          |                          |   |         
|Due after ten years                       |  |                |          |                          |   |         
|                                          |  |                |           |                          |   |          
|                                          |  | $              | 2,600,686 |                          | $ | 2,553,783
|                                          |  |                |           |                          |   |          

There were no gains or losses realized on sales and calls of securities available-for-sale in 2005 and 2004,
respectively. Securities available-for-sale with carrying values approximating $2,300,000 at December 31, 2005 and December 31, 2004, respectively, were pledged to secure public deposits and for other purposes as required or permitted by
law. There were no securities at December 31, 2005 or December 31, 2004 that have been in an impaired position for greater than twelve months; however, there were four securities with an unrealized loss at December 31, 2005 and one
security with an unrealized loss at December 31, 2004.

Federal reserve bank stock is included in restricted equity securities and totaled $366,100 at
December 31, 2005 and $153,100 at December 31, 2004, respectively.

Note 3  Allowance for Loan Losses

Changes in the allowance for loan losses for the years ended December 31, 2005 and 2004 are as follows:



|                                 |  |      |           |   |      |   |           |  
|-------------------------------- |  | ---- | --------- | - | ---- | - | --------- | -
|                                 |  | 2005 |           |   | 2004 |  
|Balance at beginning of year     |  | $    | 1,123,214 |   |      | $ | 540,601   |  
|Provision for loan losses        |  |      | 690,400   |   |      |   | 956,900   |  
|Losses charged to allowance      |  |      | (69,483   | ) |      |   | (374,287  | )
|Recoveries credited to allowance |  |      | 33,214    |   |      |   |          |  
|                                 |  |      |           |   |      |   |           |  
|Balance at end of year           |  | $    | 1,777,345 |   |      | $ | 1,123,214 |  
|                                 |  |      |           |   |      |   |           |  



29



---

##### Table of Contents

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

Net charge-offs of $36,269 and $374,287 for 2005 and 2004 equated to .03% and .57% respectively, of
average loans outstanding, net of unearned deferred fees and costs. The loan loss reserve at December 31, 2005 and 2004 was $1,777,345 and $1,123,214, respectively, or 1.23% and 1.25%, respectively, of loans, net of unearned deferred fees and
costs. There were no loans past due more than 90 days at December 31, 2005 and December 31, 2004. Nonaccrual loans were $10,975 and $0 at 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, 2005 and December 31, 2004 was $739 and $0, respectively. The average balance during 2005 and 2004 for impaired loans was approximately $15,955 and $178,841,
respectively. Interest income reflected in the 2005 and 2004 income statements related to impaired loans was $1,579 and $0, respectively.

Overdrafts
reclassified to loans at December 31, 2005 and 2004 were $38,250 and $16,091, respectively.

At December 31, 2005 and 2004 the balance of other
real estate was $20,000 and $0, respectively.

Note 4  Related Party Loans

Directors, executive officers and related interests provide the corporation with business and many are among its significant depositors and borrowers. Total amounts outstanding at December 31, 2005 and 2004 for
all such loans are summarized below:



|                             |  |      |            |   |      |   |            |  
|---------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                             |  | 2005 |            |   | 2004 |  
|Balance at beginning of year |  | $    | 3,935,617  |   |      | $ | 3,373,031  |  
|Additions                    |  |      | 7,334,165  |   |      |   | 6,666,710  |  
|Payments                     |  |      | (6,183,050 | ) |      |   | (6,104,124 | )
|                             |  |      |            |   |      |   |            |  
|Balance at end of year       |  | $    | 5,086,732  |   |      | $ | 3,935,617  |  
|                             |  |      |            |   |      |   |            |  

These loans, in the opinion of management, were made in the ordinary course of business on substantially the same
terms, including interest rates and security for loans, as those prevailing at the time in comparable transactions with others and did not involve more than the normal risk of collectibility or present other unfavorable features. Total unfunded
commitments were $3,905,572 and $729,115 at December 31, 2005 and 2004, respectively.

Note 5  Furniture, Fixtures and Equipment

Furniture, fixtures and equipment at December 31, 2005 and 2004 are as follows:



|                                          |  |      |           |   |      |   |          |  
|----------------------------------------- |  | ---- | --------- | - | ---- | - | -------- | -
|                                          |  | 2005 |           |   | 2004 |  
|Furniture and equipment                   |  | $    | 735,655   |   |      | $ | 648,357  |  
|Computer software                         |  |      | 90,635    |   |      |   | 60,310   |  
|Leasehold improvements                    |  |      | 307,476   |   |      |   | 161,491  |  
|                                          |  |      |           |   |      |   |          |  
|                                          |  |      | 1,133,766 |   |      |   | 870,158  |  
|Accumulated depreciation and amortization |  |      | (318,006  | ) |      |   | (163,853 | )
|                                          |  |      |           |   |      |   |          |  
|Furniture, fixtures and equipment, net    |  | $    | 815,760   |   |      | $ | 706,305  |  
|                                          |  |      |           |   |      |   |          |  



