##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





Form 10-K





(Mark One)

|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

For the fiscal year ended December 31, 2008



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

For the transition period from             to

Commission file number 333-86993





MainStreet BankShares, Inc.

(Exact name of registrant as specified 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)

Registrants telephone number, including area code (276) 632-8054

Securities registered pursuant to Section 12(b) of the Act:



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

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, No Par Value

(Title
of class)





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes   ̈    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes   ̈    No  x

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x    No   ̈

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (check one):



|                                              |  |   |  |                           |  |  
|--------------------------------------------- |  | - |  | ------------------------- |  | -
|Large accelerated filer                       |  |  ̈ |  | Accelerated filer         |  |  ̈
|                                              |  |   | 
|Non-accelerated filer                         |  |  ̈ |  | Smaller reporting company |  | x
|                                              |  |  
|(Do not check if a smaller reporting company) |  |   |  |                          

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 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
last sold, or the average bid and asked price of such common equity, as of June 30, 2008. $17,263,222 based on $14.10 per share.

(Applicable only to corporate registrants) Indicate the number of shares outstanding of each of the registrants classes of common stock, as of the latest practicable date 1,713,375 shares outstanding as of February 28,
2009.

Documents incorporated by reference. Portions of the Corporations 2009 Proxy Statement have been incorporated by reference into
Part III.









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##### Table of Contents

MainStreet BankShares, Inc.

Form 10-K

Index



|           |  |                                                                                                              |  |      
|---------- |  | ------------------------------------------------------------------------------------------------------------ |  | -----
|           |  | PART I                                                                                                       |  |      
|           |  |                                                                                                             
|Item 1     |  | Business                                                                                                     |  | 1-5  
|           |  |                                                                                                             
|Item 1A    |  | Risk Factors                                                                                                 |  | 5    
|           |  |                                                                                                             
|Item 1B    |  | Unresolved Staff Comments                                                                                    |  | 5    
|           |  |                                                                                                             
|Item 2     |  | Properties                                                                                                   |  | 5    
|           |  |                                                                                                             
|Item 3     |  | Legal Proceedings                                                                                            |  | 5    
|           |  |                                                                                                             
|Item 4     |  | Submission of Matters to a Vote of Security Holders                                                          |  | 6    
|           |  |                                                                                                             
|           |  | PART II                                                                                                      |  |      
|           |  |                                                                                                             
|Item 5     |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 6-7  
|           |  |                                                                                                             
|Item 6     |  | Selected Financial Data                                                                                      |  | 7    
|           |  |                                                                                                             
|Item 7     |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 8-22 
|           |  |                                                                                                             
|Item 7A    |  | Quantitative and Qualitative Disclosures about Market Risk                                                   |  | 22   
|           |  |                                                                                                             
|Item 8     |  | Financial Statements and Supplementary Data                                                                  |  | 23-48
|           |  |                                                                                                             
|Item 9     |  | Changes In and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 49   
|           |  |                                                                                                             
|Item 9A(T) |  | Controls and Procedures                                                                                      |  | 49   
|           |  |                                                                                                             
|Item 9B    |  | Other Information                                                                                            |  | 49   
|           |  |                                                                                                             
|           |  | PART III                                                                                                     |  |      
|           |  |                                                                                                             
|Item 10    |  | Directors, Executive Officers and Corporate Governance                                                       |  | 50-52
|           |  |                                                                                                             
|Item 11    |  | Executive Compensation                                                                                       |  | 52   
|           |  |                                                                                                             
|Item 12    |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 52   
|           |  |                                                                                                             
|Item 13    |  | Certain Relationships and Related Transactions, and Director Independence                                    |  | 52   
|           |  |                                                                                                             
|Item 14    |  | Principal Accountant Fees and Services                                                                       |  | 52   
|           |  |                                                                                                             
|           |  | PART IV                                                                                                      |  |      
|           |  |                                                                                                             
|Item 15    |  | Exhibits and Financial Statement Schedules                                                                   |  | 53   



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##### Table of Contents

PART I



|Item 1. | 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 has had two registered stock offerings raising a total of $14,029,501. MainStreet also had a private placement offering which raised total proceeds of
$1,807,101. These shares were registered with the Securities and Exchange Commission (SEC) effective December 8, 2006. MainStreet was primarily formed to serve as a bank holding company. Its first wholly-owned subsidiary was Smith
River Community Bank, N.A. (Smith River Bank), located in Martinsville, Virginia, which was sold on March 23, 2005 for $6.5 million. In 2002, MainStreet organized a second bank subsidiary, Franklin Community Bank, National
Association (Franklin Bank). On February 8, 2007, MainStreet formed a wholly-owned real estate company, MainStreet RealEstate, Inc., for the sole purpose of owning the real estate of the Corporation.

MainStreet is authorized to engage in any lawful activity for a bank holding company. The holding company structure provides greater flexibility than a bank standing
alone because it allows expansion and diversification of business activities through newly formed subsidiaries or through acquisitions. MainStreets business is conducted through its subsidiary bank. MainStreet provided outsourced servicing to
Smith River Bank for an annual fee. The Administrative Servicing Agreement, through which this outsourcing arrangement was conducted, expired March 22, 2008. MainStreet elected not to renew this agreement.

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 branches located at 12930 Booker T. Washington Highway, Hardy, Virginia, its 220 North branch at 35 Shepherd Drive, Rocky Mount, Virginia and its Union Hall branch
located at 25 Southlake Drive, Union Hall, Virginia. Franklin Banks primary service area is Franklin County, Town of Rocky Mount and surrounding areas. For the most part, Franklin Bank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 pre-built housing, real estate development, agriculture, and
resort and leisure services. Much of the market area is considered rural; however, the resort surrounding Smith Mountain Lake attracts many tourists to the area.

MainStreet RealEstate, Inc.

MainStreet RealEstate, Inc. was formed effective February 8, 2007 as a subsidiary of MainStreet. It was
formed for the sole purpose of owning the real estate of the Corporation. It owns the facility in which Franklin Banks Southlake branch operates.

Smith River Community Bank, N.A.

As mentioned previously, MainStreet sold Smith River Bank in March 2005 and redeployed the capital to
Franklin Bank. As part of the transaction, MainStreet agreed to acquire specified loans from Smith River Bank under certain conditions after the closing. In the event Smith River Bank determines it must charge off one of the specified loans, (after
pursuing normal collection efforts), MainStreet will acquire all of Banks right, title and interest in the charged off loan. MainStreets obligation to purchase such loans will not exceed the principal amount of the loans at the time of
purchase plus Smith River Banks out of pocket collection expenses. The outstanding principal balance of such loans at December 31, 2008 and 2007 was $86,514 and $96,370, respectively. The outstanding balance at December 31, 2008
consisted of one loan. 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 initial annual fee of $505,000, to be adjusted
annually based upon the terms of the original agreement. The original Administrative Servicing Agreement expired on March 22, 2008. MainStreet elected not to renew the Administrative Servicing Agreement.



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Competition

Franklin
Bank experiences competition in attracting and retaining business and personal checking and savings accounts, making commercial, consumer, and real estate loans and providing other services in their primary service area. The principal methods of
competition in the banking industry for deposits are service, rates offered, convenience of location, and flexible office hours. The principal methods of competition in the banking industry for loans are interest rates, loan origination fees, and
the range of lending services offered. Competition in the service area comes from other commercial banks, savings institutions, brokerage firms, credit unions, and mortgage banking firms. Competition for deposits is particularly intense in Franklin
Banks market which increases the cost and reduces the availability of local deposits. Because of the nature of Franklin Banks market, a substantial portion of the loan opportunities for which banks compete are real estate related. During
the present economic downturn, which has been focused on real estate, the number of loan opportunities is reduced and the risk of those loans is increased. 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. In February 2007 we implemented branch capture, a process by which checks are processed by tellers rather than item processing, which will allow for better efficiencies along with all day banking. We also receive and
send our cash letters electronically. 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.

Regulation, Supervision and Government Policy

BankShares and
Franklin Bank are subject to state and federal banking laws and regulations that provide for general regulatory oversight of all aspects of their operations. As a result of substantial regulatory burdens on banking, financial institutions like
MainStreet and Franklin Bank are at a disadvantage to other competitors who are not as highly regulated, and MainStreet and Franklin Banks costs of doing business are accordingly higher. A brief summary follows of certain laws, rules and
regulations which affect MainStreet and Franklin Bank. Any changes in the laws and regulations governing banking and financial services could have an adverse effect on the business prospects of MainStreet and Franklin Bank. The current economic
environment has created uncertainty in this area, as legislators and regulators attempt to address rapidly changing problems which could lead to new laws and regulations affecting financial institutions.

MainStreet BankShares, Inc.

MainStreet is a bank holding company
organized under the Federal Bank Holding Company Act (BHCA), which is administered by the Board of Governors of the Federal Reserve System (the Federal Reserve). MainStreet is required to file an annual report with the Federal Reserve and may be
required to furnish additional information pursuant to the BHCA. The Federal Reserve is authorized to examine MainStreet and its subsidiaries. With some limited exceptions, the BHCA requires a bank holding company to obtain prior approval from the
Federal Reserve before acquiring or merging with a bank or before acquiring more than 5% of the voting shares of a bank unless it already controls a majority of shares.

The Bank Holding Company Act. Under the BHCA, a bank holding company is generally prohibited from engaging in nonbanking activities unless the Federal Reserve has found those activities to be incidental to
banking. Bank holding companies also may not acquire more than 5% of the voting shares of any company engaged in nonbanking activities.

The Virginia
Banking Act. The Virginia Banking Act requires all Virginia bank holding companies to register with the Virginia State Corporation Commission (the Commission). MainStreet is required to report to the Commission with respect to financial
condition, operations and management. The Commission may also make examinations of any bank holding company and its subsidiaries.

The
Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act (GLBA) permits significant combinations among different sectors of the financial services industry, allows for expansion of financial service activities by bank holding companies and offers
financial privacy protections to consumers. GLBA preempts most state laws that prohibit financial holding companies from engaging in insurance activities. GBLA permits affiliations between banks and securities firms in the same holding company
structure, and it permits financial holding companies to directly engage in a broad range of securities and merchant banking activities. MainStreet is not a financial holding company.



2



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The Sarbanes-Oxley Act. The Sarbanes-Oxley Act (SOX) enacted sweeping reforms of the federal securities laws
intended to protect investors by improving the accuracy and reliability of corporate disclosures. It impacts all companies with securities registered under the Securities Exchange Act of 1934, including MainStreet. SOX creates increased
responsibilities for chief executive officers and chief financial officers with respect to the content of filings with the Securities and Exchange Commission. Section 404 of SOX and related Securities and Exchange Commission rules focused
increased scrutiny by internal and external auditors on MainStreets systems of internal controls over financial reporting, which is designed to insure that those internal controls are effective in both design and operation. SOX sets out
enhanced requirements for audit committees, including independence and expertise, and it includes stronger requirements for auditor independence and limits the types of non-audit services that auditors can provide. Finally, SOX contains additional
and increased civil and criminal penalties for violations of securities laws.

Capital Requirements. The Federal Reserve has adopted risk-based
capital guidelines that are applicable to MainStreet. The guidelines provide that the Company must maintain a minimum ratio of 8% of qualified total capital to risk-weighted assets (including certain off-balance sheet items, such as standby letters
of credit). At least half of total capital must be comprised of Tier 1 capital, for a minimum ratio of Tier 1 capital to risk-weighted assets of 4%. In addition, the Federal Reserve has established minimum leverage ratio guidelines of 4% for banks
that meet certain specified criteria. The leverage ratio is the ratio of Tier 1 capital to total average assets, less intangibles. MainStreet is expected to be a source of capital strength for its subsidiary bank, and regulators can undertake a
number of enforcement actions against MainStreet if its subsidiary bank becomes undercapitalized. MainStreets bank subsidiary is well capitalized and fully in compliance with capital guidelines. Bank regulators could choose to raise capital
requirements for banking organizations beyond current levels. MainStreet is unable to predict if higher capital levels may be mandated in the future.

Franklin Community Bank, N.A.

Franklin Bank is a national banking association incorporated under the laws of the United States, and the
bank is subject to regulation and examination by the Office of the Comptroller of the Currency (OCC). Franklin Banks deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to the limits of applicable law. The OCC, as the
primary regulator, and the FDIC regulate and monitor all areas of Franklin Banks operation. These areas include adequacy of capitalization and loss reserves, loans, deposits, business practices related to the charging and payment of interest,
investments, borrowings, payment of dividends, security devices and procedures, establishment of branches, corporate reorganizations and maintenance of books and records. Franklin Bank is required to maintain certain capital ratios. It must also
prepare quarterly reports on its financial condition for the OCC and conduct an annual audit of its financial affairs. The OCC requires Franklin Bank to adopt internal control structures and procedures designed to safeguard assets and monitor and
reduce risk exposure. While appropriate for the safety and soundness of banks, these requirements add to overhead expense for Franklin Bank and other banks.

The Community Reinvestment Act. Franklin Bank is subject to the provisions of the Community Reinvestment Act (CRA), which imposes an affirmative obligation on financial institutions to meet the credit needs of the communities they
serve, including low and moderate income neighborhoods. The OCC monitors Franklin Banks compliance with the CRA and assigns public ratings based upon the banks performance in meeting stated assessment goals. Unsatisfactory CRA ratings
can result in restrictions on bank operations or expansion. Franklin Bank received a satisfactory rating in its last CRA examination by the OCC.

The Gramm-Leach-Bliley Act. In addition to other consumer privacy provisions, the Gramm-Leach-Bliley Act (GLBA) restricts the use by financial institutions of customers nonpublic personal information. At the inception of the
customer relationship and annually thereafter, Franklin Bank is required to provide its customers with information regarding its policies and procedures with respect to handling of customers nonpublic personal information. GLBA generally
prohibits a financial institution from providing a customers nonpublic personal information to unaffiliated third parties without prior notice and approval by the customer.

The USA Patriot Act. The USA Patriot Act (Patriot Act) facilitates the sharing of information among government entities and financial institutions to combat terrorism and money laundering. The Patriot Act
imposes an obligation on Franklin Bank to establish and maintain anti-money laundering policies and procedures, including a customer identification program. Franklin Bank is also required to screen all customers against government lists of known or
suspected terrorists. There is additional regulatory oversight to insure compliance with the Patriot Act.

Consumer Laws and Regulations. There are
a number of laws and regulations that regulate banks consumer loan and deposit transactions. Among these are the Truth in Lending Act, the Truth in Savings Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair
Housing Act, the Fair Credit Reporting Act, and the Fair Debt Collections Practices Act. Franklin Bank is required to comply with these laws and regulations in its dealing with customers. There are numerous disclosure and other compliance
requirements associated with the consumer laws and regulations.



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Deposit Insurance. Franklin Bank has deposits that are insured by the Federal Deposit Insurance Corporation
(FDIC). FDIC maintains a Bank Insurance Fund (BIF) that is funded by risk-based insurance premium assessments on insured depository institutions. Assessments are determined based upon several factors, including the level of regulatory capital and
the results of regulatory examinations. FDIC may adjust assessments if the insured institutions risk profile changes or if the size of the BIF declines in relation to the total amount of insured deposits. In 2008, Franklin Bank paid $120.3
thousand in FDIC assessments during 2008. It is anticipated that assessments will increase in the future, to offset demands on the BIF from banks that fail in the troubled economy.

On October 3, 2008, the FDIC announced that deposits at FDIC-insured institutions would be insured up to at least $250,000. Unless Congress acts before January 2010, FDIC deposit insurance is scheduled to return
on that date to $100,000 per depositor, except for certain retirement accounts for which coverage will remain at $250,000.

FDIC announced its Transaction
Account Guarantee Program on October 14, 2008. The Transaction Account Guarantee Program, which is a part of the Temporary Liquidity Guarantee Program, provides full coverage for non-interest bearing deposit accounts for FDIC-insured
institutions that elected to participate. Franklin Bank elected to participate in this program, and its BIF assessments will increase to reflect the additional FDIC coverage.

After giving primary regulators an opportunity to first take action, FDIC may initiate an enforcement action against any depository institution it determines is engaging in unsafe or unsound actions or which is in an
unsound condition, and the FDIC may terminate that institutions deposit insurance.

Capital Requirements. The same capital requirements that
are discussed above with relation to MainStreet are applied to Franklin Bank by the OCC. The OCC guidelines provide that banks experiencing internal growth or making acquisitions are expected to maintain strong capital positions well above minimum
levels, without reliance on intangible assets.

Limits on Dividend Payments. A significant portion of MainStreets income is derived from
dividends paid by Franklin Bank. As a national bank, Franklin Bank may not pay dividends from its capital, and it may not pay dividends if the bank would become undercapitalized, as defined by regulation, after paying the dividend. Without prior OCC
approval, Franklin Banks dividend payments in any calendar year are restricted to the banks retained net income for that year, as that term is defined by the laws and regulations, combined with retained net income from the preceding two
years, less any required transfer to surplus.

The OCC and FDIC have authority to limit dividends paid by Franklin Bank, if the payment were determined to
be an unsafe and unsound banking practice. Any payment of dividends that depletes the Banks capital base could be deemed to be an unsafe and unsound banking practice.

Branching. As a national bank, Franklin Bank is required to comply with the state branch banking laws of Virginia, the state in which the Bank is located. Franklin Bank must also have the prior approval of OCC
to establish a branch or acquire an existing banking operation. Under Virginia law, Franklin Bank may open branch offices or acquire existing banks or bank branches anywhere in the state. Virginia law also permits banks domiciled in the state to
establish a branch or to acquire an existing bank or branch in another state.

Monetary Policy

The monetary and interest rate policies of the Federal Reserve, as well as general economic conditions, affect the business and earnings of MainStreet. Franklin Bank and
other banks are particularly sensitive to interest rate fluctuations. The spread between the interest paid on deposits and that which is charged on loans is the most important component of the Franklin Banks profits. In addition, interest
earned on investments held by MainStreet and Franklin Bank has a significant effect on earnings. As conditions change in the national and international economy and in the money markets, the Federal Reserves actions, particularly with regard to
interest rates, can impact loan demand, deposit levels and earnings at Franklin Bank. It is not possible to accurately predict the effects on MainStreet of economic and interest rate changes.

Other Legislative and Regulatory Concerns

Particularly because of
current uncertain and volatile economic conditions, federal and state laws and regulations could be proposed that could affect the regulation of financial institutions. New regulations could add to the regulatory burden on



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banks and increase the costs of compliance, or they could change the products that can be offered and the manner in which banks do business. We cannot
foresee how regulation of financial institutions may change in the future and how those changes might affect MainStreet.

Company Website

MainStreet maintains a website at www.msbsinc.com. The Corporations annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and all amendments to those reports are made available on its website through a link to the Securities and Exchange Commission for filings. The Companys proxy materials for the 2009 annual meeting of stockholders are also
posted on a separate website at www.cfpproxy.com/6043.

Employees

The total number of full-time equivalent persons employed by MainStreet and its wholly owned bank subsidiary as of December 31, 2008 was 53. MainStreet believes its relationship with its employees is good and no
employees are represented by a labor union.



|Item 1A. | Risk Factors
|-------- | ------------

Not required.



|Item 1B. | Unresolved Staff Comments
|-------- | -------------------------

Not required.



|Item 2. | Properties
|------- | ----------

The Corporation leases its executive office and
operations facility in Martinsville, Virginia. The lease commenced on May 1, 2004 for space located in the Patrick Henry Shopping Mall, at Suite 30, 730 East Church Street in Martinsville, Virginia. The lease will expire April 30, 2009.
The lease has an option to renew for one additional five year term.

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. Subject to certain compliance issues, Franklin Bank shall have the right or option to extend or renew the lease for one additional term of five years. If the right to extend or renew
this lease for the first renewal term is exercised, Franklin Bank has the right or option to extend or renew this lease for five additional terms of five years each. One of the owners is a director of Franklin Bank and both owners are shareholders
of BankShares. Franklin Bank owns a lot adjacent to their Rocky Mount Office. The lot is presently empty. Franklin Bank leases its branch which opened on April 9, 2004 at 12930 Booker T. Washington Highway, Hardy, Virginia. The bank provides
permanent financing to the owner of this facility. A director of the Bank is a partner in the owner of this facility. The lease commenced on April 7, 2004 and will expire April 6, 2019. Subject to certain compliance issues, Franklin Bank
shall have the right or option to extend or renew the lease for one additional term of five years. If the right to extend or renew this lease for the first renewal term is exercised, Franklin Bank has the right or option to extend or renew this
lease for five additional terms of five years each. Franklin Bank leases its 220 North branch located at 35 Shepherd Drive, Rocky Mount, Virginia. A director of Franklin Bank is a partner in the ownership of the facility. The lease commenced
June 1, 2007 and will expire June 1, 2012. Subject to certain compliance issues, Franklin Bank shall have the right or option to extend or renew the lease for one additional term of ten years. Management deems these leases to be made on
comparable market terms. The main office and all branches have a drive-up ATM.

MainStreet RealEstate owns the Southlake branch located in the Union Hall
area of Franklin County and leases it to Franklin Bank. The branch opened in August 2007. The total cost of the land and building are $425,286 and $881,123, respectively. MainStreet believes its banking facilities are well located to serve their
intended banking markets and are attractively furnished and well equipped for banking purposes. All facilities are adequately insured in managements opinion.



|Item 3. | Legal Proceedings
|------- | -----------------

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



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

None.

PART II



|Item 5. | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
|------- | ------------------------------------------------------------------------------------------------------------

MainStreet has 10,000,000 authorized shares of common stock, no par value, and had 1,713,375 shares of its common stock outstanding at January 31, 2009. In addition,
the initial organizers of MainStreet received 96,250 warrants in connection with the initial public offering. Each warrant provides the holder with the right to buy one share of stock at a price of $9.09 per share. As of December 31, 2008,
55,916 warrants are vested and unexercised, 12,834 warrants have been forfeited and 27,500 have been exercised. Warrants exercised during 2008 totaled 5,500.

Options in the amount of 33,000 (included in the total 167,908 outstanding at year-end), of which all are vested and exercisable, have been granted at the then fair market value of $9.55 to former employees. In addition, MainStreet has
issued stock options to present and former employees to purchase 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, 2008, 167,908 stock options are
outstanding. Of this total, 154,012 stock options are vested and exercisable.

In addition, the shareholders of MainStreet BankShares, Inc. 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 and its subsidiaries. The Plan terminated on January 21, 2009. Awards made under the Plan prior to and outstanding on that date remain valid in accordance with their terms. Option awards are generally granted with an exercise price
equal to the market value of MainStreets stock at the date of grant. The options issued in 2007 and 2006 have a vesting period of 3 years and have a ten year contractual term. The options issued in 2005 vested immediately upon grant and have a
ten year contractual term. All share awards provide for accelerated vesting if there is a change in control (as defined in the Plan). As of December 31, 2008, there were 136,527 options granted under this plan of which 822 options have been
exercised and 797 stock options have been forfeited and placed back into the Plan for issuance.

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

According to information obtained by Company management and believed to be reliable, the quarterly range of closing prices per share for the common stock during the last two fiscal years was as follows:



|              |  |           |       |          |   |           |  |          |       |  |   |      
|------------- |  | --------- | ----- | -------- | - | --------- |  | -------- | ----- |  | - | -----
|              |  | 2008      |       | 2007    
|Quarter Ended |  | HighClose |       | LowClose |   | HighClose |  | LowClose
|March 31      |  | $         | 18.25 |          | $ | 15.00     |  | $        | 18.60 |  | $ | 18.10
|June 30       |  | $         | 16.25 |          | $ | 14.10     |  | $        | 18.25 |  | $ | 16.30
|September 30  |  | $         | 14.50 |          | $ | 10.40     |  | $        | 16.30 |  | $ | 12.50
|December 31   |  | $         | 16.00 |          | $ | 8.50      |  | $        | 16.25 |  | $ | 13.25

There are approximately 1,658 shareholders of common stock as of December 31, 2008.

At a regularly scheduled Board meeting on September 19, 2007, the Board of Directors approved a plan to repurchase up to 100,000 shares of the Companys common
stock. A total of 26,000 shares at a cost of $383,330 were repurchased during 2008. Shares may be purchased on the open market or through privately negotiated transactions. Price, timing, and the number of shares repurchased, if any, will be based
on various market conditions. No termination date was set for the program. As of December 31, 2008, 78,800 shares at a total cost of $1,176,170 had been repurchased. The following tables detail the shares repurchased during the fourth and first
quarters of 2008. There were no shares repurchased during the third and second quarters of 2008.



6



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##### Table of Contents

|                       |  |                                 |  |                             |  |                                                                              |  |                                                                            
|---------------------- |  | ------------------------------- |  | --------------------------- |  | ---------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------
|2008 Period            |  | Total Number ofShares Purchased |  | Average PricePaid per Share |  | Total Number ofShares Purchased asPart of PubliclyAnnounced Plans orPrograms |  | Maximum Number ofShares that May YetBe Purchased Underthe Plans or Programs
|October 1-October 31   |  | 11,000                          |  | 12.03                       |  | 11,000                                                                       |  |                                                                           
|November 1-November 30 |  |                                |  |                            |  |                                                                             |  |                                                                           
|December 1-December 31 |  |                                |  |                            |  |                                                                             |  |                                                                           
|                       |  |                                 |  |                             |  |                                                                              |  |                                                                            
|Total                  |  | 11,000                          |  | 12.03                       |  | 11,000                                                                       |  |                                                                           
|                       |  |                                 |  |                             |  |                                                                              |  |                                                                            



|                      |  |                                 |  |                             |  |                                                                              |  |                                                                            
|--------------------- |  | ------------------------------- |  | --------------------------- |  | ---------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------
|2008 Period           |  | Total Number ofShares Purchased |  | Average PricePaid per Share |  | Total Number ofShares Purchased asPart of
PubliclyAnnounced Plans orPrograms |  | Maximum Number ofShares that May YetBe Purchased Underthe Plans or Programs
|January 1-January 31  |  | 15,000                          |  | 16.73                       |  | 15,000                                                                       |  | 32,200                                                                     
|February 1-Feruary 29 |  |                                |  |                            |  |                                                                             |  |                                                                           
|March 1-March 31      |  |                                |  |                            |  |                                                                             |  |                                                                           
|                      |  |                                 |  |                             |  |                                                                              |  |                                                                            
|Total                 |  | 15,000                          |  | 16.73                       |  | 15,000                                                                       |  | 32,200                                                                     
|                      |  |                                 |  |                             |  |                                                                              |  |                                                                            

MainStreet does not intend to repurchase any additional shares under this repurchase program.

MainStreet declared its first cash dividend in the amount of $.05 per share at its regularly scheduled board meeting on September 19, 2007. Since that date,
MainStreet paid a quarterly dividend in the amount of $.05 per share each quarter until the fourth quarter of 2008. Given the injection of $1.3 million into the loan loss reserve by Franklin Bank during the fourth quarter of 2008, MainStreets
Board of Directors deemed it prudent to suspend the cash dividend. The only source of funds for dividends is dividends paid to MainStreet by Franklin Bank. Franklin Bank is 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 payment of future dividends by MainStreet will
depend in part on a return by Franklin Bank to more historical levels of profitability.

Information in the format relating to MainStreet securities
authorized for issuance under the Companys Equity Compensation plans is as follows:



|                                                           |  |                                                                                         |  |                                                                          |       |                                                                                                                                       |       
|---------------------------------------------------------- |  | --------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------ | ----- | ------------------------------------------------------------------------------------------------------------------------------------- | ------
|Plan Category                                              |  | Number of SecuritiesTo be Issued UponExercise ofOutstanding Options,Warrants and
Rights |  | Weighted-AverageExercise Price ofOutstanding Options,Warrants and Rights |       | Number of SecuritiesRemaining AvailableFor Future IssuanceUnder EquityCompensation
Plans(Excluding SecuritiesReflected in Column (a))
|                                                           |  | (a)                                                                                     |  | (b)                                                                      |       | (c)                                                                                                                                  
|Equity compensation plans approved by security holders     |  | 134,908                                                                                 |  | $                                                                        | 12.86 |                                                                                                                                       | 14,970
|Equity compensation plans not approved by security holders |  | 33,000                                                                                  |  |                                                                          | 9.55  |                                                                                                                                       |      
|                                                           |  |                                                                                         |  |                                                                          |       |                                                                                                                                       |       
|Total                                                      |  | 167,908                                                                                 |  | $                                                                        | 12.21 |                                                                                                                                       | 14,970
|                                                           |  |                                                                                         |  |                                                                          |       |                                                                                                                                       |       

The Plan terminated January 21, 2009, except with respect to awards granted prior to that date.

Refer to Part II, Item 8, Note 14 for a detailed discussion of the stock options and warrants that are outstanding.



|Item 6. | Selected Financial Data
|------- | -----------------------

Not required



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##### Table of Contents

|Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

The following discussion is intended to assist in understanding and evaluating the financial condition and results of operations of MainStreet BankShares, Inc. (MainStreet, BankShares, or
Corporation) on a consolidated basis. This discussion and analysis should be read in conjunction with BankShares consolidated financial statements and related notes included in Item 8 of this report on Form 10-K.

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 has had two
registered stock offerings raising a total of $14,029,501. MainStreet also had a private placement offering which raised total proceeds of $1,807,101. These shares were registered with the Securities and Exchange Commission (SEC)
effective December 8, 2006. MainStreet was primarily formed to serve as a bank holding company. Its first wholly-owned subsidiary was Smith River Community Bank, N.A. (Smith River Bank), located in Martinsville, Virginia, which was
sold on March 23, 2005 for $6.5 million. In 2002, MainStreet organized a second bank subsidiary, Franklin Community Bank, National Association (Franklin Bank) to serve the Franklin County area of Virginia. MainStreet provides a wide
variety of banking services through Franklin Bank. 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 has four offices in Rocky Mount and Franklin County. On February 8, 2007, MainStreet
formed a wholly-owned real estate company, MainStreet RealEstate, Inc. for the sole purpose of owning the real estate of the Corporation. MainStreet RealEstate, Inc. owns the Union Hall (Southlake) branch of Franklin Bank.

As mentioned previously, MainStreet sold Smith River Bank in 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 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 Banks out of pocket collection expenses. The outstanding principal balance of
such loans at December 31, 2008 and 2007 was $86,514 and $96,370, respectively. The outstanding balance as of December 31, 2008 consisted of one loan. 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, to be adjusted annually based upon the terms of the original agreement. The original Administrative Services
Agreement expired on March 22, 2008 and MainStreet elected to not renew the Administrative Servicing Agreement.

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.

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



8



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##### Table of Contents

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 our historical loan loss experience, risk-rated loans, past dues, concentrations of credit, unsecured loans,
loan exceptions, and the economic trend. These are generally grouped by homogeneous loan pools. 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, 2008 were
$224,601,324 compared to $205,781,882 at December 31, 2007, an increase of $18,819,442, or 9.15%. This increase in assets was primarily funded through Federal Home Loan Bank advances along with overnight borrowings. The largest increase in
assets was in loans, net of unearned income, in the amount of $20.7 million, or 11.99% increase. The largest components of total assets at December 31, 2008 were loans, net of unearned income, in the amount of $193,507,550 and securities
available for sale in the amount of $21,588,488. Total deposits were $171,857,866 at December 31, 2008, a decline of $3,858,931 or 2.20% from December 31, 2007 volumes. In the third quarter of 2008 deposit pricing became even more intense
as banks were challenged by liquidity issues and were willing to pay increased interest rates to attract depositors. Franklin Bank experienced a reduction in deposits during the third quarter which appears to have stabilized. Total
shareholders equity at December 31, 2008 and 2007 was $21,367,265 and $21,025,110, respectively. MainStreets net income for the twelve months ending December 31, 2008 and 2007 was $586,264 and $2,510,844, respectively. Basic
net income per share was $.34 and $1.42 for 2008 and 2007, respectively. Diluted net income per share for 2008 and 2007 was $.33 and $1.37, respectively. Return on average assets in 2008 and 2007 was .27% and 1.26%, respectively while return on
average shareholders equity was 2.72% and 12.28% for 2008 and 2007, respectively. The impact on MainStreet of the recessionary environment throughout 2008 accelerated in the fourth quarter. Based on the continued deteriorating conditions, we
expensed $1.3 million into the loan loss reserve during this period. This decision was based on an increase in our nonperforming loans, continued softness in the local real estate market, and the current regulatory environment.

The Federal Reserve lowered short term interest rates 50 basis points in September 2007, 25 basis points in October 2007, and 25 basis points in December 2007 and 2007
ended with short-term interest rates at 4.25%. In 2008, the Federal Reserve lowered short-term interest rates 400 basis points with a range of 0 - .25% at December 31, 2008. MainStreet is asset sensitive and interest rates on variable rate
loans make up almost 40% of Franklins loan portfolio. In a rising interest rate environment, this initially has a positive impact on the net interest margin because deposit rates are slower to reprice at the higher rates. In a declining
interest rate environment, asset sensitivity initially has a negative impact on the net interest margin until deposit rates have an opportunity to reprice. Overall deposit maturity has been short because Franklin Bank was organized during a rising
interest rate environment; therefore, giving opportunities for repricing even in a declining rate environment. Nonetheless, with prime at 3.25% which is the interest rate basis for many of our loans, MainStreets net interest margin has been
adversely affected by the declining rates. In addition, as mentioned above, competition for deposits has been fierce in our market particularly during the latter part of 2008 while institutions sought deposits to aid liquidity pressure.
MainStreets net interest margin for the years ending December 31, 2008 and 2007 was 3.33% and 3.94%, respectively, a decline of 61 basis points. Loan competition was not as much a factor in 2008 as previously but declining rates reduced
loan profitability as loans repriced and new loans were made at lower rates. Young financial institutions such as Franklin Bank must price new loans competitively. This negatively impacts the margin. Also the ability for nonfinancial entities to
provide financial services also increases competition. Franklin Banks growth is quite dependent on consumer and real estate based lending and there is concern over the sustainability given the current economic environment. Franklin Banks
growth in the future may be negatively affected by interest rate decreases, continued deterioration in the real estate market, if it occurs, liquidity, and the economic environment in general.



9



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Results of Operations

Net Interest Income

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
as follows:

The following statistical information is based on daily average balances.