30



---

##### Table of Contents

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

Note 6  Deposits

The maturities of time deposits $100,000 and over and other time deposits at December 31, 2005 and 2004 are as follows:



|                         |  |                                 |            |                     |   |           
|------------------------ |  | ------------------------------- | ---------- | ------------------- | - | ----------
|                         |  | 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
|                         |  |                                 |            |                     |   |           
|                         | 
|                         |  | 2004                           
|                         |  | Time Deposits $100,000 and Over |            | Other Time Deposits
|Three months or less     |  | $                               | 7,950,585  |                     | $ | 12,950,390
|Over 3 through 6 months  |  |                                 | 5,305,003  |                     |   | 7,110,508 
|Over 6 through 12 months |  |                                 | 1,244,594  |                     |   | 4,528,012 
|Over 12 months           |  |                                 | 1,033,264  |                     |   | 3,762,995 
|                         |  |                                 |            |                     |   |           
|Total                    |  | $                               | 15,533,446 |                     | $ | 28,351,905
|                         |  |                                 |            |                     |   |           

Total deposit dollars from executive officers, directors, and their related interests at December 31, 2005
and 2004 were $3,214,968 and $3,743,130, respectively.

Note 7  Long-term and short-term borrowings

Long-term borrowings as of December 31, 2005 consist of a Federal Home Loan Bank of Atlanta (FHLB) advance in the amount of $10,000,000. Interest is paid
monthly on the convertible advance. The advance floats at one month LIBOR minus 50 bps for the first year. The rate reprices monthly on the interest payment due date. The rate at December 31, 2005 was 3.87%. The maturity date is May 19,
2010. The advance is callable once on May 19, 2006. FHLB may 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 is not converted on May 19, 2006, the advance will 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.

Short-term borrowings in the amount of $2,025,000
consist 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 annually
for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future. Valuation allowances are established when necessary to reduce deferred tax assets to the amount
expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.



31



---

##### Table of Contents

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

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



|                                  |  |      |         |   |      |   |          |  
|--------------------------------- |  | ---- | ------- | - | ---- | - | -------- | -
|                                  |  | 2005 |         |   | 2004 |  
|Current                           |  | $    | 960,013 |   |      | $ |         |  
|Deferred tax provision (benefit)  |  |      | (74,907 | ) |      |   | 35,651   |  
|Adjustment to valuation allowance |  |      |        |   |      |   | (513,010 | )
|                                  |  |      |         |   |      |   |          |  
|Income Tax Expense (Benefit)      |  | $    | 885,106 |   |      | $ | (477,359 | )
|                                  |  |      |         |   |      |   |          |  

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



|                                        |  |      |         |   |      |   |          |  
|--------------------------------------- |  | ---- | ------- | - | ---- | - | -------- | -
|                                        |  | 2005 |         |   | 2004 |  
|Computed at the expected statutory rate |  | $    | 887,401 |   |      | $ | 34,579   |  
|Nondeductible meals & entertainment     |  |      | 852     |   |      |   | 1,502    |  
|Other                                   |  |      | (3,147  | ) |      |   | (430     | )
|Adjustment to valuation allowance       |  |      |        |   |      |   | (513,010 | )
|                                        |  |      |         |   |      |   |          |  
|Income Tax Expense (Benefit)            |  | $    | 885,106 |   |      | $ | (477,359 | )
|                                        |  |      |         |   |      |   |          |  

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



|                                                 |  |      |         |      |   |        
|------------------------------------------------ |  | ---- | ------- | ---- | - | -------
|                                                 |  | 2005 |         | 2004
|Allowance for loan losses                        |  | $    | 521,563 |      | $ | 315,422
|Net operating loss carry forward                 |  |      |        |      |   | 160,086
|Unrealized loss on securities available for sale |  |      | 15,947  |      |   |       
|Indemnity loan accrual                           |  |      | 100,000 |      |   |       
|Other                                            |  |      | 258     |      |   | 65     
|Organizational costs                             |  |      | 46,491  |      |   | 74,113 
|                                                 |  |      |         |      |   |        
|Deferred tax assets                              |  |      | 684,259 |      |   | 549,686
|                                                 |  |      |         |      |   |        
|Prepaid service contracts and insurance          |  |      | 37,249  |      |   | 25,421 
|Depreciation and amortization                    |  |      | 78,797  |      |   | 46,824 
|Unrealized gain on securities available-for-sale |  |      |        |      |   | 2,785  
|Other                                            |  |      |        |      |   | 82     
|                                                 |  |      |         |      |   |        
|Deferred tax liabilities                         |  |      | 116,046 |      |   | 75,112 
|                                                 |  |      |         |      |   |        
|Net deferred tax assets                          |  | $    | 568,213 |      | $ | 474,574
|                                                 |  |      |         |      |   |        

There are no available net operating loss carry forwards at December 31, 2005.



32



---

##### Table of Contents

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

Note 9  Net Income Per Share



|                                                    |  |                              |           |                    |           |                  |   |     
|--------------------------------------------------- |  | ---------------------------- | --------- | ------------------ | --------- | ---------------- | - | ----
|                                                    |  | 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 |                    | 1,571,093 |                  | $ | 1.10
|Net income from discontinued operations, net of tax |  | $                            | 1,645,648 |                    | 1,571,093 |                  | $ | 1.05
|Net income available to common shareholders         |  | $                            | 3,370,546 |                    | 1,571,093 |                  | $ | 2.15
|Diluted EPS                                         |  |                              |           |                    |           |                  |   |     
|Net income from continuing operations, net of tax   |  | $                            | 1,724,898 |                    | 1,592,003 |                  | $ | 1.08
|Net income from discontinued operations, net of tax |  | $                            | 1,645,648 |                    | 1,592,003 |                  | $ | 1.03
|Net income available to common shareholders         |  | $                            | 3,370,546 |                    | 1,592,003 |                  | $ | 2.11
|                                                    | 
|                                                    |  | Year Ended December 31, 2004
|                                                    |  | Income Numerator             |           | Shares Denominator |           | Per ShareAmount 
|Basic EPS                                           |  |                              |           |                    |           |                  |   |     
|Net income from continuing operations, net of tax   |  | $                            | 579,063   |                    | 1,401,303 |                  | $ | .41 
|Net income from discontinued operations, net of tax |  | $                            | 196,135   |                    | 1,401,303 |                  | $ | .14 
|Net income available to common shareholders         |  | $                            | 775,198   |                    | 1,401,303 |                  | $ | .55 
|Diluted EPS                                         |  |                              |           |                    |           |                  |   |     
|Net income from continuing operations, net of tax   |  | $                            | 579,063   |                    | 1,401,960 |                  | $ | .41 
|Net income from discontinued operations, net of tax |  | $                            | 196,135   |                    | 1,401,960 |                  | $ | .14 
|Net income available to common shareholders         |  | $                            | 775,198   |                    | 1,401,960 |                  | $ | .55 

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,
2005 and 2004.



33



---

##### Table of Contents

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2005 and 2004



|                                                                   |  |                             |         |   |                             |   |         |  
|------------------------------------------------------------------ |  | --------------------------- | ------- | - | --------------------------- | - | ------- | -
|                                                                   |  | Year Ended December 31,2005 |         |   | Year Ended December 31,2004 |  
|Net unrealized holding losses during the year                      |  | $                           | (55,094 | ) |                             | $ | (75,703 | )
|Accumulated other comprehensive income of subsidiary sold          |  |                             | (35,679 | ) |                             |   |         |  
|Less reclassification adjustments for gains included in net income |  |                             |        |   |                             |   |        |  
|Income tax benefit (expense)                                       |  |                             | 18,732  |   |                             |   | (2,785  | )
|                                                                   |  |                             |         |   |                             |   |         |  
|Change in Accumulated Other Comprehensive Income (Loss)            |  | $                           | (72,041 | ) |                             | $ | (78,488 | )
|                                                                   |  |                             |         |   |                             |   |         |  

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 $24,417 for the year ended December 31, 2005.

Note 12  Leases and Commitments

At December 31, 2005 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 $187,000 for the years ended December 31, 2005 and
2004, respectively. Future rental payments under non-cancelable operating leases approximate $208,000, $208,000, $208,000, $189,000 and $181,000 for the years ended December 31, 2006, 2007, 2008, 2009 and 2010, respectively.

Franklin Bank owns a lot adjacent to their Rocky Mount Office with a purchase price of $100,000. No other real property is owned by MainStreet or the Bank.

The Corporation has an employment agreement with its President and Chief Executive Officer. The agreement has a three-year rolling term which has been ended by the
President. Under the terms of the agreement, Mr. McCullar will continue in a consulting capacity after retirement until July 13, 2007. Mr. McCullar has announced his retirement effective April 30, 2006. The Corporation has also
entered into an employment contract with its Executive Vice President and Chief Financial Officer. This agreement also has a three-year term and is automatically extended by one year if not terminated at least 90 days prior to each anniversary. The
Corporation and Franklin Bank also have an employment agreement with Larry A. Heaton, President and Chief Executive Officer of Franklin Bank. This agreement has a rolling one year term that unless terminated 90 days prior to each anniversary date,
is extended automatically for an additional year.



34



---

##### Table of Contents

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

Note 13 - Stock Options and Warrants

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

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

The shareholders of MainStreet approved the 2004 Key Employee Stock Option Plan, (the Plan), at its
Annual Meeting on April 15, 2004. The Plan permits the grant of Non-Qualified Stock Options and Incentive Stock Options to persons designated as Key Employees of BankShares or its subsidiaries. The Plan was effective by the Board of
Directors as of January 21, 2004 and remains in effect, subject to the right of the Board of Directors to terminate the Plan, until January 21, 2009, at which time it terminates except with respect to awards made prior to and outstanding
on that date which remain valid in accordance with their terms. The maximum number of shares that may be issued under the Plan may not exceed 137,000. As of December 31, 2005, there were 98,377 options granted under this Plan.