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



|                                           |  |                |             |   |          |   |            |  |      |                |  |   |             |   |            |   |            |  |      |  
|------------------------------------------ |  | -------------- | ----------- | - | -------- | - | ---------- |  | ---- | -------------- |  | - | ----------- | - | ---------- | - | ---------- |  | ---- | -
|                                           |  | 2008           |             |   | 2007     |  
|                                           |  | AverageBalance |             |   | Interest |   | Yield/Rate |  |      | AverageBalance |  |   | Interest    |   | Yield/Rate |  
|Loans, net of unearned                     |  | $              | 185,844,676 |   |          | $ | 12,426,655 |  | 6.69 | %              |  | $ | 164,207,214 |   |            | $ | 13,662,840 |  | 8.32 | %
|Securities available-for-sale              |  |                | 23,092,799  |   |          |   | 1,260,783  |  | 5.50 |                |  |   | 14,384,500  |   |            |   | 723,488    |  | 5.37 |  
|Restricted equity securities               |  |                | 976,277     |   |          |   | 39,518     |  | 4.05 |                |  |   | 899,445     |   |            |   | 53,780     |  | 5.98 |  
|Interest-bearing deposits in banks         |  |                | 270,010     |   |          |   | 6,325      |  | 2.34 |                |  |   | 461,821     |   |            |   | 23,379     |  | 5.06 |  
|Federal funds sold                         |  |                | 2,500,249   |   |          |   | 55,843     |  | 2.23 |                |  |   | 11,845,879  |   |            |   | 605,178    |  | 5.11 |  
|                                           |  |                |             |   |          |   |            |  |      |                |  |   |             |   |            |   |            |  |      |  
|Total Interest Earning Assets              |  |                | 212,684,011 |   |          |   | 13,789,124 |  | 6.49 | %              |  |   | 191,798,859 |   |            |   | 15,068,665 |  | 7.88 | %
|Cash and due from banks                    |  |                | 2,845,382   |   |          |   |            |  |      |                |  |   | 2,757,193   |   |            |   |            |  |      |  
|Other assets                               |  |                | 7,526,328   |   |          |   |            |  |      |                |  |   | 6,728,338   |   |            |   |            |  |      |  
|Allowance for loan losses                  |  |                | (2,257,988  | ) |          |   |            |  |      |                |  |   | (1,988,231  | ) |            |   |            |  |      |  
|                                           |  |                |             |   |          |   |            |  |      |                |  |   |             |   |            |   |            |  |      |  
|                                           |  |                |             |   |          |  
|Total Assets                               |  | $              | 220,797,733 |   |          |   |            |  |      |                |  | $ | 199,296,159 |   |            |   |            |  |      |  
|                                           |  |                |             |   |          |   |            |  |      |                |  |   |             |   |            |   |            |  |      |  
|                                           |  |                |             |   |          |  
|Interest checking deposits                 |  | $              | 8,247,385   |   |          | $ | 99,158     |  | 1.20 | %              |  | $ | 8,652,018   |   |            | $ | 229,842    |  | 2.66 | %
|Money market deposits                      |  |                | 19,805,672  |   |          |   | 464,167    |  | 2.34 |                |  |   | 14,835,902  |   |            |   | 608,238    |  | 4.10 |  
|Savings deposits                           |  |                | 10,767,449  |   |          |   | 115,163    |  | 1.07 |                |  |   | 12,094,901  |   |            |   | 260,670    |  | 2.16 |  
|Time deposits $100,000 and over            |  |                | 50,887,141  |   |          |   | 2,283,924  |  | 4.49 |                |  |   | 49,151,575  |   |            |   | 2,590,298  |  | 5.27 |  
|Other time deposits                        |  |                | 70,615,836  |   |          |   | 3,102,958  |  | 4.39 |                |  |   | 69,783,201  |   |            |   | 3,578,715  |  | 5.13 |  
|Federal funds purchased                    |  |                | 1,041,838   |   |          |   | 22,522     |  | 2.16 |                |  |   | 471         |   |            |   | 24         |  | 5.10 |  
|Corporate cash management                  |  |                | 274,470     |   |          |   | 5,501      |  | 2.00 |                |  |   |            |   |            |   |           |  |     |  
|Repurchase agreements                      |  |                | 13,483,607  |   |          |   | 538,950    |  | 4.00 |                |  |   | 2,157,534   |   |            |   | 92,313     |  | 4.28 |  
|Short-term borrowings                      |  |                | 4,904,371   |   |          |   | 82,333     |  | 1.68 |                |  |   | 3,753,425   |   |            |   | 207,022    |  | 5.52 |  
|                                           |  |                |             |   |          |   |            |  |      |                |  |   |             |   |            |   |            |  |      |  
|Total interest-bearing liabilities         |  |                | 180,027,769 |   |          |   | 6,714,676  |  | 3.73 | %              |  |   | 160,429,027 |   |            |   | 7,567,122  |  | 4.72 | %
|Demand deposits                            |  |                | 17,968,355  |   |          |   |            |  |      |                |  |   | 17,088,264  |   |            |   |            |  |      |  
|Other liabilities                          |  |                | 1,256,447   |   |          |   |            |  |      |                |  |   | 1,332,244   |   |            |   |            |  |      |  
|                                           |  |                |             |   |          |   |            |  |      |                |  |   |             |   |            |   |            |  |      |  
|Total Liabilities                          |  |                | 199,252,571 |   |          |   |            |  |      |                |  |   | 178,849,535 |   |            |   |            |  |      |  
|Shareholders Equity                       |  |                | 21,545,162  |   |          |   |            |  |      |                |  |   | 20,446,624  |   |            |   |            |  |      |  
|                                           |  |                |             |   |          |   |            |  |      |                |  |   |             |   |            |   |            |  |      |  
|Total Liabilities and Shareholders Equity |  | $              | 220,797,733 |   |          |   |            |  |      |                |  | $ | 199,296,159 |   |            |   |            |  |      |  
|                                           |  |                |             |   |          |   |            |  |      |                |  |   |             |   |            |   |            |  |      |  
|Net Interest Earnings                      |  |                |             |   |          | $ | 7,074,448  |  | 2.76 | %              |  |   |             |   |            | $ | 7,501,543  |  | 3.16 | %
|                                           |  |                |             |   |          |   |            |  |      |                |  |   |             |   |            |   |            |  |      |  
|Net Yield on Interest Earning Assets       |  |                |             |   |          |   |            |  | 3.33 | %              |  |   |             |   |            |   |            |  | 3.94 | %
|                                           |  |                |             |   |          |   |            |  |      |                |  |   |             |   |            |   |            |  |      |  

Loan fees, net of costs, are included in total interest income. Gross loan fee income totaled $476,817 and
$783,151 as of December 31, 2008 and 2007, respectively. The average balance of nonaccrual assets is included in the calculation of asset yields. The yield is calculated based on the tax equivalent yield for tax exempt interest on municipal
securities using a 34% marginal tax rate.



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##### Table of Contents

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



|                                          |  |                                                           |           |   |                                                           |   |            |                         |  |   |               |   |  |             |           |   |                         |   |          |   |  |   |           |  
|----------------------------------------- |  | --------------------------------------------------------- | --------- | - | --------------------------------------------------------- | - | ---------- | ----------------------- |  | - | ------------- | - |  | ----------- | --------- | - | ----------------------- | - | -------- | - |  | - | --------- | -
|                                          |  | 2008 Compared to 2007 Increase(Decrease) Due to Change In |           |   | 2007 Compared to 2006 Increase(Decrease) Due to Change In |  
|                                          |  | AverageVolume                                             |           |   | Average Rate                                              |   |            | TotalIncrease(Decrease) |  |   | AverageVolume |   |  | AverageRate |           |   | TotalIncrease(Decrease) |  
|Interest Income:                          |  |                                                           |           |   |                                                           |   |            |                         |  |   |               |   |  |             |           |   |                         |   |          |   |  |   |           |  
|Loans, net of unearned                    |  | $                                                         | 1,658,375 |   |                                                           | $ | (2,894,560 | )                       |  | $ | (1,236,185    | ) |  | $           | 813,037   |   |                         | $ | 316,019  |   |  | $ | 1,129,056 |  
|Securities available-for-sale             |  |                                                           | 470,808   |   |                                                           |   | 66,487     |                         |  |   | 537,295       |   |  |             | 514,193   |   |                         |   | 47,284   |   |  |   | 561,477   |  
|Restricted equity securities              |  |                                                           | 4,284     |   |                                                           |   | (18,546    | )                       |  |   | (14,262       | ) |  |             | (20,527   | ) |                         |   | 2,154    |   |  |   | (18,373   | )
|Interest-bearing deposits in banks        |  |                                                           | (7,436    | ) |                                                           |   | (9,618     | )                       |  |   | (17,054       | ) |  |             | 11,036    |   |                         |   | 80       |   |  |   | 11,116    |  
|Federal funds sold                        |  |                                                           | (320,615  | ) |                                                           |   | (228,720   | )                       |  |   | (549,335      | ) |  |             | 148,440   |   |                         |   | 10,887   |   |  |   | 159,327   |  
|                                          |  |                                                           |           |   |                                                           |   |            |                         |  |   |               |   |  |             |           |   |                         |   |          |   |  |   |           |  
|Total Interest Income                     |  | $                                                         | 1,805,416 |   |                                                           | $ | (3,084,957 | )                       |  | $ | (1,279,541    | ) |  | $           | 1,466,179 |   |                         | $ | 376,424  |   |  | $ | 1,842,603 |  
|Interest Expense:                         |  |                                                           |           |   |                                                           |   |            |                         |  |   |               |   |  |             |           |   |                         |   |          |   |  |   |           |  
|Interest checking deposits                |  | $                                                         | (10,286   | ) |                                                           | $ | (120,398   | )                       |  | $ | (130,684      | ) |  | $           | 13,829    |   |                         | $ | (26,192  | ) |  | $ | (12,363   | )
|Money market deposits                     |  |                                                           | 165,449   |   |                                                           |   | (309,520   | )                       |  |   | (144,071      | ) |  |             | 201,924   |   |                         |   | 42,891   |   |  |   | 244,815   |  
|Savings deposits                          |  |                                                           | (26,031   | ) |                                                           |   | (119,476   | )                       |  |   | (145,507      | ) |  |             | (52,370   | ) |                         |   | 15,531   |   |  |   | (36,839   | )
|Certificates of deposit $100,000 and over |  |                                                           | 88,856    |   |                                                           |   | (395,230   | )                       |  |   | (306,374      | ) |  |             | 587,999   |   |                         |   | 225,435  |   |  |   | 813,434   |  
|Other time deposits                       |  |                                                           | 42,230    |   |                                                           |   | (517,987   | )                       |  |   | (475,757      | ) |  |             | 680,970   |   |                         |   | 354,678  |   |  |   | 1,035,648 |  
|Federal funds purchased                   |  |                                                           | 22,520    |   |                                                           |   | (22        | )                       |  |   | 22,498        |   |  |             | (2,198    | ) |                         |   | (244     | ) |  |   | (2,442    | )
|Repurchase agreements                     |  |                                                           | 453,107   |   |                                                           |   | (6,470     | )                       |  |   | 446,637       |   |  |             | 92,313    |   |                         |   |         |   |  |   | 92,313    |  
|Short-term borrowings                     |  |                                                           | 49,971    |   |                                                           |   | (174,660   | )                       |  |   | (124,689      | ) |  |             | (294,930  | ) |                         |   | 15,404   |   |  |   | (279,526  | )
|Corporate cash management                 |  |                                                           | 5,501     |   |                                                           |   |           |                         |  |   | 5,501         |   |  |             | (158,772  | ) |                         |   |         |   |  |   | (158,772  | )
|                                          |  |                                                           |           |   |                                                           |   |            |                         |  |   |               |   |  |             |           |   |                         |   |          |   |  |   |           |  
|Total Interest Expense                    |  | $                                                         | 791,317   |   |                                                           | $ | (1,643,763 | )                       |  | $ | (852,446      | ) |  | $           | 1,068,765 |   |                         | $ | 627,503  |   |  | $ | 1,696,268 |  
|                                          |  |                                                           |           |   |                                                           |   |            |                         |  |   |               |   |  |             |           |   |                         |   |          |   |  |   |           |  
|Net Interest Income                       |  | $                                                         | 1,014,099 |   |                                                           | $ | (1,441,194 | )                       |  | $ | (427,095      | ) |  | $           | 397,414   |   |                         | $ | (251,079 | ) |  | $ | 146,335   |  
|                                          |  |                                                           |           |   |                                                           |   |            |                         |  |   |               |   |  |             |           |   |                         |   |          |   |  |   |           |  

For 2008 and 2007, net interest income totaled $7,074,448 and $7,501,543, respectively, a decline of $427,095, or
5.69%. The total average interest-earning assets were $212,684,011 and $191,798,859 for the years ending December 31, 2008 and 2007, respectively, an increase of $20,885,152, or 10.89%. The total average interest-bearing liabilities were
$180,027,769 and $160,429,027 for the years ending December 31, 2008 and 2007, respectively, an increase of $19,598,742 or 12.22%. 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 $21.6 million in 2008 over 2007, or 13.18%. Average volume on securities available for sale increased $8.7 million in 2008 compared to 2007, or 60.54%
primarily due to securities purchased to collateralize the repurchase agreements. Offsetting these increases was a decline of $9.3 million, or 78.89% in average federal funds sold. Average volumes in borrowings and deposits increased from 2007
funding the balance sheet, whereas, actual deposits were below 2007 at year end. From the beginning of 2007 to end of 2008, short-term interest rates and the prime rate have plummeted 500 basis points with such rates at .25% and 3.25%, respectively,
at year end.

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 our historical loan loss experience, risk-rated loans, past dues, concentrations of credit, unsecured loans, loan exceptions and the economic trend. These are generally grouped by homogeneous loan pools. An allowance for
impaired loans is generally determined based on collateral values or the present value of estimated cash flows. This allowance, then, is designated as a specific reserve.



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##### Table of Contents

For the year-to-date periods ending December 31, 2008 and 2007, the provision for loan losses was $1,964,300 and
$255,521, respectively. As mentioned previously, the 2008 expense was increased by $1.3 million in the fourth quarter due to increased nonperforming loans, deteriorating economic conditions, continued softness in the real estate market, and the
current regulatory environment. The 2007 provision expense was primarily due to loan growth. The allowance for loan losses, or the reserve, was $3,502,029 and $2,086,592 at December 31, 2008 and 2007, respectively. This allowance equated to
1.81% and 1.21% of loans, net of unearned income at December 31, 2008 and 2007, respectively. Net charge-offs were $548,863, $111,710 and $25,908 for 2008, 2007 and 2006, respectively, or .30%, .07% and .02%, 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. The higher charge-offs in 2008 reflect the adverse economic conditions in our market and generally throughout the country. No assurance can be given that such conditions or other circumstances will
not result in increased provisions in the future.

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 31,2008 |             |   | December 31,2007 |   |             | December 31,2006 | 
|Average amount of loans, net of unearned, outstanding during the year                 |  | $                | 185,844,676 |   |                  | $ | 164,207,214 |                  |  | $ | 154,369,148 |  
|Balance of allowance for loan losses at beginning of year                             |  |                  | 2,086,592   |   |                  |   | 1,942,781   |                  |  |   | 1,777,345   |  
|Loans charged off:                                                                    |  |                  |             |   |                  |   |             |                  |  |   |             |  
|Commercial                                                                            |  |                  | (140,003    | ) |                  |   | (40,808     | )                |  |   | (576        | )
|Commercial real estate                                                                |  |                  | (3,397      | ) |                  |   |            |                  |  |   | (29,463     | )
|Real estate construction                                                              |  |                  | (102,637    | ) |                  |   |            |                  |  |   |            |  
|Residential real estate                                                               |  |                  | (190,662    | ) |                  |   | (51,023     | )                |  |   | (10,035     | )
|Home equity lines                                                                     |  |                  | (81,097     | ) |                  |   | (43,663     | )                |  |   |            |  
|Loans to individuals                                                                  |  |                  | (36,688     | ) |                  |   | (4,443      | )                |  |   | (1,681      | )
|                                                                                      |  |                  |             |   |                  |   |             |                  |  |   |             |  
|Total loans charged off:                                                              |  |                  | (554,484    | ) |                  |   | (139,937    | )                |  |   | (41,755     | )
|                                                                                      |  |                  |             |   |                  |   |             |                  |  |   |             |  
|Recoveries of loans previously charged off:                                           |  |                  |             |   |                  |   |             |                  |  |   |             |  
|Commercial                                                                            |  |                  | 1,740       |   |                  |   | 25,037      |                  |  |   | 7,090       |  
|Commercial real estate                                                                |  |                  |            |   |                  |   |            |                  |  |   | 2,086       |  
|Real estate construction                                                              |  |                  | 3,731       |   |                  |   |            |                  |  |   | 1,003       |  
|Residential real estate                                                               |  |                  | 150         |   |                  |   | 3,190       |                  |  |   | 5,668       |  
|Home equity lines                                                                     |  |                  |            |   |                  |   |            |                  |  |   |            |  
|Loans to individuals                                                                  |  |                  |            |   |                  |   |            |                  |  |   |            |  
|                                                                                      |  |                  |             |   |                  |   |             |                  |  |   |             |  
|Total recoveries:                                                                     |  |                  | 5,621       |   |                  |   | 28,227      |                  |  |   | 15,847      |  
|                                                                                      |  |                  |             |   |                  |   |             |                  |  |   |             |  
|Net loans charged off:                                                                |  |                  | (548,863    | ) |                  |   | (111,710    | )                |  |   | (25,908     | )
|Additions to the allowance for loan losses                                            |  |                  | 1,964,300   |   |                  |   | 255,521     |                  |  |   | 191,344     |  
|                                                                                      |  |                  |             |   |                  |   |             |                  |  |   |             |  
|Balance of allowance for loan losses at end of year                                   |  | $                | 3,502,029   |   |                  | $ | 2,086,592   |                  |  | $ | 1,942,781   |  
|                                                                                      |  |                  |             |   |                  |   |             |                  |  |   |             |  
|Ratio of net charge offs during the period to average loans outstanding during period |  |                  | .30         | % |                  |   | .07         | %                |  |   | .02         | %
|                                                                                      |  |                  |             |   |                  |   |             |                  |  |   |             |  

The amount of the loan loss reserve by category and the percentage of each category to total loans is as follows:



|                         |  |               |           |  |               |   |  |               |           |  |        |   |  |   |           |  |        |  
|------------------------ |  | ------------- | --------- |  | ------------- | - |  | ------------- | --------- |  | ------ | - |  | - | --------- |  | ------ | -
|                         |  | December 2008 |           |  | December 2007 |   |  | December 2006 |          
|Commercial               |  | $             | 274,588   |  | 9.43          | % |  | $             | 226,395   |  | 10.85  | % |  | $ | 170,770   |  | 8.79   | %
|Commercial real estate   |  |               | 634,581   |  | 31.62         |   |  |               | 498,278   |  | 23.88  |   |  |   | 395,356   |  | 20.35  |  
|Real estate construction |  |               | 1,111,907 |  | 26.47         |   |  |               | 717,370   |  | 34.38  |   |  |   | 777,890   |  | 40.04  |  
|Residential real estate  |  |               | 739,152   |  | 22.60         |   |  |               | 428,377   |  | 20.53  |   |  |   | 357,277   |  | 18.39  |  
|Home equity lines        |  |               | 223,972   |  | 8.28          |   |  |               | 175,482   |  | 8.41   |   |  |   | 196,415   |  | 10.11  |  
|Loans to individuals     |  |               | 17,880    |  | 1.60          |   |  |               | 40,690    |  | 1.95   |   |  |   | 45,073    |  | 2.32   |  
|Specific reserve         |  |               | 499,949   |  |              |   |  |               |          |  |       |   |  |   |          |  |       |  
|Unallocated              |  |               |          |  |              |   |  |               |          |  |       |   |  |   |          |  |       |  
|                         |  |               |           |  |               |   |  |               |           |  |        |   |  |   |           |  |        |  
|Total                    |  | $             | 3,502,029 |  | 100.00        | % |  | $             | 2,086,592 |  | 100.00 | % |  | $ | 1,942,781 |  | 100.00 | %
|                         |  |               |           |  |               |   |  |               |           |  |        |   |  |   |           |  |        |  



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##### Table of Contents

Noninterest Income

Noninterest income for the years ending December 31, 2008 and December 31, 2007 was $957,507 and $1,506,400, respectively, a decrease of $548,893, or 36.44%. The following chart demonstrates the categories of change:



|                                                         |  |              |          |   |              |   |         |               |  |   |                   |   |  |            |  
|-------------------------------------------------------- |  | ------------ | -------- | - | ------------ | - | ------- | ------------- |  | - | ----------------- | - |  | ---------- | -
|Noninterest Income                                       |  | YTD 12/31/08 |          |   | YTD 12/31/07 |   |         | Dollar Change |  |   | Percentage Change |  
|Service charges on deposit accounts                      |  | $            | 328,493  |   |              | $ | 269,238 |               |  | $ | 59,255            |   |  | 22.01      | %
|Mortgage brokerage income                                |  |              | 229,631  |   |              |   | 301,508 |               |  |   | (71,877           | ) |  | (23.84     | )
|Servicing fee income                                     |  |              | 150,619  |   |              |   | 562,877 |               |  |   | (412,258          | ) |  | (73.24     | )
|Income on bank owned life insurance                      |  |              | 123,553  |   |              |   | 96,897  |               |  |   | 26,656            |   |  | 27.51      |  
|Gain on sale of securities                               |  |              | 46,340   |   |              |   |        |               |  |   | 46,340            |   |  | 100.00     |  
|Loss & impairment on other real estate and repossessions |  |              | (179,944 | ) |              |   | (977    | )             |  |   | (178,967          | ) |  | (18,318.01 | )
|Other fee income & miscellaneous                         |  |              | 258,815  |   |              |   | 276,857 |               |  |   | (18,042           | ) |  | (6.52      | )

As can be seen by the above chart, servicing fee income experienced the greatest decline by dollars in noninterest
income at $412,258 or 73.24% in the year-to-year comparison. MainStreets Administrative Servicing Agreement (see Business) with Smith River Bank expired in March of 2008 at which time MainStreet elected to not renew the agreement.
The 2008 servicing fee income included the first three months of the year along with termination fees charged to Smith River Bank. Service charges on deposit accounts increased in 2008 over 2007 by 22.01% primarily due to increased NSF charges.
Mortgage brokerage income has provided a good base of noninterest income, although dependent on the vibrancy of the real estate market. As the real estate market softened in 2007 and continued in 2008, the mortgage brokerage income declined. The
decline in 2008 from 2007 was $71,877, or 23.84%. Franklin Bank has partnered with several different organizations to originate mortgage loans, which for the most part, then close in the companies names. Franklin Bank receives mortgage
brokerage fee income from the transactions. During 2007, Franklin Bank purchased Bank Owned Life Insurance (BOLI) on the lives of the two executive officers of the Company, the President/Chief Executive Officer and the Executive Vice
President/Chief Financial Officer. The income related to the BOLI in 2008 was $123,553 and $96,897 in 2007. Municipal securities were sold in 2008 which produced a $46,340 gain. There were no sales in 2007. During 2008, other real estate owned and
repossessions had a loss upon sale or write-down of $179,944 compared to $977 in 2007. Other fee income and miscellaneous income declined $18,042 or 6.52% in 2008 from 2007. Franklin Bank purchased a small interest in a title insurance company.
Title fee income declined $8,282 in 2008 compared to 2007 due to the soft real estate market. In 2007, MainStreet maintained a reserve against the loans agreed to be indemnified to Smith River Bank upon its sale. During 2007, MainStreet reversed
$33.0 thousand of the reserve and reversed an additional $15.7 thousand in 2008 bringing the reserve to zero. This resulted in a decline in the year-to-year noninterest income comparison of $17.3 thousand. During 2007, MainStreet purchased the
second lien on a loan upon which Franklin Bank held the first lien. It was purchased at a discount that resulted in a fourth quarter gain of $48.2 thousand in 2007. This income would not be repeated in 2008. Offsetting these declines somewhat in
other fee income and miscellaneous noninterest income was an increase in evaluation fee income of $19.4 thousand. Franklin Bank began in late first quarter 2007 performing its own evaluations on loans originated in the amount of $250,000 and less
not requiring an appraisal. Also, ATM and debit card fee income increased $30.8 thousand in 2008 over 2007 income.

Noninterest Expense

Total noninterest expense for the years ending December 31, 2008 and December 31, 2007 was $5,224,187 and $5,033,163, respectively, an increase of $191,024,
or 3.80%. The following chart shows the noninterest expense by category for the years ending December 31, 2008 and 2007, the dollar change and the percentage change.



|                               |  |          |           |          |   |               |  |   |                   |   |  |       |   
|------------------------------ |  | -------- | --------- | -------- | - | ------------- |  | - | ----------------- | - |  | ----- | --
|Expense                        |  | 12-31-08 |           | 12-31-07 |   | Dollar Change |  |   | Percentage Change |  
|Salaries and employee benefits |  | $        | 2,642,566 |          | $ | 2,774,923     |  | $ | (132,357          | ) |  | (4.77 | )%
|Occupancy and equipment        |  |          | 830,851   |          |   | 717,466       |  |   | 113,385           |   |  | 15.80 |   
|Professional fees              |  |          | 323,523   |          |   | 198,833       |  |   | 124,690           |   |  | 62.71 |   
|Advertising and promotion      |  |          | 100,676   |          |   | 106,576       |  |   | (5,900            | ) |  | (5.54 | ) 
|Outside processing             |  |          | 424,945   |          |   | 399,669       |  |   | 25,276            |   |  | 6.32  |   
|Franchise tax                  |  |          | 202,500   |          |   | 172,620       |  |   | 29,880            |   |  | 17.31 |   
|Other expenses                 |  |          | 699,126   |          |   | 663,076       |  |   | 36,050            |   |  | 5.44  |   

As can be seen by the table, the largest component of noninterest expense is salaries and employee benefits,
followed by occupancy and equipment costs and then other expenses. MainStreets employees continue to be its most valuable resource



13



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##### Table of Contents

and asset. In 2007, MainStreet opened two additional offices of Franklin Bank located on the 220 North corridor and in Union Hall. The opening of these two
additional banking offices added noninterest expense to many categories during 2007 that continued into 2008. Salaries and employee benefits, as a whole, decreased in 2008 compared to 2007 by $132,357, or 4.77%. Salaries expense was $2,185,685 in
2008 compared to $2,040,782 in 2007, an increase of $144,903. This increase was attributable to the two new branches offset somewhat by vacant positions during the year that have now been filled. An incentive plan based on performance of the bank
and certain individual goals was in place and resulted in an expense of $370,662 in 2007 and only $14,649 in 2008, a decline of $356,013. Under FAS 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans
and Initial Direct Costs of Leases, certain costs associated with originating loans are amortized over the life of the loan. These costs begin as credits to salary expense and are amortized into the net interest margin over the life of the
loan as a reduction. These credits to salary expense were $9,673 greater in 2008 than 2007 causing an overall decrease in salary expense. Occupancy and equipment costs include rent, utilities, janitorial service, repairs and maintenance, real estate
taxes, service maintenance contracts and depreciation expense. A substantial part of the $113,385 increase was due to expense associated with the two new offices opened in the second and third quarters of 2007. Professional fees include fees for
audit, legal, and other and experienced an increase of $124,690 in 2008 compared to 2007. This expense was attributed to projects in 2008 requiring legal expertise along with additional audit expense related to The Sarbanes Oxley Act of 2002
(SOX). Outside processing primarily includes data processing, payroll processing, check clearings, and insurance. In this category of expense, data processing costs increased $15.5 thousand due to increased services implemented in 2007
such as branch capture, ACH and health savings accounts. 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. FDIC assessments increased $55.3 thousand in 2008 over 2007. Director fees also increased due to increased meetings and the dollar amount paid to each director. The increase in 2008 over 2007 was
$31,350. Other categories experienced declines due to the one time cost of many items attributed to the opening of the two branches in 2007. The franchise tax expense is based on the total amount of Franklin Banks capital. During the fourth
quarter of 2008, MainStreet down streamed $1.5 million in capital to Franklin Bank which increased the franchise tax expense.

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. 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. No valuation allowances were deemed necessary at December 31, 2008 and 2007. 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.
MainStreet recorded income tax expense in the amounts of $257,204 and $1,208,415 for the years ended December 31, 2008 and 2007, respectively. MainStreet is currently being audited for the tax years ending 2005 and 2006 by the Internal Revenue
Service. Management does not anticipate any material adjustments.

BALANCE SHEET

Investment Portfolio

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



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



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



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



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

Funds not utilized for
capital expenditures or lending are invested in overnight federal funds, securities of the U.S. Government and its agencies, mortgage-backed securities, municipal bonds, and certain other debt and equity securities. Currently, the Corporation has
invested in U.S. agencies, mortgage backed securities, Federal Reserve Bank stock and Federal Home Loan Bank stock. MainStreets policy is not to invest in derivatives or other high-risk instruments at this time. The entire securities portfolio
was categorized as available-for-sale at December 31, 2008 and December 31, 2007 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.

The amortized cost and approximate market values and gross unrealized gains and losses
of securities available for sale appear in Part II, Item 8, Note 2 of this report. Proceeds from the sale of these securities are included in the cash flow



14



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##### Table of Contents

statement. Gross gains and losses along with pledged information appear in Part II, Item 8, Note 2 of this report. The following table shows the
maturities of securities available-for-sale as of December 31, 2008 and the weighted average yields of such securities. The weighted average yields are calculated on the basis of the cost and effective yields weighted for the scheduled maturity
of each security. The maturities of the mortgage backed securities are based on stated final maturity. Cash flows from prepayments can cause actual maturities to differ significantly.



|                           |  |                        |   |       |                      |   |        |                       |           |  |                   |        |  |       |   |  |        |   |       |   |            |       |      |   |  |   |           
|-------------------------- |  | ---------------------- | - | ----- | -------------------- | - | ------ | --------------------- | --------- |  | ----------------- | ------ |  | ----- | - |  | ------ | - | ----- | - | ---------- | ----- | ---- | - |  | - | ----------
|                           |  | Due in OneYear or Less |   |       | Due After1  5 Years |   |        | Due After5  10 Years |           |  | Due After10 Years |        |  |      
|                           |  | Amount                 |   | Yield |                      |   | Amount |                       | Yield     |  |                   | Amount |  | Yield |   |  | Amount |   | Yield |   |            | Total
|U. S. government agencies  |  | $                      |  |       |                     | % |        | $                     | 1,911,343 |  | 3.36              | %      |  | $     |  |  |       | % |       | $ | 520,615    |       | 6.00 | % |  | $ | 2,431,958 
|Mortgage backed securities |  |                        |  |       |                     |   |        |                       |          |  |                  |        |  |       |  |  |       |   |       |   | 19,156,530 |       | 5.50 |   |  |   | 19,156,530
|                           |  |                        |   |       |                      |   |        |                       |           |  |                   |        |  |       |   |  |        |   |       |   |            |       |      |   |  |   |           
|Total                      |  | $                      |  |       |                      |   |        | $                     | 1,911,343 |  |                   |        |  | $     |  |  |        |   |       | $ | 19,677,145 |       |      |   |  | $ | 21,588,488
|                           |  |                        |   |       |                      |   |        |                       |           |  |                   |        |  |       |   |  |        |   |       |   |            |       |      |   |  |   |           

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, 2008 and 2007 the breakdown of gross loans in the loan portfolio was as follows:



|                                              |  |      |             |   |      |        |   |      |   |             |   |  |        |   |  |   |             |   |  |        |  
|--------------------------------------------- |  | ---- | ----------- | - | ---- | ------ | - | ---- | - | ----------- | - |  | ------ | - |  | - | ----------- | - |  | ------ | -
|                                              |  | 2008 |             |   | 2007 |        |   | 2006 |  
|Commercial                                    |  | $    | 18,251,922  |   |      | 9.43   | % |      | $ | 18,741,417  |   |  | 10.85  | % |  | $ | 13,746,302  |   |  | 8.79   | %
|Real Estate:                                  |  |      |             |   |      |        |   |      |   |             |   |  |        |   |  |   |             |   |  |        |  
|Construction & land development               |  |      | 51,200,170  |   |      | 26.47  |   |      |   | 59,372,175  |   |  | 34.38  |   |  |   | 31,817,589  |   |  | 20.35  |  
|Residential 1-4 families                      |  |      | 43,707,986  |   |      | 22.60  |   |      |   | 35,452,703  |   |  | 20.53  |   |  |   | 62,605,650  |   |  | 40.04  |  
|Home equity lines                             |  |      | 16,012,671  |   |      | 8.28   |   |      |   | 14,519,634  |   |  | 8.41   |   |  |   | 28,752,593  |   |  | 18.39  |  
|Commercial real estate                        |  |      | 61,174,895  |   |      | 31.62  |   |      |   | 41,236,085  |   |  | 23.88  |   |  |   | 15,812,617  |   |  | 10.12  |  
|Loans to individuals                          |  |      | 3,087,053   |   |      | 1.60   |   |      |   | 3,378,381   |   |  | 1.95   |   |  |   | 3,613,311   |   |  | 2.31   |  
|                                              |  |      |             |   |      |        |   |      |   |             |   |  |        |   |  |   |             |   |  |        |  
|Gross Loans                                   |  |      | 193,434,697 |   |      | 100.00 | % |      |   | 172,700,395 |   |  | 100.00 | % |  |   | 156,348,062 |   |  | 100.00 | %
|Unearned income & deferred fees               |  |      | 72,853      |   |      |        |   |      |   | 82,324      |   |  |        |   |  |   | 147,565     |   |  |        |  
|                                              |  |      |             |   |      |        |   |      |   |             |   |  |        |   |  |   |             |   |  |        |  
|Loans, net of unearned income & deferred fees |  |      | 193,507,550 |   |      |        |   |      |   | 172,782,719 |   |  |        |   |  |   | 156,495,627 |   |  |        |  
|Less: Allowance for loan losses               |  |      | (3,502,029  | ) |      |        |   |      |   | (2,086,592  | ) |  |        |   |  |   | (1,942,781  | ) |  |        |  
|                                              |  |      |             |   |      |        |   |      |   |             |   |  |        |   |  |   |             |   |  |        |  
|Loans, net                                    |  | $    | 190,005,521 |   |      |        |   |      | $ | 170,696,127 |   |  |        |   |  | $ | 154,552,846 |   |  |        |  
|                                              |  |      |             |   |      |        |   |      |   |             |   |  |        |   |  |   |             |   |  |        |  

As can be seen by the loan portfolio dollars, MainStreet experienced loan growth in 2008 compared to 2007 with an
increase of $20,734,302 or 12.01% due to continuing loan demand. Although some continued loan growth for Franklin Bank is expected, it is unlikely that the level of loan growth experienced since the Bank opened in September 2002 will continue. The
real estate market has materially softened. The credit markets have tightened substantially. These and other factors indicate diminished economic activity and lower loan demand particularly in real estate related loans. Moreover, Franklin
Banks current concentration in real estate related loans reduces the Banks participation in these loan markets. Our loan to deposit ratio for 2008 and 2007 was 112.60% and 98.33%, respectively. This is a high degree of leverage. It is
prudent to decrease the ratio thereby increasing liquidity. We will continue to serve our customers, but in doing so will be governed by the necessity of preserving the institutions history of safety and soundness during these difficult
economic times. As noted in the above chart, real estate related loans comprise 88.97% and 87.20% of gross loans at year end December 31, 2008 and 2007, respectively.