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

The per share weighted average fair value of stock options granted during 2005 was $4.78 on the date of grant utilizing the Black-Scholes option-pricing model with the
following assumptions:



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

The Corporation applies APB Opinion No. 25, Accounting for Stock Issued to Employees, in accounting for its
stock options and warrants and, accordingly, no compensation cost has been recognized for its stock options or warrants in the consolidated financial statements. The stock options and warrants granted had an exercise price equal to the market value
of the underlying common stock on the date of grant. The following table illustrates the effect on the net income and net income per share if the corporation had applied the fair value recognition provisions of FASB Statement No. 123,
Accounting for Stock Based Compensation, to its stock options and warrants:



35



---

##### Table of Contents

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2005 and 2004



|                                                                                                               |  |                 |           |   |                 |   |        
|-------------------------------------------------------------------------------------------------------------- |  | --------------- | --------- | - | --------------- | - | -------
|                                                                                                               |  | Year Ended 2005 |           |   | Year Ended 2004
|Net income as reported                                                                                         |  | $               | 3,370,546 |   |                 | $ | 775,198
|Deduct total stock-based employee compensation expense determined under fair value based method for all awards |  |                 | (470,192  | ) |                 |   |       
|                                                                                                               |  |                 |           |   |                 |   |        
|Proforma net income                                                                                            |  | $               | 2,900,354 |   |                 | $ | 775,198
|                                                                                                               |  |                
|Net income per share:                                                                                          |  |                 |           |   |                 |   |        
|Basic-as reported                                                                                              |  | $               | 2.15      |   |                 | $ | .55    
|Basic-proforma                                                                                                 |  | $               | 1.85      |   |                 | $ | .55    
|                                                                                                               |  |                
|Diluted-as reported                                                                                            |  | $               | 2.11      |   |                 | $ | .55    
|Diluted-proforma                                                                                               |  | $               | 1.82      |   |                 | $ | .55    

Following is a status and summary of changes of options and warrants during the years ended December 31, 2005
and 2004, respectively.



|                                 |  |                 |  |                
|-------------------------------- |  | --------------- |  | ---------------
|                                 |  | Year Ended 2005 |  | Year Ended 2004
|Outstanding at beginning of year |  | 135,833         |  | 135,833        
|Granted                          |  | 98,377          |  |               
|Exercised                        |  |                |  |               
|Forfeited                        |  |                |  |               
|                                 |  |                 |  |                
|Outstanding at year-end          |  | 234,210         |  | 135,833        
|                                 |  |                 |  |                

The exercise price of the outstanding stock options and warrants have a range of $10.00-$13.30 and $10.00-$10.50
at December 31, 2005 and 2004, respectively. At December 31, 2005 there were 158,377 options and 75,833 warrants exercisable at a weighted average price of $11.45. At December 31, 2004 there were 60,000 options and 75,833 warrants
exercisable at a weighted average price of $10.11. The weighted average contractual maturity of the options and warrants was 7.2 and 6.6 years, respectively.

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 dividends until it is deemed appropriate
by management.

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 the correspondent bank.

BankShares and Franklin Bank are
subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital ratios can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if
undertaken, could have a material effect on the consolidated financial statements. Quantitative measures established by regulations to ensure capital adequacy require BankShares and Franklin Bank to maintain minimum capital ratios. MainStreet and
Franklin Bank were well-capitalized at December 31, 2005. At December 31, 2004, BankShares Tier II risked based capital ratio had fallen below the minimum for a well-capitalized bank along with



36



---

##### Table of Contents

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

Franklin Banks Tier II risk-based capital ratios. In addition, Franklin Banks Tier I leverage
ratio was below the well capitalized level for a denovo bank. (Franklin Bank was no longer in denovo status after September 16, 2005.) As a result, BankShares implemented a capital restoration plan. A private placement offering, which began on
September 20, 2004 and terminated January 31, 2005, raised $1,807,101 in capital through the sale of 200,789 shares of common stock. In addition, BankShares and Smith River Bank entered into a purchase agreement with Argentum Capital
Management, LLC pursuant to which MainStreet sold and Argentum and its assigns purchased all of the outstanding shares of common stock of Smith River Bank for $6,500,000. At December 31, 2004, BankShares and Franklin Bank were above capital
adequacy requirements to which they are subject. Actual capital amounts and ratios for MainStreet are presented in the following table:



|                                                                                          |  |        |            |       |                      |   |        |                                                                  |            |  |      |        |  |       |            |  |       |  
|----------------------------------------------------------------------------------------- |  | ------ | ---------- | ----- | -------------------- | - | ------ | ---------------------------------------------------------------- | ---------- |  | ---- | ------ |  | ----- | ---------- |  | ----- | -
|                                                                                          |  | Actual |            |       | For Capital Adequacy |   |        | To Be Well Capitalized                                           |           
|As of December 31, 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 |            |       | For Capital Adequacy |   |        | To Be Well Capitalized                                           |           
|As of December 31, 2004                                                                   |  | Amount |            | Ratio |                      |   | Amount |                                                                  | Ratio      |  |      | Amount |  | Ratio |           
|Total capital (to risk weighted assets)                                                   |  | $      | 13,365,708 |       | 8.96                 | % |        | $                                                                | 11,929,000 |  | 8.00 | %      |  | $     | 14,912,000 |  | 10.00 | %
|Tier I capital (to risk weighted assets)                                                  |  |        | 12,242,494 |       | 8.21                 |   |        |                                                                  | 5,965,000  |  | 4.00 |        |  |       | 8,947,000  |  | 6.00  |  
|Tier I capital (to average assets)                                                        |  |        | 12,242,494 |       | 7.86                 |   |        |                                                                  | 6,229,000  |  | 4.00 |        |  |       | 7,786,000  |  | 5.00  |  
|                                                                                         
|Actual capital amounts and ratios for Franklin Bank are presented in the following table: | 
|                                                                                          |  |        |           
|                                                                                          |  | Actual |            |       | For Capital Adequacy |   |        | To Be Well Capitalized Under Prompt Corrective Action 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  |  