For the most part, MainStreets business activity is with customers located in its primary market area. Accordingly, operating results are closely correlated with the economic trends within the region and
influenced by the significant industries in the region including 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 loan portfolio is diversified, but does have three areas classified as concentrations of credit at December 31, 2008. The areas of concentrations of credits are in loans for real estate to commercial
borrowers with an outstanding balance of $35,152,304; loans for construction of buildings with an outstanding balance of $25,911,163; and loans for construction of heavy and civil engineering buildings with an outstanding balance of $17,040,449. At
December 31, 2007 there were three areas classified as concentrations of credit which were loans for real estate to commercial borrowers with an outstanding balance of $31,136,240; loans for construction of buildings with an outstanding balance
of $25,473,907 and loans for construction of heavy and civil engineering buildings with an outstanding balance of $18,805,124. The residential 1-4 family loan portfolio consists of first liens and junior lines on residential properties. The consumer
loan portfolio consists primarily of loans to individuals for home improvements, personal property, automobiles, and other consumer purposes.



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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.

The following table shows the amount of commercial loans outstanding at December 31, 2008 and their maturity distribution.



|                                          |  |                |            |                               |   |                 |  |       |           |  |   |           
|----------------------------------------- |  | -------------- | ---------- | ----------------------------- | - | --------------- |  | ----- | --------- |  | - | ----------
|                                          |  | WithinOne Year |            | After OneBut WithinFive Years |   | AfterFive Years |  | Total
|Commercial                                |  | $              | 11,487,020 |                               | $ | 5,742,522       |  | $     | 1,022,380 |  | $ | 18,251,922
|Interest rates are floating or adjustable |  |                | 9,564,699  |                               |   | 777,779         |  |       |          |  |   | 10,342,478
|Interest rates are fixed or predetermined |  |                | 1,922,321  |                               |   | 4,964,743       |  |       | 1,022,380 |  |   | 7,909,444 

The following table shows the amount of real estate construction loans outstanding at December 31, 2008 and
their maturity distribution.



|                                          |  |                |            |                               |   |                 |  |       |           |  |   |           
|----------------------------------------- |  | -------------- | ---------- | ----------------------------- | - | --------------- |  | ----- | --------- |  | - | ----------
|                                          |  | WithinOne Year |            | After OneBut WithinFive Years |   | AfterFive Years |  | Total
|Real estate construction                  |  | $              | 33,254,364 |                               | $ | 14,694,702      |  | $     | 3,251,104 |  | $ | 51,200,170
|Interest rates are floating or adjustable |  |                | 21,015,889 |                               |   | 2,403,128       |  |       | 108,955   |  |   | 23,527,972
|Interest rates are fixed or predetermined |  |                | 12,238,475 |                               |   | 12,291,574      |  |       | 3,142,149 |  |   | 27,672,198

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, also our impaired loans, were $4,217,698, $147,278, and $588,762 at December 31, 2008, December 31, 2007, and December 31, 2006, respectively. This substantial increase in nonaccrual loans represents
the negative economic trends in our markets which accelerated throughout 2008. These loans are also considered impaired loans. Lost interest related to impaired loans as of December 31, 2008, December 31, 2007 and December 31,
2006 was $113,626, $15,421, and $21,804, respectively. Interest income reflected in the 2008 and 2007 income statements related to impaired loans was $207,346 and $1,126, respectively. A specific reserve allowance was maintained against these loans
at December 31, 2008 in the amount of $499,949. There was no specific reserve at December 31, 2007. Loans that were past due more than 90 days at December 31, 2008 and 2007, respectively, were $464,701 and $483,636. Our nonperforming
loans increased during 2008 and we continue to monitor our loans closely and strive to identify issues early in order to address them as needed.

At
December 31, 2008, 2007, and 2006, MainStreet has $1,158,600, $703,771 and $310,772, respectively, in other real estate, which is property acquired through foreclosure. Other real estate is carried at the lower of cost or fair market value,
less selling costs, based on appraised value.

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 112.60% and 98.33% as of December 31, 2008 and 2007, respectively. The ratio of total time
deposits, including $100,000 and over, to total deposits was 68.81% and 70.21% at December 31, 2008 and 2007, respectively. Total deposits at December 31, 2008 and 2007 were $171,857,866 and $175,716,797, respectively, a decline of
$3,858,931, or 2.20%. The deposit mix was as follows:



|                                |  |      |             |  |        |   |  |   |             |  |        |  
|------------------------------- |  | ---- | ----------- |  | ------ | - |  | - | ----------- |  | ------ | -
|                                |  | 2008 |             |  | 2007   |  
|Demand deposits                 |  | $    | 16,235,463  |  | 9.45   | % |  | $ | 18,430,757  |  | 10.49  | %
|Interest checking deposits      |  |      | 7,583,082   |  | 4.41   |   |  |   | 7,740,195   |  | 4.41   |  
|Money market deposits           |  |      | 19,793,511  |  | 11.52  |   |  |   | 14,732,384  |  | 8.38   |  
|Savings deposits                |  |      | 9,980,230   |  | 5.81   |   |  |   | 11,441,921  |  | 6.51   |  
|Time deposits $100,000 and over |  |      | 50,804,834  |  | 29.56  |   |  |   | 51,414,626  |  | 29.26  |  
|Other time deposits             |  |      | 67,460,746  |  | 39.25  |   |  |   | 71,956,914  |  | 40.95  |  
|                                |  |      |             |  |        |   |  |   |             |  |        |  
|Total                           |  | $    | 171,857,866 |  | 100.00 | % |  | $ | 175,716,797 |  | 100.00 | %
|                                |  |      |             |  |        |   |  |   |             |  |        |  



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The chart reflects that the largest components of deposits are in time deposits including $100,000 and over. The mix has
stayed comparably the same from 2007 to year end 2008. The levels and mix of deposits are influenced by such factors as customer service, interest rates paid, service charges, and the convenience of banking locations. Competition for deposits is
fierce from other depository institutions in our market. This affects the availability and ultimately the pricing of deposits. 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 3.78% and 4.70% for 2008 and 2007, respectively, a decline of 92 basis points. This decline is reflective of the overall decline in the Federal
Reserve short-term interest rate which fell 400 basis points in 2008. In the third quarter of 2008 deposit pricing became substantially more competitive as banks were challenged by liquidity issues. This pushed rates paid on deposits higher. This
caused Franklin Bank to experience deposit decline during the third quarter which appears to have stabilized. However, Franklin Banks loan to deposit ratio remains high reflecting the limited availability of deposits at rates consistent with
maintaining a satisfactory net interest margin. The average amount and rate of deposits can be found in the Net Interest Income section of this Managements Discussion and Analysis in the Distribution of Assets, Liabilities, and
Shareholders Equity: Interest Rate and Interest Differentials table. The maturities of time deposits $100,000 and over and other time deposits are shown in Part II, Item 8, Footnote #7.

Borrowings

MainStreet has several outlets for borrowings generally
to assist with liquidity. At December 31, 2008, MainStreet had balances outstanding with Federal Home Loan Bank of Atlanta, overnight federal funds purchased, reverse repurchase agreements and internal corporate cash management accounts. At
December 31, 2007, MainStreet had outstanding balances in reverse repurchase agreements. Refer to Footnotes #8 and #9 for detailed information on our borrowings. Because of MainStreets high loan to deposit ratio, the Corporation is
focused on enhancing liquidity. The following table presents information on each category of MainStreets borrowings.



|                                                              |  |                   |            |   |                   |   |            |  
|------------------------------------------------------------- |  | ----------------- | ---------- | - | ----------------- | - | ---------- | -
|                                                              |  | December 31, 2008 |            |   | December 31, 2007 |  
|Short-term Federal Home Loan Bank advances                    |  |                   |            |   |                   |   |            |  
|Amount outstanding at period end                              |  | $                 | 15,000,000 |   |                   | $ |           |  
|Weighted average interest rate at period end                  |  |                   | .46        | % |                   |   |           | %
|Maximum amount outstanding at any month-end during the period |  | $                 | 15,000,000 |   |                   | $ | 10,000,000 |  
|Average amount outstanding during the period                  |  | $                 | 4,904,371  |   |                   | $ | 3,753,425  |  
|Weighted average interest rate during period                  |  |                   | 1.68       | % |                   |   | 5.52       | %
|Federal funds purchased                                       |  |                   |            |   |                   |   |            |  
|Amount outstanding at period end                              |  | $                 | 1,512,000  |   |                   | $ |           |  
|Weighted average interest rate at period end                  |  |                   | .79        | % |                   |   |           | %
|Maximum amount outstanding at any month-end during the period |  | $                 | 6,299,792  |   |                   | $ |           |  
|Average amount outstanding during the period                  |  | $                 | 1,041,838  |   |                   | $ | 471        |  
|Weighted average interest rate during period                  |  |                   | 2.16       | % |                   |   | 5.10       | %
|Repurchase agreement                                          |  |                   |            |   |                   |   |            |  
|Amount outstanding at period end                              |  | $                 | 13,500,000 |   |                   | $ | 7,500,000  |  
|Weighted average interest rate at period end                  |  |                   | 3.93       | % |                   |   | 4.22       | %
|Maximum amount outstanding at any month-end during the period |  | $                 | 13,500,000 |   |                   | $ | 7,500,000  |  
|Average amount outstanding during the period                  |  | $                 | 13,483,607 |   |                   | $ | 2,157,534  |  
|Weighted average interest rate during the period              |  |                   | 4.00       | % |                   |   | 4.28       | %
|Corporate Cash Management                                     |  |                   |            |   |                   |   |            |  
|Amount outstanding at period end                              |  | $                 | 199,375    |   |                   | $ |           |  
|Weighted average interest rate at period end                  |  |                   | .60        | % |                   |   |           | %
|Maximum amount outstanding at any month-end during the period |  | $                 | 400,000    |   |                   |   |           |  
|Average amount outstanding during the period                  |  | $                 | 274,470    |   |                   |   |           |  
|Weighted average interest rate during the period              |  |                   | 2.00       | % |                   |   |           | %



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##### Table of Contents

Shareholders Equity

Total shareholders equity was $21,367,265 and $21,025,110 at December 31, 2008 and 2007, respectively. Average shareholders equity to average assets was 9.76% and 10.26% for 2008 and 2007, respectively. The initial stock
offering was completed during the third quarter of 2000 with gross proceeds of $6,893,680. Offering expenses of $185,518 were netted against equity. The secondary stock offering was completed December 31, 2002 with gross proceeds of $7,135,821.
Offering expenses of $260,880 were netted against equity. The private placement offering terminated January 31, 2005 having sold 220,859 shares with total proceeds of $1,807,101. Offering expenses of $79,603 were netted against equity. This
offering has since been registered with the SEC.

At a regularly scheduled Board meeting on September 19, 2007, the Board of Directors approved a plan
to repurchase up to 100,000 shares of the Companys common stock. By year end 2008, a total of 78,800 shares had been repurchased with total costs of $1,176,170. Of this 26,000 shares were repurchased in 2008 for a total cost of $383,330. There
were 5,500 warrants exercised during 2008 for a total of $49,995. Refer to the Statement of Changes in Shareholders Equity for the detail.

MainStreets Board of Directors, at their regularly scheduled Board meeting on September 19, 2007 approved a cash dividend of $.05 per share which was MainStreets first cash dividend paid. Since that date, MainStreet paid a
quarterly dividend until the fourth quarter of 2008. Given the injection of $1.3 million into the loan loss reserve during the fourth quarter, the Board of Directors deemed it prudent to suspend the cash dividend. The dividend payout ratio for 2008
and 2007 was 43.99% and 7.01%, respectively.

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
certain capital ratios. Failure to meet 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. While MainStreet and Franklin Bank were well-capitalized at December 31, 2008 and 2007 in the current economic circumstances, capital resources are a focus for the
Corporation. See Note No. 15 to the financial statements for capital ratios.

Liquidity and Asset Liability Management

Asset liability management functions to maximize profitability within established guidelines for liquidity, capital adequacy, and interest rate risk. It also helps to
ensure that there is adequate liquidity to meet loan demand or deposit outflows and interest rate fluctuations. Liquidity is the ability to meet maturing obligations and commitments, withstand deposit fluctuations, fund operations, and provide for
loan requests. MainStreets material off-balance sheet obligations are loan commitments that were $27,099,979 and $38,019,087, respectively at December 31, 2008 and 2007. 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 banks, 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 at December 31, 2008 and December 31, 2007 was 1.74% and 8.19%, respectively. As can be seen from the ratios, liquidity has decreased
in 2008 due to an increase in loan demand and a decrease in deposits, therefore, increasing the loan to deposit ratio. Deposits provide the basic core for liquidity. As discussed earlier, during the third quarter of 2008 banking institutions were
challenged with liquidity as a result of the withdrawal of deposits due to concerns over the health of the countrys financial system. Financial institutions utilized high interest rates in the market to maintain and attract depositors. As a
result, deposits at Franklin Bank declined during the third quarter. This has seemed to stabilize but has negatively affected our net interest margin. In addition to the borrowing facilities, MainStreet in early 2009 has developed relationships with
several entities allowing for the gathering of brokered deposits. We have also become a member of the Certificate of Deposit Account Registry Service (CDARS). This allows us to provide our depositors with up to $50 million dollars in
FDIC



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##### Table of Contents

insurance. We receive the deposits and forward them to CDARS and we receive deposits back if wanted. The send and receive transaction is called a reciprocal
transaction. We can also bid on deposits in a one-way buy transaction which would allow for new depositors. CDARS deposits are also considered brokered deposits. We have acquired brokered deposits during 2009 and along with a $2.3 million payoff of
a loan, Franklin Bank has paid down its advances with FHLB.

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. MainStreet utilizes these techniques for
management of interest rate risk in order to minimize change in net interest income with interest rate changes. MainStreet BankShares, Inc. has partnered with Compass Bank using the Sendero model to help measure interest rate risk. The asset
liability management process requires a number of key assumptions. Management determines the most likely outlook for the economy and interest rates measuring the effect on net interest income in a rising and declining 100, 200, and 300 interest rate
environment. With the change from level shock, net interest income is modeled assuming that interest rates move the full rate change in the first month. With the change from level ramp, net interest income is modeled assuming rates move one quarter
of the full rate change in each quarter. With this approach, management also reviews the economic value of equity that is the net present value of the balance sheets cash flows or the residual value of future cash flows ultimately due to
shareholders. The following table demonstrates the percentage change in net interest income from the then current level prime rate of 3.25% at December 31, 2008 in a rising and declining 100, 200, and 300 basis point interest rate environment:



|                                                       |  |            |   |  |                        |   |  |                         |  
|------------------------------------------------------ |  | ---------- | - |  | ---------------------- | - |  | ----------------------- | -
|Net Interest Income Percentage Change From Level Rates | 
|                                                       |  |            |  
|Rate Shift                                             |  | Prime Rate |   |  | Change From Level Ramp |   |  | Change from Level Shock |  
|+300 bp                                                |  | 6.25       | % |  | 10.00                  | % |  | 17.00                   | %
|+200 bp                                                |  | 5.25       |   |  | 6.00                   |   |  | 9.00                    |  
|+100 bp                                                |  | 4.25       |   |  | 3.00                   |   |  | 4.00                    |  
|-100 bp                                                |  | 2.25       |   |  | -2.00                  |   |  | -4.00                   |  
|-200 bp                                                |  | 1.25       |   |  | -4.00                  |   |  | -5.00                   |  
|-300 bp                                                |  | 0.25       |   |  | -7.00                  |   |  | -11.00                  |  

MainStreet is sensitive to change in the interest rate environment particularly due to the large percentage of
variable rate loans in our loan portfolio. In a rising rate environment, it is anticipated that the impact would be positive on the net interest margin. In a declining rate environment, MainStreet has significant exposure to the net interest margin.
Management seeks to lower the impact on the net interest margin. To help offset the compression in the net interest margin, MainStreet entered into two reverse repurchase agreements for a total of $13.5 million. These agreements were put in place to
add to net interest income. Refer to Footnote #9 for detailed information on the repurchase agreements.

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

MainStreet provides certain services for its subsidiary bank and
real estate company. These services include accounting, investments, treasury management, compliance, audit, deposit and loan operations, and data processing. In exchange for these services, the Bank and the real estate company pay an affiliate fee
to the holding company. Per the servicing agreement signed upon the sale of Smith River Bank, MainStreet agreed to provide certain services to Smith River Bank for an annual fee of $505,000 for a three-year period, to be adjusted annually based upon
the terms of the original agreement. The original Administrative Servicing Agreement expired on March 22, 2008 at which time MainStreet elected not to renew the Agreement.

The affiliate fee paid to MainStreet helps support MainStreets cash requirements since most of the expenses are directly related to the companies it owns. Dividends from Franklin Bank are also a source of cash
for MainStreet. 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 RealEstate owns the facility in which the Southlake branch of Franklin Bank operates. The land cost was $425,286 and
the cost of the building was $881,123. The construction of the facility was completed and operations began in August 2007. The corporation has only a modest amount of fixed assets.

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 8 detailing the dollar amount by
maturity.



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##### Table of Contents

|                                               |  |                                                                         
|---------------------------------------------- |  | ------------------------------------------------------------------------
|                                               |  | Footnote Disclosure in Item 8 Notes to Consolidated Financial Statements
|                                               | 
|Contractual Cash Obligations Operating Leases  |  | Footnote #13                                                            
|                                               | 
|Other Commitments Commitments to extend credit |  | Footnote #17                                                            
|                                               | 
|Related Person Loans                           |  | Footnote #5                                                             
|                                               | 
|Borrowings                                     |  | Footnote #8                                                             
|                                               | 
|Repurchase Agreements                          |  | Footnote #9                                                             

Impact of Inflation

Most of MainStreets assets are monetary in nature and therefore are sensitive to interest rate fluctuations. MainStreet does not have significant fixed assets or inventories. Fluctuations in interest rates and actions of the Board of
Governors of the Federal Reserve System (FRB) have a great effect on MainStreets profitability. Management continually strives to manage the relationship between interest-sensitive assets and liabilities. As discussed above,
MainStreet and Franklin Bank must comply with numerous federal and state laws and regulations. In light of the increasing government involvement in the financial services industry and to address the underlying causes of the recent credit crunch, it
is likely that financial institutions like MainStreet and Franklin Bank will have to meet additional legal requirements, all of which add to the Corporations cost of doing business. In addition, regulatory concerns over real estate related
assets on the balance sheets of financial institutions and liquidity due to deposit fluctuations and other factors are likely to translate into higher regulatory scrutiny of financial institutions. This could impact MainStreet.

Stock Compensation Plans

BankShares approved the 2004 Key Employee
Stock Option Plan at its Annual Meeting of Shareholders on April 15, 2004. This Plan permitted the granting of Non-qualified Stock Options and Incentive Stock Options to persons designated as Key Employees of BankShares and its
subsidiaries. The Plan terminated on January 21, 2009. Awards made under the Plan prior to and outstanding on that date remain valid in accordance with their terms.

Recent Accounting Developments

In September 2006, the Financial Accounting Standards Board (FASB) reached a
consensus on Emerging Issues Task Force (EITF) Issue 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements, (EITF Issue 06-4). In
March 2007, the FASB reached a consensus on EITF Issue 06-10, Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements, (EITF Issue 06-10). Both of these standards require a company to recognize an
obligation over an employees service period based upon the substantive agreement with the employee such as the promise to maintain a life insurance policy or provide a death benefit postretirement. MainStreet adopted the provisions of these
standards effective January 1, 2008. The adoption of these standards was not material to the consolidated financial statements.

In September 2006,
the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and
expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but rather, provides enhanced guidance to other pronouncements that require or permit assets or liabilities to be measured at fair value.
This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those years. The FASB has approved a one-year deferral for the implementation of the Statement for
nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis.MainStreet adopted SFAS 157 effective January 1, 2008. The adoption of SFAS 157 was not
material to the consolidated financial statements.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective of this Statement is to improve
financial reporting by



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providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. The fair value option established by this Statement permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity shall report unrealized
gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The fair value option may be applied instrument by instrument and is irrevocable. SFAS 159 is effective as of the beginning of
an entitys first fiscal year that begins after November 15, 2007, with early adoption available in certain circumstances.MainStreet adopted SFAS 159 effective January 1, 2008. The Company decided not to report any existing
financial assets or liabilities at fair value that are not already reported, thus the adoption of this statement did not have a material impact on the consolidated financial statements.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), Business Combinations (SFAS 141(R)). The Standard will significantly change the financial accounting and
reporting of business combination transactions. SFAS 141(R) establishes principles for how an acquirer recognizes and measures the identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree; recognizes and
measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business
combination. SFAS 141(R) is effective for acquisition dates on or after the beginning of an entitys first year that begins after December 15, 2008. MainStreet does not expect the implementation of SFAS 141(R) to have a material impact on
its consolidated financial statements, at this time.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160,
Noncontrolling Interests in Consolidated Financial Statements an Amendment of ARB No. 51 (SFAS 160). The Standard will significantly change the financial accounting and reporting of noncontrolling (or minority) interests in
consolidated financial statements. SFAS 160 is effective as of the beginning of an entitys first fiscal year that begins after December 15, 2008, with early adoption prohibited. MainStreet does not expect the implementation of SFAS 160 to
have a material impact on its consolidated financial statements, at this time.

In November 2007, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 109, Written Loan Commitments Recorded at Fair Value Through Earnings (SAB 109). SAB 109 expresses the current view of the staff that the expected net future cash flows related to the associated servicing of
the loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. SEC registrants are expected to apply the views in Question 1 of SAB 109 on a prospective basis to derivative loan
commitments issued or modified in fiscal quarters beginning after December 15, 2007. Implementation of SAB 109 did not have a material impact on its consolidated financial statements.

In December 2007, the SEC issued Staff Accounting Bulletin No. 110, Use of a Simplified Method in Developing Expected Term of Share Options (SAB 110).
SAB 110 expresses the current view of the staff that it will accept a companys election to use the simplified method discussed in SAB 107 for estimating the expected term of plain vanilla share options regardless of whether the
company has sufficient information to make more refined estimates. The staff noted that it understands that detailed information about employee exercise patterns may not be widely available by December 31, 2007. Accordingly, the staff will
continue to accept, under certain circumstances, the use of the simplified method beyond December 31, 2007. Implementation of SAB 110 did not have a material impact on its (consolidated) financial statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities  an amendment of SFAS No. 133,
(SFAS No. 161). SFAS No. 161 requires that an entity provide enhanced disclosures related to derivative and hedging activities. SFAS No. 161 is effective for the Company on January 1, 2009.

In April 2008, the FASB issued FASB Staff Position (FSP) No. 142-3, Determination of the Useful Life of Intangible Assets (FSP
No. 142-3). FSP No. 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under FASB SFAS No. 142, Goodwill
and Other Intangible Assets (SFAS No. 142). The intent of FSP No. 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows
used to measure the fair value of the assets under SFAS No. 141(R). FSP No. 142-3 is effective for MainStreet on January 1, 2009, and applies prospectively to intangible assets that are acquired individually or with a group of other
assets in business combinations and asset acquisitions.The adoption of FSP No. 142-3 is not expected to have a material impact on the Corporations consolidated financial statements.

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, (SFAS No. 162). SFAS No. 162
identifies the sources of accounting principles and the framework for selecting the principles to be



21



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used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles.
SFAS No. 162 is effective 60 days following the SECs approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles. Management does not expect the adoption of the provision of SFAS No. 162 to have any impact on the consolidated financial statements.

In September 2008, the FASB issued FSP FAS 133-1 and FIN 45-4, Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the
Effective Date of FASB Statement No. 161, (FSP 133-1 and FIN 45-4). FSP 133-1 and FIN 45-4 require a seller of credit derivatives to disclose information about its credit derivatives and hybrid instruments that have embedded
credit derivatives to enable users of financial statements to assess their potential effect on its financial position, financial performance and cash flows. The disclosures required by FSP 133-1 and FIN 45-4 will be effective for the Corporation on
December 31, 2008 and is not expected to have a material impact on the consolidated financial statements.

In October 2008, the FASB issued FSP FAS
157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active, (FSP 157-3). FSP 157-3 clarifies the application of SFAS No. 157 in determining the fair value of a financial asset
during periods of inactive markets. FSP 157-3 was effective as of September 30, 2008 and did not have material impact on the Corporations consolidated financial statements.

In December 2008, the FASB issued FSP No. FAS 140-4 and FIN 46(R)-8, Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities. FSP No.
FAS 140-4 and FIN 46(R)-8 requires enhanced disclosures about transfers of financial assets and interests in variable interest entities. The FSP is effective for interim and annual periods ending after December 15, 2008. Since the FSP requires
only additional disclosures concerning transfers of financial assets and interest in variable interest entities, adoption of the FSP will not affect the Corporations financial condition, results of operations or cash flows.

In January 2009, the FASB reached a consensus on EITF Issue 99-20-1. This FSP amends the impairment guidance in EITF Issue No. 99-20, Recognition of Interest
Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets, to achieve more consistent determination of whether an other-than-temporary impairment
has occurred. The FSP also retains and emphasizes the objective of an other-than-temporary impairment assessment and the related disclosure requirements in FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity
Securities, and other related guidance. The FSP is effective for interim and annual reporting periods ending after December 15, 2008 and shall be applied prospectively. The FSP was effective as of December 31, 2008 and did not have a
material impact on the consolidated financial statements.



|Item 7A. | Quantitative and Qualitative Disclosures about Market Risk
|-------- | ----------------------------------------------------------

Not
required.



22



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##### Table of Contents

|Item 8. | Financial Statements and Supplementary Data
|------- | -------------------------------------------

LOGO

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

MainStreet BankShares, Inc.

Martinsville, Virginia

We have audited the accompanying consolidated
balance sheets of MainStreet BankShares, Inc. and Subsidiaries as of December 31, 2008 and 2007, and the related statements of operations, changes in stockholders equity and cash flows for the years then ended. These financial statements
are the responsibility of the Corporation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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MainStreet BankShares, Inc. and Subsidiaries as of December 31, 2008 and
2007, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

We were not engaged to examine managements assertion about the effectiveness of MainStreet BankShares, Inc.s internal control over financial reporting as of December 31, 2008 included in the accompanying
Managements Report on Internal Control Over Financial Reporting and, accordingly, we do not express an opinion thereon.



LOGO

|                    
|--------------------
|Winchester, Virginia
|February 25, 2009   



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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets



|                                                                                                                                        |  |                  |             |   |                  |   |             |  
|--------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ----------- | - | ---------------- | - | ----------- | -
|                                                                                                                                        |  | December 31,2008 |             |   | December 31,2007 |  
|ASSETS                                                                                                                                  |  |                  |             |   |                  |   |             |  
|                                                                                                                                        |  |                 
|Cash and due from banks                                                                                                                 |  | $                | 2,767,176   |   |                  | $ | 2,745,795   |  
|Interest-bearing deposits in other banks                                                                                                |  |                  | 127,853     |   |                  |   | 469,186     |  
|Federal funds sold                                                                                                                      |  |                  | 280,000     |   |                  |   | 970,000     |  
|Securities available-for-sale                                                                                                           |  |                  | 21,588,488  |   |                  |   | 22,569,594  |  
|Restricted equity securities                                                                                                            |  |                  | 1,434,900   |   |                  |   | 741,300     |  
|                                                                                                                                        |  |                 
|Loans:                                                                                                                                  |  |                  |             |   |                  |   |             |  
|Total Gross Loans                                                                                                                       |  |                  | 193,434,697 |   |                  |   | 172,700,395 |  
|Unearned deferred fees and costs, net                                                                                                   |  |                  | 72,853      |   |                  |   | 82,324      |  
|                                                                                                                                        |  |                  |             |   |                  |   |             |  
|Loans, net of unearned deferred fees and costs                                                                                          |  |                  | 193,507,550 |   |                  |   | 172,782,719 |  
|Less: Allowance for loan losses                                                                                                         |  |                  | (3,502,029  | ) |                  |   | (2,086,592  | )
|                                                                                                                                        |  |                  |             |   |                  |   |             |  
|Net Loans                                                                                                                               |  |                  | 190,005,521 |   |                  |   | 170,696,127 |  
|Bank premises and equipment, net                                                                                                        |  |                  | 2,141,949   |   |                  |   | 2,388,729   |  
|Accrued interest receivable                                                                                                             |  |                  | 855,054     |   |                  |   | 973,880     |  
|Other assets                                                                                                                            |  |                  | 2,679,933   |   |                  |   | 1,630,374   |  
|Bank owned life insurance                                                                                                               |  |                  | 2,720,450   |   |                  |   | 2,596,897   |  
|                                                                                                                                        |  |                  |             |   |                  |   |             |  
|Total Assets                                                                                                                            |  | $                | 224,601,324 |   |                  | $ | 205,781,882 |  
|                                                                                                                                        |  |                  |             |   |                  |   |             |  
|                                                                                                                                        |  |                 
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                    |  |                  |             |   |                  |   |             |  
|                                                                                                                                        |  |                 
|Deposits:                                                                                                                               |  |                  |             |   |                  |   |             |  
|Non-interest bearing demand deposits                                                                                                    |  | $                | 16,235,463  |   |                  | $ | 18,430,757  |  
|Interest bearing deposits                                                                                                               |  |                  | 155,622,403 |   |                  |   | 157,286,040 |  
|                                                                                                                                        |  |                  |             |   |                  |   |             |  
|Total Deposits                                                                                                                          |  |                  | 171,857,866 |   |                  |   | 175,716,797 |  
|                                                                                                                                        |  |                 
|Repurchase agreements                                                                                                                   |  |                  | 13,500,000  |   |                  |   | 7,500,000   |  
|Short-term borrowings                                                                                                                   |  |                  | 16,711,375  |   |                  |   |            |  
|Accrued interest payable and other liabilities                                                                                          |  |                  | 1,164,818   |   |                  |   | 1,539,975   |  
|                                                                                                                                        |  |                  |             |   |                  |   |             |  
|                                                                                                                                        |  |                 
|Total Liabilities                                                                                                                       |  |                  | 203,234,059 |   |                  |   | 184,756,772 |  
|                                                                                                                                        |  |                  |             |   |                  |   |             |  
|                                                                                                                                        |  |                 
|Commitments and contingencies                                                                                                           |  |                  |            |   |                  |   |            |  
|                                                                                                                                        |  |                 
|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 1,713,375 and 1,733,875 in 2008 and 2007,
respectively |  |                  | 17,799,014  |   |                  |   | 18,071,032  |  
|Retained earnings                                                                                                                       |  |                  | 3,269,480   |   |                  |   | 2,941,122   |  
|Accumulated other comprehensive income                                                                                                  |  |                  | 298,771     |   |                  |   | 12,956      |  
|                                                                                                                                        |  |                  |             |   |                  |   |             |  
|                                                                                                                                        |  |                 
|Total Shareholders Equity                                                                                                              |  |                  | 21,367,265  |   |                  |   | 21,025,110  |  
|                                                                                                                                        |  |                  |             |   |                  |   |             |  
|                                                                                                                                        |  |                 
|Total Liabilities and Shareholders Equity                                                                                              |  | $                | 224,601,324 |   |                  | $ | 205,781,882 |  
|                                                                                                                                        |  |                  |             |   |                  |   |             |  

See accompanying notes to consolidated financial statements.



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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Income



|                                                           |  |                             |            |   |                             |   |            |  
|---------------------------------------------------------- |  | --------------------------- | ---------- | - | --------------------------- | - | ---------- | -
|                                                           |  | Year EndedDecember 31, 2008 |            |   | Year EndedDecember 31, 2007 |  
|Interest Income:                                           |  |                             |            |   |                             |   |            |  
|Interest and fees on loans                                 |  | $                           | 12,426,655 |   |                             | $ | 13,662,840 |  
|Interest on interest-bearing deposits                      |  |                             | 6,325      |   |                             |   | 23,379     |  
|Interest on federal funds sold                             |  |                             | 55,843     |   |                             |   | 605,178    |  
|Interest on securities available-for-sale                  |  |                             | 1,260,783  |   |                             |   | 723,488    |  
|Dividends on restricted equity securities                  |  |                             | 39,518     |   |                             |   | 53,780     |  
|                                                           |  |                             |            |   |                             |   |            |  
|                                                           |  |                            
|Total Interest Income                                      |  |                             | 13,789,124 |   |                             |   | 15,068,665 |  
|                                                           |  |                             |            |   |                             |   |            |  
|                                                           |  |                            
|Interest Expense:                                          |  |                             |            |   |                             |   |            |  
|Interest on time deposits $100,000 and over                |  |                             | 2,283,924  |   |                             |   | 2,590,298  |  
|Interest on other deposits                                 |  |                             | 3,781,446  |   |                             |   | 4,677,465  |  
|Interest on repurchase agreements                          |  |                             | 538,950    |   |                             |   | 92,313     |  
|Interest on short-term borrowings                          |  |                             | 110,356    |   |                             |   | 207,046    |  
|                                                           |  |                             |            |   |                             |   |            |  
|                                                           |  |                            
|Total Interest Expense                                     |  |                             | 6,714,676  |   |                             |   | 7,567,122  |  
|                                                           |  |                             |            |   |                             |   |            |  
|                                                           |  |                            
|Net Interest Income                                        |  |                             | 7,074,448  |   |                             |   | 7,501,543  |  
|Provision for loan losses                                  |  |                             | 1,964,300  |   |                             |   | 255,521    |  
|                                                           |  |                             |            |   |                             |   |            |  
|                                                           |  |                            
|Net Interest Income After Provision for Loan Losses        |  |                             | 5,110,148  |   |                             |   | 7,246,022  |  
|                                                           |  |                             |            |   |                             |   |            |  
|                                                           |  |                            
|Noninterest Income:                                        |  |                             |            |   |                             |   |            |  
|Service charges on deposit accounts                        |  |                             | 328,493    |   |                             |   | 269,238    |  
|Mortgage brokerage income                                  |  |                             | 229,631    |   |                             |   | 301,508    |  
|Servicing fee income                                       |  |                             | 150,619    |   |                             |   | 562,877    |  
|Income on bank owned life insurance                        |  |                             | 123,553    |   |                             |   | 96,897     |  
|Gain on sale of securities                                 |  |                             | 46,340     |   |                             |   |           |  
|Loss and impairment of other real estate and repossessions |  |                             | (179,944   | ) |                             |   | (977       | )
|Other fee income and miscellaneous income                  |  |                             | 258,815    |   |                             |   | 276,857    |  
|                                                           |  |                             |            |   |                             |   |            |  
|Total Noninterest Income                                   |  |                             | 957,507    |   |                             |   | 1,506,400  |  
|                                                           |  |                             |            |   |                             |   |            |  
|                                                           |  |                            
|Noninterest Expense:                                       |  |                             |            |   |                             |   |            |  
|Salaries and employee benefits                             |  |                             | 2,642,566  |   |                             |   | 2,774,923  |  
|Occupancy and equipment expense                            |  |                             | 830,851    |   |                             |   | 717,466    |  
|Professional fees                                          |  |                             | 323,523    |   |                             |   | 198,833    |  
|Advertising and promotion                                  |  |                             | 100,676    |   |                             |   | 106,576    |  
|Outside processing                                         |  |                             | 424,945    |   |                             |   | 399,669    |  
|Franchise tax                                              |  |                             | 202,500    |   |                             |   | 172,620    |  
|Other expenses                                             |  |                             | 699,126    |   |                             |   | 663,076    |  
|                                                           |  |                             |            |   |                             |   |            |  
|Total Noninterest Expense                                  |  |                             | 5,224,187  |   |                             |   | 5,033,163  |  
|                                                           |  |                             |            |   |                             |   |            |  
|                                                           |  |                            
|Net Income Before Tax                                      |  | $                           | 843,468    |   |                             | $ | 3,719,259  |  
|Income Tax Expense                                         |  |                             | 257,204    |   |                             |   | 1,208,415  |  
|                                                           |  |                             |            |   |                             |   |            |  
|Net Income                                                 |  | $                           | 586,264    |   |                             | $ | 2,510,844  |  
|                                                           |  |                             |            |   |                             |   |            |  
|                                                           |  |                            
|Basic Net Income Per Share                                 |  | $                           | .34        |   |                             | $ | 1.42       |  
|                                                           |  |                             |            |   |                             |   |            |  
|Diluted Net Income Per Share                               |  | $                           | .33        |   |                             | $ | 1.37       |  
|                                                           |  |                             |            |   |                             |   |            |  

See accompanying notes to consolidated financial statements.