37



---

##### Table of Contents

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2005 and 2004



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

Note 15  Parent Company Financial Information

CONDENSED BALANCE SHEETS



|                                               |  |                   |            |                   |   |           
|---------------------------------------------- |  | ----------------- | ---------- | ----------------- | - | ----------
|                                               |  | December 31, 2005 |            | December 31, 2004
|Assets                                         |  |                   |            |                   |   |           
|                                               |  |                  
|Cash and due from banks                        |  | $                 | 198,372    |                   | $ | 105,772   
|Interest-bearing deposits in other banks       |  |                   | 1,596,672  |                   |   | 223,652   
|Furniture, fixtures and equipment, net         |  |                   | 110,332    |                   |   | 96,782    
|Other assets                                   |  |                   | 708,122    |                   |   | 164,772   
|Investment in subsidiary bank                  |  |                   | 13,714,780 |                   |   | 7,294,645 
|Investment in assets held for sale             |  |                   |           |                   |   | 4,477,503 
|                                               |  |                   |            |                   |   |           
|Total Assets                                   |  | $                 | 16,328,278 |                   | $ | 12,363,126
|                                               |  |                   |            |                   |   |           
|Liabilities and Shareholders Equity           |  |                   |            |                   |   |           
|Accrued interest payable and other liabilities |  | $                 | 345,097    |                   | $ | 79,547    
|                                               |  |                  
|Shareholders Equity                           |  |                   |            |                   |   |           
|Common shareholders equity                    |  |                   | 15,983,181 |                   |   | 12,283,579
|                                               |  |                   |            |                   |   |           
|Total Liabilities and Shareholders Equity     |  | $                 | 16,328,278 |                   | $ | 12,363,126
|                                               |  |                   |            |                   |   |           



38



---

##### Table of Contents

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

CONDENSED STATEMENTS OF INCOME



|                                                   |  |                              |           |   |                              |   |           |  
|-------------------------------------------------- |  | ---------------------------- | --------- | - | ---------------------------- | - | --------- | -
|                                                   |  | Year Ended December 31, 2005 |           |   | Year Ended December 31, 2004 |  
|Income                                             |  |                              |           |   |                              |   |           |  
|Equity in undistributed income of subsidiary banks |  | $                            | 1,756,498 |   |                              | $ | 531,959   |  
|Equity in undistributed income of assets sold      |  |                              | 239,483   |   |                              |   | 196,135   |  
|Gain on sale of subsidiary                         |  |                              | 1,606,165 |   |                              |   |          |  
|Interest income                                    |  |                              | 34,480    |   |                              |   | 2,608     |  
|Other income                                       |  |                              | 2,862     |   |                              |   | 604,175   |  
|Servicing fee income                               |  |                              | 517,098   |   |                              |   |          |  
|Affiliate fee income                               |  |                              | 815,917   |   |                              |   | 491,806   |  
|                                                   |  |                              |           |   |                              |   |           |  
|Total Income                                       |  |                              | 4,972,503 |   |                              |   | 1,826,683 |  
|                                                   |  |                             
|Expenses                                           |  |                              |           |   |                              |   |           |  
|Salaries and employee benefits                     |  |                              | 797,554   |   |                              |   | 594,782   |  
|Occupancy and equipment expense                    |  |                              | 104,713   |   |                              |   | 93,770    |  
|Professional fees                                  |  |                              | 224,322   |   |                              |   | 161,827   |  
|Outside processing                                 |  |                              | 92,763    |   |                              |   | 69,136    |  
|Indemnity loan accrual                             |  |                              | 250,000   |   |                              |   |          |  
|Other expenses                                     |  |                              | 153,590   |   |                              |   | 180,335   |  
|                                                   |  |                              |           |   |                              |   |           |  
|Total Expenses                                     |  |                              | 1,622,942 |   |                              |   | 1,099,850 |  
|                                                   |  |                              |           |   |                              |   |           |  
|Net Income Before Tax                              |  |                              | 3,349,561 |   |                              |   | 726,833   |  
|Income Tax Benefit                                 |  |                              | (20,985   | ) |                              |   | (48,365   | )
|                                                   |  |                              |           |   |                              |   |           |  
|Net Income                                         |  | $                            | 3,370,546 |   |                              | $ | 775,198   |  
|                                                   |  |                              |           |   |                              |   |           |  