25



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##### Table of Contents

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders Equity



|                                                                                                         |  |                       |   |  |             |            |   |                  |   |           |                                     |  |   |                          |   |  |   |            |  
|-------------------------------------------------------------------------------------------------------- |  | --------------------- | - |  | ----------- | ---------- | - | ---------------- | - | --------- | ----------------------------------- |  | - | ------------------------ | - |  | - | ---------- | -
|                                                                                                         |  | Numberof CommonShares |   |  | CommonStock |            |   | RetainedEarnings |   |           | AccumulatedOtherComprehensiveIncome |  |   | TotalShareholdersEquity |  
|Balance at December 31, 2006                                                                             |  | 1,763,853             |   |  | $           | 18,576,739 |   |                  | $ | 606,306   |                                     |  | $ | 6,411                    |   |  | $ | 19,189,456 |  
|                                                                                                         |  |                       |   |  |            
|Comprehensive Income:                                                                                    |  |                       |   |  |             |            |   |                  |   |           |                                     |  |   |                          |   |  |   |            |  
|                                                                                                         |  |                       |   |  |            
|Net Income                                                                                               |  |                      |   |  |             |           |   |                  |   | 2,510,844 |                                     |  |   |                         |   |  |   | 2,510,844  |  
|                                                                                                         |  |                       |   |  |            
|Net unrealized holding gains during the period                                                           |  |                      |   |  |             |           |   |                  |   |          |                                     |  |   | 9,916                    |   |  |   | 9,916      |  
|                                                                                                         |  |                       |   |  |            
|Deferred income tax expense                                                                              |  |                      |   |  |             |           |   |                  |   |          |                                     |  |   | (3,371                   | ) |  |   | (3,371     | )
|                                                                                                         |  |                       |   |  |             |            |   |                  |   |           |                                     |  |   |                          |   |  |   |            |  
|                                                                                                         |  |                       |   |  |            
|Total Comprehensive Income                                                                               |  |                      |   |  |             |           |   |                  |   | 2,510,844 |                                     |  |   | 6,545                    |   |  |   | 2,517,389  |  
|                                                                                                         |  |                       |   |  |            
|Stock option and warrant exercise including tax benefit of $54,865                                       |  | 22,822                |   |  |             | 264,783    |   |                  |   |          |                                     |  |   |                         |   |  |   | 264,783    |  
|                                                                                                         |  |                       |   |  |            
|Cash dividends declared                                                                                  |  |                      |   |  |             |           |   |                  |   | (176,028  | )                                   |  |   |                         |   |  |   | (176,028   | )
|                                                                                                         |  |                       |   |  |            
|Repurchase of common stock                                                                               |  | (52,800               | ) |  |             | (792,840   | ) |                  |   |          |                                     |  |   |                         |   |  |   | (792,840   | )
|                                                                                                         |  |                       |   |  |            
|Stock-based compensation costs                                                                           |  |                      |   |  |             | 22,350     |   |                  |   |          |                                     |  |   |                         |   |  |   | 22,350     |  
|                                                                                                         |  |                       |   |  |             |            |   |                  |   |           |                                     |  |   |                          |   |  |   |            |  
|                                                                                                         |  |                       |   |  |            
|Balance at December 31, 2007                                                                             |  | 1,733,875             |   |  | $           | 18,071,032 |   |                  | $ | 2,941,122 |                                     |  | $ | 12,956                   |   |  | $ | 21,025,110 |  
|                                                                                                         |  |                       |   |  |            
|Comprehensive Income:                                                                                    |  |                       |   |  |             |            |   |                  |   |           |                                     |  |   |                          |   |  |   |            |  
|                                                                                                         |  |                       |   |  |            
|Net Income                                                                                               |  |                      |   |  |             |           |   |                  |   | 586,264   |                                     |  |   |                         |   |  |   | 586,264    |  
|                                                                                                         |  |                       |   |  |            
|Net unrealized holding gains during the period                                                           |  |                      |   |  |             |           |   |                  |   |          |                                     |  |   | 479,393                  |   |  |   | 479,393    |  
|                                                                                                         |  |                       |   |  |            
|Less reclassification adjustments for gains included in net income, net of income tax expense of $15,756 |  |                      |   |  |             |           |   |                  |   |          |                                     |  |   | (30,584                  | ) |  |   | (30,584    | )
|                                                                                                         |  |                       |   |  |            
|Deferred income tax expense                                                                              |  |                      |   |  |             |           |   |                  |   |          |                                     |  |   | (162,994                 | ) |  |   | (162,994   | )
|                                                                                                         |  |                       |   |  |             |            |   |                  |   |           |                                     |  |   |                          |   |  |   |            |  
|                                                                                                         |  |                       |   |  |            
|Total Comprehensive Income                                                                               |  |                      |   |  |             |           |   |                  |   | 586,264   |                                     |  |   | 285,815                  |   |  |   | 872,079    |  
|                                                                                                         |  |                       |   |  |            
|Warrant exercise including tax benefit of $15,727                                                        |  | 5,500                 |   |  |             | 65,722     |   |                  |   |          |                                     |  |   |                         |   |  |   | 65,722     |  
|                                                                                                         |  |                       |   |  |            
|Cash dividends declared                                                                                  |  |                      |   |  |             |           |   |                  |   | (257,906  | )                                   |  |   |                         |   |  |   | (257,906   | )
|                                                                                                         |  |                       |   |  |            
|Repurchase of common stock                                                                               |  | (26,000               | ) |  |             | (383,330   | ) |                  |   |          |                                     |  |   |                         |   |  |   | (383,330   | )
|                                                                                                         |  |                       |   |  |            
|Stock-based compensation costs                                                                           |  |                      |   |  |             | 45,590     |   |                  |   |          |                                     |  |   |                         |   |  |   | 45,590     |  
|                                                                                                         |  |                       |   |  |             |            |   |                  |   |           |                                     |  |   |                          |   |  |   |            |  
|                                                                                                         |  |                       |   |  |            
|Balance at December 31, 2008                                                                             |  | 1,713,375             |   |  | $           | 17,799,014 |   |                  | $ | 3,269,480 |                                     |  | $ | 298,771                  |   |  | $ | 21,367,265 |  
|                                                                                                         |  |                       |   |  |             |            |   |                  |   |           |                                     |  |   |                          |   |  |   |            |  

See accompanying notes to consolidated financial statements.



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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows



|                                                                      |  |                             |             |   |                             |   |             |  
|--------------------------------------------------------------------- |  | --------------------------- | ----------- | - | --------------------------- | - | ----------- | -
|                                                                      |  | Year EndedDecember 31, 2008 |             |   | Year EndedDecember 31, 2007 |  
|Cash Flows From Operating Activities:                                 |  |                             |             |   |                             |   |             |  
|Net income from operations                                            |  | $                           | 586,264     |   |                             | $ | 2,510,844   |  
|Provision for loan losses                                             |  |                             | 1,964,300   |   |                             |   | 255,521     |  
|Depreciation and amortization                                         |  |                             | 280,888     |   |                             |   | 230,898     |  
|Amortization of discounts and premiums, net                           |  |                             | (12,980     | ) |                             |   | (36,445     | )
|Gain on sale of securities                                            |  |                             | (46,340     | ) |                             |   |            |  
|Loss and impairment on other real estate owned and repossessions      |  |                             | 179,944     |   |                             |   | 977         |  
|Stock option expense                                                  |  |                             | 45,590      |   |                             |   | 22,350      |  
|Deferred tax benefit                                                  |  |                             | (528,272    | ) |                             |   | (28,195     | )
|(Increase) decrease in accrued interest receivable                    |  |                             | 118,826     |   |                             |   | (101,670    | )
|Increase in other assets                                              |  |                             | (1,526,963  | ) |                             |   | (741,788    | )
|Increase in value of BOLI                                             |  |                             | (123,553    | ) |                             |   | (96,897     | )
|Increase (decrease) in accrued interest payable and other liabilities |  |                             | (288,463    | ) |                             |   | 167,434     |  
|Tax benefit of warrant exercise                                       |  |                             | 15,727      |   |                             |   | 54,865      |  
|                                                                      |  |                             |             |   |                             |   |             |  
|Net cash provided by operating activities                             |  |                             | 664,968     |   |                             |   | 2,237,894   |  
|                                                                      |  |                             |             |   |                             |   |             |  
|Cash Flows From Investing Activities:                                 |  |                             |             |   |                             |   |             |  
|(Increase) decrease in interest-bearing deposits in other banks       |  |                             | 341,333     |   |                             |   | (213,406    | )
|Decrease in federal funds sold                                        |  |                             | 690,000     |   |                             |   | 11,914,000  |  
|Purchases of furniture, fixtures, and equipment                       |  |                             | (34,108     | ) |                             |   | (1,879,670  | )
|Purchases of securities available-for-sale                            |  |                             | (13,181,238 | ) |                             |   | (38,738,792 | )
|Purchases of restricted equity securities                             |  |                             | (693,600    | ) |                             |   | (46,200     | )
|Calls/maturities/repayments of securities available-for-sale          |  |                             | 9,628,023   |   |                             |   | 36,291,870  |  
|Proceeds from sale of securities                                      |  |                             | 5,026,694   |   |                             |   |            |  
|Proceeds from sale of other real estate owned and repossessions       |  |                             | 678,494     |   |                             |   | 322,795     |  
|Redemption of restricted equity securities                            |  |                             |            |   |                             |   | 450,000     |  
|Loan originations and principal collections, net                      |  |                             | (21,273,694 | ) |                             |   | (16,398,802 | )
|Purchase of bank owned life insurance                                 |  |                             |            |   |                             |   | (2,500,000  | )
|                                                                      |  |                             |             |   |                             |   |             |  
|Net cash used in investing activities                                 |  |                             | (18,818,096 | ) |                             |   | (10,798,205 | )
|                                                                      |  |                             |             |   |                             |   |             |  
|Cash Flows From Financing Activities:                                 |  |                             |             |   |                             |   |             |  
|Increase (decrease) non-interest bearing deposits                     |  |                             | (2,195,294  | ) |                             |   | 4,173,397   |  
|Increase (decrease) interest bearing deposits                         |  |                             | (1,663,637  | ) |                             |   | 6,723,349   |  
|Proceeds from repurchase agreement                                    |  |                             | 6,000,000   |   |                             |   | 7,500,000   |  
|Proceeds from short-term borrowings                                   |  |                             | 16,711,375  |   |                             |   |            |  
|Repayment of short-term borrowings                                    |  |                             |            |   |                             |   | (10,000,000 | )
|Proceeds from issuance of common stock                                |  |                             | 49,995      |   |                             |   | 209,918     |  
|Repurchase of common stock                                            |  |                             | (383,330    | ) |                             |   | (792,840    | )
|Dividends paid                                                        |  |                             | (344,600    | ) |                             |   | (89,334     | )
|                                                                      |  |                             |             |   |                             |   |             |  
|Net cash provided by financing activities                             |  |                             | 18,174,509  |   |                             |   | 7,724,490   |  
|                                                                      |  |                             |             |   |                             |   |             |  
|Net increase (decrease) in cash and cash equivalents                  |  |                             | 21,381      |   |                             |   | (835,821    | )
|Cash and cash equivalents at beginning of year                        |  | $                           | 2,745,795   |   |                             | $ | 3,581,616   |  
|                                                                      |  |                             |             |   |                             |   |             |  
|Cash and cash equivalents at end of year                              |  | $                           | 2,767,176   |   |                             | $ | 2,745,795   |  
|                                                                      |  |                             |             |   |                             |   |             |  
|Supplemental disclosure of cash flow information:                     |  |                             |             |   |                             |   |             |  
|Cash paid during the year for interest                                |  | $                           | 6,873,827   |   |                             | $ | 7,552,547   |  
|                                                                      |  |                             |             |   |                             |   |             |  
|Cash paid during the period for taxes                                 |  | $                           | 997,122     |   |                             | $ | 1,092,000   |  
|                                                                      |  |                             |             |   |                             |   |             |  
|Unrealized (gain) on investment securities                            |  | $                           | (433,053    | ) |                             | $ | (9,916      | )
|                                                                      |  |                             |             |   |                             |   |             |  
|Transfer of loans to other real estate and other assets               |  | $                           | 1,279,731   |   |                             | $ | 731,568     |  
|                                                                      |  |                             |             |   |                             |   |             |  

See accompanying notes to consolidated financial statements.



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##### Table of Contents

MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2008 and 2007

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. MainStreet also had a private placement offering which raised total proceeds of $1,807,101. The shares purchased from the private placement offering were also subsequently registered. The Corporation was
primarily organized to serve as a bank holding company. Its first wholly-owned subsidiary was Smith River Community Bank, N.A., (Smith River Bank) which was sold on March 23, 2005 for $6.5 million. In 2002, MainStreet organized a
second bank subsidiary, Franklin Community Bank, National Association (Franklin Bank). On February 8, 2007, MainStreet formed a wholly-owned real estate company, MainStreet RealEstate, Inc., for the sole purpose of owning the real
estate of the Corporation.

Franklin Bank was organized as a nationally chartered commercial bank and member of the Federal Reserve Bank of Richmond.
Franklin Bank opened for business on September 16, 2002. Franklin Bank operates as a locally owned and operated commercial bank emphasizing personal customer service and other advantages incident to banking with a locally owned community bank.
Franklin Banks primary service area is Franklin County, Town of Rocky Mount and surrounding areas. It currently has four banking offices including its main office.

When MainStreet sold Smith River Bank the capital was redeployed to Franklin Bank. As part of the transaction, MainStreet agreed to acquire specified loans from Smith River Bank under certain conditions after the
closing. In the event Smith River Bank determines it must charge off one of the specified loans, (after pursuing normal collection efforts), MainStreet will acquire all of Banks right, title and interest in the charged off loan.
MainStreets obligation to purchase such loans will not exceed the principal amount of the loans at the time of purchase plus Smith River Banks out of pocket collection expenses. The outstanding principal balance of such loans at
December 31, 2008 and 2007 was $86,514 and $96,370, respectively. The outstanding balance at December 31, 2008 consisted of one loan. 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 initial annual fee of $505,000, to be adjusted annually based upon the terms of the original agreement. The original Administrative Servicing Agreement expired on
March 22, 2008. MainStreet elected not to renew the Administrative Servicing Agreement.

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



|(b) | Principles of Consolidation
|--- | ---------------------------

The consolidated financial statements include
the accounts of MainStreet and its wholly-owned subsidiaries, Franklin Bank and MainStreet RealEstate, Inc. All significant intercompany accounts and transactions associated with MainStreets subsidiaries have 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.