39



---

##### Table of Contents

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

CONDENSED STATEMENTS OF CASH FLOWS



|                                                                 |  |                              |            |   |                              |   |            |  
|---------------------------------------------------------------- |  | ---------------------------- | ---------- | - | ---------------------------- | - | ---------- | -
|                                                                 |  | Year Ended December 31, 2005 |            |   | Year Ended December 31, 2004 |  
|Cash Flows From Operating Activities:                            |  |                              |            |   |                              |   |            |  
|Net income from continuing operations                            |  | $                            | 1,724,898  |   |                              | $ | 579,063    |  
|Net income from discontinued operations                          |  |                              | 1,645,648  |   |                              |   | 196,135    |  
|Adjustments to reconcile net income to net cash from operations: |  |                              |            |   |                              |   |            |  
|Gain on sale of subsidiary                                       |  |                              | (1,606,165 | ) |                              |   |           |  
|Depreciation                                                     |  |                              | 23,753     |   |                              |   | 12,687     |  
|Equity in undistributed income of subsidiary bank                |  |                              | (1,756,498 | ) |                              |   | (531,959   | )
|Equity in assets sold                                            |  |                              | (239,483   | ) |                              |   | (196,135   | )
|Increase in other assets                                         |  |                              | (543,350   | ) |                              |   | (110,553   | )
|Increase in other liabilities                                    |  |                              | 265,550    |   |                              |   | 67,839     |  
|                                                                 |  |                              |            |   |                              |   |            |  
|Net Cash Provided by (Used in) Operating Activities              |  |                              | (485,647   | ) |                              |   | 17,077     |  
|                                                                 |  |                              |            |   |                              |   |            |  
|Cash Flows From Investing Activities:                            |  |                              |            |   |                              |   |            |  
|(Increase) decrease in interest-bearing deposits                 |  |                              | (1,373,020 | ) |                              |   | 918,993    |  
|Purchases of furniture and equipment                             |  |                              | (37,303    | ) |                              |   | (98,097    | )
|Proceeds from sale of subsidiary                                 |  |                              | 6,500,000  |   |                              |   |           |  
|Costs of subsidiary sale                                         |  |                              | (212,527   | ) |                              |   |           |  
|Capital contributed to subsidiary banks                          |  |                              | (4,700,000 | ) |                              |   | (2,175,005 | )
|                                                                 |  |                              |            |   |                              |   |            |  
|Net Cash Provided by (Used in) Investing Activities              |  |                              | 177,150    |   |                              |   | (1,354,109 | )
|                                                                 |  |                              |            |   |                              |   |            |  
|Cash Flows from Financing Activities:                            |  |                              |            |   |                              |   |            |  
|Proceeds from issuance of common stock                           |  |                              | 402,759    |   |                              |   | 1,444,347  |  
|Costs of stock issuance                                          |  |                              | (1,662     | ) |                              |   | (77,941    | )
|                                                                 |  |                              |            |   |                              |   |            |  
|Net Cash Provided By Financing Activities                        |  |                              | 401,097    |   |                              |   | 1,366,406  |  
|                                                                 |  |                              |            |   |                              |   |            |  
|Net Increase in Cash                                             |  |                              | 92,600     |   |                              |   | 29,374     |  
|Cash at Beginning of Year                                        |  |                              | 105,772    |   |                              |   | 76,398     |  
|                                                                 |  |                              |            |   |                              |   |            |  
|Cash at End of Year                                              |  | $                            | 198,372    |   |                              | $ | 105,772    |  
|                                                                 |  |                              |            |   |                              |   |            |  

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, 2005 and 2004 outstanding commitments to extend credit were $42,625,299, and
$34,773,854 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.



40



---

##### Table of Contents

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

Note 17  Concentrations of Credit Risk

Virtually all of MainStreets business activity is with customers located in our primary market area. Accordingly, operating results are closely correlated with the
economic trends within the region and influenced by the significant industries within the region including furniture, pre-built housing, real estate development, agricultural, and resort and leisure services. In addition, the ultimate collectibility
of the loan portfolio is susceptible to changes in the market condition of the region. The commercial portfolio is diversified, but does have three areas classified as concentrations of credit at December 31, 2005. The areas of concentrations
of credits are in 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. At December 31, 2004, there were also three areas classified as concentrations of credit which were loans for real estate with an outstanding balance of $11,009,692, loans for construction of buildings with
an outstanding balance of $10,507,422; and loans for construction of heavy and civil engineering buildings with an outstanding balance of $4,850,326.

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.



41



---

##### Table of Contents

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

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, 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
|                                               |  |                |             |            |   |            



42



---

##### Table of Contents

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

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



|                                               |  |                |            |            |   |           
|---------------------------------------------- |  | -------------- | ---------- | ---------- | - | ----------
|                                               |  | Carrying Value |            | Fair Value
|FINANCIAL ASSETS:                              |  |                |            |            |   |           
|                                               |  |               
|Cash and due from banks                        |  | $              | 1,862,473  |            | $ | 1,862,473 
|Interest-bearing deposits in other banks       |  |                | 265,215    |            |   | 265,215   
|Federal funds sold                             |  |                | 2,292,000  |            |   | 2,292,002 
|Securities available-for-sale                  |  |                | 3,615,619  |            |   | 3,615,619 
|Restricted equity securities                   |  |                | 251,800    |            |   | 251,800   
|Loans, net of unearned deferred fees and costs |  |                | 89,951,795 |            |   | 89,297,574
|                                               |  |                |            |            |   |           
|Total Financial Assets                         |  | $              | 98,238,902 |            | $ | 97,584,683
|                                               |  |                |            |            |   |           
|FINANCIAL LIABILITIES:                         |  |                |            |            |   |           
|                                               |  |               
|Deposits:                                      |  |                |            |            |   |           
|Non-interest bearing demand deposits           |  | $              | 8,983,120  |            | $ | 8,983,120 
|Interest checking deposits                     |  |                | 4,544,443  |            |   | 4,544,443 
|Money market deposits                          |  |                | 12,023,169 |            |   | 12,023,169
|Savings deposits                               |  |                | 21,002,367 |            |   | 21,002,367
|Time deposits $100,000 and over                |  |                | 15,533,446 |            |   | 15,538,781
|Other time deposits                            |  |                | 28,351,905 |            |   | 28,333,822
|                                               |  |                |            |            |   |           
|Total Financial Liabilities                    |  | $              | 90,438,450 |            | $ | 90,425,702
|                                               |  |                |            |            |   |           

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.



43



---

##### Table of Contents

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

None

Item 8A. Controls and Procedures

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

Item 8B. Other Information

None

PART III

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

Directors of the Registrant

MainStreets Board of Directors are divided into three classes that serve
staggered three-year terms. The members of one class are elected at each annual meeting of shareholders and hold office until the third annual meeting following their election or until successors are elected and qualified. The term of the
Class A Directors expires in 2008, the term of the Class B Directors expires in 2006, and the term of the Class C Directors expires in 2007. The following tables set forth material information about MainStreets current executive officers
and directors.



|                                      |  |                                                                
|------------------------------------- |  | ---------------------------------------------------------------
|Name (Age)                            |  | Offices and Positions Held                                     
|Class A Directors  Term Expires 2008
|                                      | 
|Larry A. Heaton (48)                  |  | Director since October 2002                                    
|                                      |  | President/CEO of Franklin Community Bank, N.A. since           
|                                      |  | October 2002                                                   
|                                      | 
|Morton W. Lester (72)                 |  | Director since January 1999                                    
|                                      | 
|Cecil R. McCullar (69)                |  | Director since January 1999                                    
|                                      |  | President/CEO of MainStreet BankShares, Inc. since January 1999
|                                      | 
|Michael A. Turner (52)                |  | Director since December 2002                                   
|                                     
|Class B Directors  Term Expires 2006
|                                      | 
|Jesse D. Cahill, Sr. (75)             |  | Director since January 1999                                    
|                                      | 
|Joseph F. Clark (43)                  |  | Director since July 2001                                       
|                                      | 
|Roxann B. Dillon (72)                 |  | Director since January 1999                                    
|                                      | 
|Joe C. Philpott (74)                  |  | Director since January 1999                                    
|                                      | 
|Joel R. Shepherd (42)                 |  | Director since December 2002                                   



44



---

##### Table of Contents

|                                       |  |                             
|-------------------------------------- |  | ----------------------------
|                                      
|Class C Directors  Terms Expires 2007
|                                       | 
|Charles L. Dalton (42)                 |  | Director since July 2001    
|                                       | 
|John M. Deekens (58)                   |  | Director since July 2001    
|                                       | 
|Danny M. Perdue (60)                   |  | Director since December 2002
|                                       | 
|Milford A. Weaver (80)                 |  | Director since July 1999    

Jesse D. Cahill, Sr. has been a real estate broker and general contractor since 1959. He is a director of Caho,
Inc., Rocuda Finance, Rocuda Mortgage and Rocuda Fast Cash. He owns 50% of Caho, Inc. and 100% of the other three companies. Mr. Cahill will not stand for re-election as a director in April 2006 due to the age requirement for retirement.

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

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

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

Roxann B. Dillon is a principal stockholder in Dillon Insurance Agency. She is a retired school teacher. Ms. Dillon will not stand for
re-election as a director in April 2006 due to the age requirement for retirement.

Larry A. Heaton is President, CEO and a director of Franklin Community
Bank, N.A. From October 2000 until September 2002, Mr. Heaton was a consultant for MainStreet BankShares, Inc. working on the study, application and organization of Franklin Community Bank, N.A. Prior to that, he was Senior Vice
President/Regional Retail Banking Manager with BB&T from July 1999 through April 2000. Prior to that position, he served as President and CEO and Director of the Bank of Ferrum from June 1991 to July 1999. He served as Senior Commercial Loan
Officer at Piedmont Trust Bank (affiliate bank of Bank of Ferrum) from 1983 to 1991, and prior to that, in various capacities with Piedmont Trust Bank. Mr. Heaton serves as a director of the Franklin County YMCA and the United Way of Franklin
County. He also serves on the Board of Trustees for Ferrum College. He is also a member of the Rocky Mount Rotary Club. Mr. Heaton has been appointed by the Board of Directors of MainStreet to succeed Mr. McCullar as President and Chief
Executive Officer of MainStreet effective May 1, 2006.

Morton W. Lester is President of The Lester Corporation, a real estate investment and property
management company, and Vice President of Motor Imports, Inc. Currently, Mr. Lester serves on the Blue Ridge Airport Authority, and has served as its chairman for many years.

Cecil R. McCullar has worked for several banks. Most recently he was the President and CEO of First American FSB, a $450 million thrift which is a wholly owned subsidiary of First American Corporation from 1995 to
1998, and Charter Federal Savings Bank, which was a $750 million thrift with 28 branches throughout southwest Virginia and Knoxville, Tennessee from 1993 to 1995. Mr. McCullar announced his retirement in the January board meeting effective
April 30, 2006.

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

Joe C. Philpott, retired, worked for Bassett Furniture Industries
for 42 years, retiring as Executive Vice President of Manufacturing and a director. Mr. Philpott will not stand for re-election as director in April 2006 due to the age requirement for retirement.

Joel R. Shepherd is the Owner and Manager of Virginia Home Furnishings, Inc., Blue Ridge Antique Center, Inc., 220 Self Storage, Inc., Shepherd Properties, LLC and
Orient Bay, LLC. Prior to developing his current businesses, Mr. Shepherd served from 1986 to 1993 as a Vice President and Portfolio Manager in the Funds Management Division of Dominion Bankshares, Inc. (acquired by First Union).
Mr. Shepherd is also a director of Franklin Community Bank, N.A.



45



---

##### Table of Contents

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.

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

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

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

MainStreet has adopted a Code of Ethics for all of its employees including its Chief Executive and Chief Accounting
Officers. A copy of the Code of Ethics may be obtained without charge upon request by writing to Brenda H. Smith, Executive Vice President, 730 East Church Street, Suite 30, Martinsville, Virginia, 24112.

Item 10. Executive Compensation

The information required by Item 10 of Form 10-KSB appears on pages 14 through 16
of the Corporations 2006 Proxy Statement and is incorporated herein by reference.

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

The information
required by Item 11 of Form 10-KSB appears on pages 9 through 11 of the Corporations 2006 Proxy Statement and is incorporated herein by reference.

Item 12. Certain Relationships and Related Transactions

MainStreets executive officers and directors, and other
corporations, business organizations, and persons with which some of MainStreets executive officers and directors are associated have banking relationships with 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.



46



---

##### Table of Contents

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

Item 13. Exhibits

a) See Index to Exhibits.

Item 14. Principal Accountant Fees and Services

The information required by Item 14 of Form 10-KSB appears in the
Corporations 2006 Proxy Statement under the Audit Committee Report and is incorporated herein by reference.



47



---

##### Table of Contents

SIGNATURES

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

MAINSTREET BANKSHARES, INC.



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

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



|                        |  |                               |  |        
|----------------------- |  | ----------------------------- |  | -------
|NAME                    |  | TITLE                         |  | DATE   
|/s/ Cecil R. McCullar   |  | President and Chief Executive |  | 3/13/06
|Cecil R. McCullar       |  | Officer, Director             |  | Date   
|                        |  |                              
|/s/ Brenda H. Smith     |  | Executive Vice President      |  | 3/13/06
|Brenda H. Smith         |  | Chief Financial Officer       |  | Date   
|                        |  | Corporate Secretary           |  |        
|                        |  |                              
|/s/ Jesse D. Cahill, Sr |  | Director                      |  | 3/13/06
|Jesse D. Cahill, Sr.    |  |                               |  | Date   
|                        |  |                              
|/s/ Joseph F. Clark     |  | Director                      |  | 3/13/06
|Joseph F. Clark         |  |                               |  | Date   
|                        |  |                              
|/s/ Charles L. Dalton   |  | Director                      |  | 3/13/06
|Charles L. Dalton       |  |                               |  | Date   
|                        |  |                              
|/s/ John M. Deekens     |  | Director                      |  | 3/13/06
|John M. Deekens         |  |                               |  | Date   
|                        |  |                              
|/s/ Roxann B. Dillon    |  | Director                      |  | 3/13/06
|Roxann B. Dillon        |  |                               |  | Date   
|                        |  |                              
|/s/ Larry A. Heaton     |  | Director                      |  | 3/13/06
|Larry A. Heaton         |  | President/CEO of              |  | Date   
|                        |  | Franklin Community Bank, N.A. |  |        
|                        |  |                              
|/s/ Morton W. Lester    |  | Director                      |  | 3/13/06
|Morton W. Lester        |  |                               |  | Date   
|                        |  |                              
|/s/ Danny M. Perdue     |  | Director                      |  | 3/13/06
|Danny M. Perdue         |  |                               |  | Date   
|                        |  |                              
|/s/ Joe C. Philpott     |  | Director                      |  | 3/13/06
|Joe C. Philpott         |  |                               |  | Date   
|                        |  |                              
|/s/ Joel R. Shepherd    |  | Chairman of the Board         |  | 3/13/06
|Joel R. Shepherd        |  |                               |  | Date   
|                        |  |                              
|/s/ Michael A. Turner   |  | Director                      |  | 3/13/06
|Michael A. Turner       |  |                               |  | Date   
|                        |  |                              
|/s/ Milford A. Weaver   |  | Director                      |  | 3/13/06
|Milford A. Weaver       |  |                               |  | Date   



48



---

##### 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.                                                                                                                                                                                                                                                                           
|         | 
|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.)
|--- | ---------------------------------------------------------------------------------------------------



49