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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2008 and 2007



Purchased premiums and discounts
are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held to maturity and available for sale securities below their cost that are determined to be other than temporary are
reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and
near-term prospects of the issuer, and (3) the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Gains and losses on the sale of
securities are recorded on the settlement date and are determined using the specific identification method.



|(e) | Loans
|--- | -----

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

BankShares collectively reviews for impairment all consumer loans and smaller homogeneous loans. BankShares considers a loan to be impaired when, based upon current
information and events, it believes it is probable that BankShares will be unable to collect all amounts due according to the contractual terms of the loan agreement. BankShares impaired loans include nonaccrual loans 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-rated loans and discusses individually the loans on these reports with the responsible loan officers. Management provides a detailed
quarterly analysis of the allowance based on our historical loan loss experience, risk-rated loans, past dues, concentrations of credit, unsecured loans, loan exceptions and the economic trend. These are generally grouped by homogeneous loan pools.
Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash



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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2008 and 2007



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. 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 lower of cost or 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. Other real estate owned was $1,158,600 and $703,771 at December 31, 2008 and 2007, respectively, and is included in other assets on the Corporations balance sheet.



|(i) | Bank Premises and Equipment
|--- | ---------------------------

Land is carried at cost. Buildings,
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 ranging from three years to forty
years. Maintenance, repairs and minor improvements are charged to expense as incurred. Significant improvements are capitalized.



|(j) | Stock Options and Warrants
|--- | --------------------------

MainStreet adopted Statement of Financial
Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS No. 123 (R)), on January 1, 2006 using the modified-prospective method, which requires the recognition of compensation costs beginning with the
effective date based on (a) the requirements of SFAS No. 123 (R) for all share-based awards granted after the effective date and (b) the requirements of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS
No. 123), for all awards granted to employees prior to the effective date of SFAS No. 123 (R) that remain unvested after the effective date. MainStreet recorded compensation cost in the amount of $45,590 and $22,350 for the years
ended December 31, 2008 and December 31, 2007, respectively. Additional disclosures required by SFAS No. 123 (R) are included in Note 14 to the consolidated financial statements herein.



|(k) | 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.

When tax returns are filed, it is highly
certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The
benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the
resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit
that is more than 50 percent likely of being realized upon settlement with the applicable taxing



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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2008 and 2007



authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability
for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest and penalties associated with unrecognized tax benefits are
classified as additional income taxes in the statement of income.



|(l) | 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. Please refer to Note 11 for detailed information on net income per share for the
years ending December 31, 2008 and 2007, respectively. Please refer to Note 14 for detailed information on stock options and warrants for the years ending December 31, 2008 and 2007, respectively.



|(m) | Comprehensive Income
|--- | --------------------

Accounting principles generally require that
recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities and pension liability adjustments, are reported as a
separate component of the equity section of the balance sheet, such items, along with net income are components of comprehensive income.



|(n) | Advertising Costs
|--- | -----------------

The Corporation follows the policy of charging the
costs of advertising to expense as incurred.



|(o) | Reclassifications
|--- | -----------------

Certain reclassifications have been made to prior
period balances to conform to current year provisions.



|(p) | 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.



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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2008 and 2007



Note 2  Securities

The carrying values, unrealized gains and losses and approximate market values of investment securities at December 31, 2008 and 2007 are shown in the
following tables. The entire investment portfolio is classified as available-for-sale to preserve maximum liquidity for funding needs.



|                                    |  |               |            |                       |   |                        |  |                         |   |  |   |           
|----------------------------------- |  | ------------- | ---------- | --------------------- | - | ---------------------- |  | ----------------------- | - |  | - | ----------
|                                    |  | 2008         
|                                    |  | AmortizedCost |            | Gross UnrealizedGains |   | Gross UnrealizedLosses |  | ApproximateMarket Value
|U. S. government agencies           |  | $             | 2,397,461  |                       | $ | 34,497                 |  | $                       |  |  | $ | 2,431,958 
|Mortgage backed securities          |  |               | 18,738,344 |                       |   | 418,186                |  |                         |  |  |   | 19,156,530
|                                    |  |               |            |                       |   |                        |  |                         |   |  |   |           
|                                    |  |               |            |                      
|Total securities available-for-sale |  | $             | 21,135,805 |                       | $ | 452,683                |  | $                       |  |  | $ | 21,588,488
|                                    |  |               |            |                       |   |                        |  |                         |   |  |   |           



|                                    |  |               |            |                       |   |                        |  |   |                         |   |  |   |           
|----------------------------------- |  | ------------- | ---------- | --------------------- | - | ---------------------- |  | - | ----------------------- | - |  | - | ----------
|                                    |  | 2007         
|                                    |  | AmortizedCost |            | Gross UnrealizedGains |   | Gross UnrealizedLosses |  |   | ApproximateMarket Value
|U.S. government agencies            |  | $             | 4,007,723  |                       | $ | 9,703                  |  | $ | (2,907                  | ) |  | $ | 4,014,519 
|Mortgage backed securities          |  |               | 15,931,085 |                       |   | 58,159                 |  |   | (22,629                 | ) |  |   | 15,966,615
|Municipal bonds                     |  |               | 2,611,156  |                       |   | 10,032                 |  |   | (32,728                 | ) |  |   | 2,588,460 
|                                    |  |               |            |                       |   |                        |  |   |                         |   |  |   |           
|                                    |  |               |            |                      
|Total securities available-for-sale |  | $             | 22,549,964 |                       | $ | 77,894                 |  | $ | (58,264                 | ) |  | $ | 22,569,594
|                                    |  |               |            |                       |   |                        |  |   |                         |   |  |   |           

The amortized costs and market values of securities available-for-sale at December 31, 2008, by contractual
maturity, are shown in the following table. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.



|                                          |  |               |            |                         |   |           
|----------------------------------------- |  | ------------- | ---------- | ----------------------- | - | ----------
|                                          |  | AmortizedCost |            | ApproximateMarket Value
|Due in one year or less                   |  | $             |           |                         | $ |          
|Due after one year but within five years  |  |               | 1,895,632  |                         |   | 1,911,343 
|Due after five years but within ten years |  |               |           |                         |   |          
|Due after ten years                       |  |               | 19,240,173 |                         |   | 19,677,145
|                                          |  |               |            |                         |   |           
|                                          |  | $             | 21,135,805 |                         | $ | 21,588,488
|                                          |  |               |            |                         |   |           

Gains realized on sales and calls of securities available-for-sale were $46,340 and $0 in 2008 and 2007,
respectively. Securities available-for-sale with carrying values approximating $18,618,505 and $10,323,439 at December 31, 2008 and December 31, 2007, respectively, were pledged to secure public deposits and for other purposes as required
or permitted by law.

At December 31, 2008, MainStreet had no securities in an unrealized loss position. Following demonstrates the unrealized loss
position of securities available for sale at December 31, 2007.



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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2008 and 2007



|                                      |  |                     |            |                  |                   |         |           |       |                  |           |  |           |         |                  |  |   |            |  |   |         |  
|------------------------------------- |  | ------------------- | ---------- | ---------------- | ----------------- | ------- | --------- | ----- | ---------------- | --------- |  | --------- | ------- | ---------------- |  | - | ---------- |  | - | ------- | -
|                                      |  | December 31, 2007   |           
|                                      |  | Less Than 12 Months |            |                  | 12 Months or More |         |           | Total |                 
|                                      |  | FairValue           |            | UnrealizedLosses |                   |         | FairValue |       | UnrealizedLosses |           |  | FairValue |         | UnrealizedLosses | 
|U. S. Agencies                        |  | $                   | 3,001,394  |                  | $                 | (2,907  | )         |       | $                |          |  | $         |        |                  |  | $ | 3,001,394  |  | $ | (2,907  | )
|Mortgage backed securities            |  |                     | 6,842,196  |                  |                   | (12,846 | )         |       |                  | 2,255,369 |  |           | (9,783  | )                |  |   | 9,097,565  |  |   | (22,629 | )
|Municipal bonds                       |  |                     | 996,436    |                  |                   | (28,347 | )         |       |                  | 576,715   |  |           | (4,381  | )                |  |   | 1,573,151  |  |   | (32,728 | )
|                                      |  |                     |            |                  |                   |         |           |       |                  |           |  |           |         |                  |  |   |            |  |   |         |  
|Total temporarily impaired securities |  | $                   | 10,840,026 |                  | $                 | (44,100 | )         |       | $                | 2,832,084 |  | $         | (14,164 | )                |  | $ | 13,672,110 |  | $ | (58,264 | )
|                                      |  |                     |            |                  |                   |         |           |       |                  |           |  |           |         |                  |  |   |            |  |   |         |  

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

Federal Reserve Bank stock is included in restricted equity securities and totaled $390,100 at December 31, 2008 and
December 31, 2007, respectively. Federal Home Loan Bank stock makes up the remainder of the balance in restricted equity securities and totaled $1,044,800 and $351,200 at December 31, 2008 and 2007, respectively.

Note 3  Loans Receivable

The major components of gross loans
in the consolidated balance sheets at December 31, 2008 and 2007 are as follows:



|                                  |  |      |             |      |   |            
|--------------------------------- |  | ---- | ----------- | ---- | - | -----------
|                                  |  | 2008 |             | 2007
|Commercial                        |  | $    | 18,251,922  |      | $ | 18,741,417 
|Real Estate:                      |  |      |             |      |   |            
|Construction and land development |  |      | 51,200,170  |      |   | 59,372,175 
|Residential 1-4 families          |  |      | 43,707,986  |      |   | 35,452,703 
|Home Equity lines                 |  |      | 16,012,671  |      |   | 14,519,634 
|Commercial real estate            |  |      | 61,174,895  |      |   | 41,236,085 
|Consumer                          |  |      | 3,087,053   |      |   | 3,378,381  
|                                  |  |      |             |      |   |            
|Total Gross Loans                 |  | $    | 193,434,697 |      | $ | 172,700,395
|                                  |  |      |             |      |   |            

Overdrafts reclassified to loans at December 31, 2008 and 2007 were $48,973 and $93,102, respectively.

Note 4  Allowance for Loan Losses

Changes in
the allowance for loan losses for the years ended December 31, 2008 and 2007 are as follows:



|                                 |  |      |           |   |      |   |           |  
|-------------------------------- |  | ---- | --------- | - | ---- | - | --------- | -
|                                 |  | 2008 |           |   | 2007 |  
|Balance at beginning of year     |  | $    | 2,086,592 |   |      | $ | 1,942,781 |  
|Provision for loan losses        |  |      | 1,964,300 |   |      |   | 255,521   |  
|Losses charged to allowance      |  |      | (554,484  | ) |      |   | (139,937  | )
|Recoveries credited to allowance |  |      | 5,621     |   |      |   | 28,227    |  
|                                 |  |      |           |   |      |   |           |  
|Balance at end of year           |  | $    | 3,502,029 |   |      | $ | 2,086,592 |  
|                                 |  |      |           |   |      |   |           |  

Net charge-offs of $548,863 and $111,710 for 2008 and 2007, respectively, equated to .30% and .07%, respectively,
of average loans outstanding, net of unearned deferred fees and costs. The loan loss reserve at December 31, 2008 and 2007 represented 1.81% and 1.21%, respectively, of loans, net of unearned deferred fees and costs.



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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2008 and 2007



|                                                  |  |                       |           |                   |   |        
|------------------------------------------------- |  | --------------------- | --------- | ----------------- | - | -------
|                                                  |  | For the Periods Ended
|                                                  |  | December 31, 2008     |           | December 31, 2007
|Nonaccrual loans and leases                       |  | $                     | 4,217,698 |                   | $ | 147,278
|Foreclosed real estate                            |  |                       | 1,158,600 |                   |   | 703,771
|Other foreclosed property                         |  |                       |          |                   |   | 22,500 
|                                                  |  |                       |           |                   |   |        
|Total foreclosed property                         |  |                       | 1,158,600 |                   |   | 726,271
|                                                  |  |                       |           |                   |   |        
|Total nonperforming assets                        |  | $                     | 5,376,298 |                   | $ | 873,549
|                                                  |  |                       |           |                   |   |        
|Loans 90 days or more past due and still accruing |  | $                     | 464,701   |                   | $ | 483,636

Impaired loans were $4,217,698 and $147,278 at December 31, 2008 and December 31, 2007, respectively, of
which all were on nonaccrual. Lost interest related to these loans at December 31, 2008 and 2007 was $113,626 and $15,421, respectively. The average balance during 2008 and 2007 for impaired loans was approximately $1,766,634 and $377,716,
respectively. Interest income reflected in the 2008 and 2007 income statements related to impaired loans was $207,346 and $1,126, respectively. A total of $499,949 in specific reserves was included in the balance of the allowance for loan losses as
of December 31, 2008 for impaired loans.

Note 5  Related Person Loans

Directors, executive officers and related interests provide the corporation with business and many are among its significant depositors and borrowers. Total amounts outstanding at December 31, 2008 and 2007 for
all such loans are summarized below:



|                             |  |      |             |   |      |   |            |  
|---------------------------- |  | ---- | ----------- | - | ---- | - | ---------- | -
|                             |  | 2008 |             |   | 2007 |  
|Balance at beginning of year |  | $    | 11,003,322  |   |      | $ | 7,646,470  |  
|Additions                    |  |      | 21,402,828  |   |      |   | 10,900,085 |  
|Payments                     |  |      | (20,818,600 | ) |      |   | (7,543,233 | )
|                             |  |      |             |   |      |   |            |  
|Balance at end of year       |  | $    | 11,587,550  |   |      | $ | 11,003,322 |  
|                             |  |      |             |   |      |   |            |  

These loans, in the opinion of management, were made in the ordinary course of business on substantially the same
terms, including interest rates and collateral, as those prevailing at the time for comparable loans with persons not related to the lender and did not involve more than the normal risk of collectibility or present other unfavorable features. Total
unfunded commitments to related persons were $3,928,980 and $3,191,233 at December 31, 2008 and 2007, respectively.

Note 6  Bank premises
and Equipment

Bank premises and equipment at December 31, 2008 and 2007 are as follows:



|                                          |  |      |            |   |      |   |           |  
|----------------------------------------- |  | ---- | ---------- | - | ---- | - | --------- | -
|                                          |  | 2008 |            |   | 2007 |  
|Buildings and land                        |  | $    | 1,306,410  |   |      | $ | 1,306,410 |  
|Furniture and equipment                   |  |      | 1,219,875  |   |      |   | 1,195,684 |  
|Computer software                         |  |      | 187,630    |   |      |   | 177,713   |  
|Leasehold improvements                    |  |      | 412,818    |   |      |   | 412,818   |  
|Automobiles                               |  |      | 20,284     |   |      |   | 20,284    |  
|                                          |  |      |            |   |      |   |           |  
|                                          |  |      | 3,147,017  |   |      |   | 3,112,909 |  
|Accumulated depreciation and amortization |  |      | (1,005,068 | ) |      |   | (724,180  | )
|                                          |  |      |            |   |      |   |           |  
|Bank premises and equipment, net          |  | $    | 2,141,949  |   |      | $ | 2,388,729 |  
|                                          |  |      |            |   |      |   |           |  

Depreciation expense was $280,888 and $230,898 for 2008 and 2007, respectively.



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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2008 and 2007



Note 7  Deposits

The maturities of time deposits $100,000 and over and other time deposits at December 31, 2008 and 2007 are as follows:



|      |  |                                |            |                     |   |           
|----- |  | ------------------------------ | ---------- | ------------------- | - | ----------
|      |  | 2008                          
|      |  | Time Deposits$100,000 and Over |            | Other Time Deposits
|2009  |  | $                              | 43,897,734 |                     | $ | 58,951,415
|2010  |  |                                | 3,919,540  |                     |   | 3,282,839 
|2011  |  |                                | 1,103,508  |                     |   | 1,327,589 
|2012  |  |                                | 398,795    |                     |   | 261,608   
|2013  |  |                                | 1,485,257  |                     |   | 3,637,295 
|      |  |                                |            |                     |   |           
|Total |  | $                              | 50,804,834 |                     | $ | 67,460,746
|      |  |                                |            |                     |   |           
|      | 
|      |  | 2007                          
|      |  | Time Deposits$100,000 and Over |            | Other Time Deposits
|2008  |  | $                              | 44,348,746 |                     | $ | 64,141,011
|2009  |  |                                | 3,965,453  |                     |   | 5,355,957 
|2010  |  |                                | 1,764,494  |                     |   | 1,164,032 
|2011  |  |                                | 949,548    |                     |   | 1,136,372 
|2012  |  |                                | 386,385    |                     |   | 159,542   
|      |  |                                |            |                     |   |           
|Total |  | $                              | 51,414,626 |                     | $ | 71,956,914
|      |  |                                |            |                     |   |           

Total deposit dollars from executive officers, directors, and their related interests at December 31, 2008
and 2007 were $8,271,475 and $6,911,600, respectively.

Note 8  Short-term Borrowings

The Corporation borrowed short-term $9,500,000 from Federal Home Loan Bank of Atlanta (FHLB) in July 2008 at the daily rate credit. Subsequently, the
Corporation borrowed short-term $5,500,000 in November 2008 from FHLB also at the daily rate credit. The interest rate in effect at December 31, 2008 was .46%. The borrowing is secured by a blanket lien on loans secured by commercial real
estate and loans secured by 1-4 family first liens, second liens, and equity lines.

Federal funds purchased were $1,512,000 at December 31, 2008.

The Corporation has an internal Corporate Cash Management account for customers to sweep their excess demand deposit accounts on an overnight basis in
order to earn interest. This account is not FDIC insured but the Corporation is required to pledge agency funds at 100% towards these balances. The Corporate Cash Management sweep accounts were $199,375 at December 31, 2008. There were no such
accounts at December 31, 2007.

Note 9  Repurchase Agreements

The Corporation entered into a repurchase agreement with Citigroup Global Markets, Inc. (CGMI) in the amount of $7,500,000 on September 18, 2007. The repurchase date is September 18, 2012. The
pricing rate was fixed at 4.22% until September 18, 2008. On that date, it could have been called by CBMI and can be called quarterly with two business days prior notice. Interest is payable quarterly. The repurchase agreement is collateralized
by agency mortgage backed securities. The interest rate remained at 4.22% at December 31, 2008.



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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2008 and 2007



The Corporation entered into a
repurchase agreement with Barclays Capital on January 2, 2008 in the amount of $6,000,000. The final maturity date is January 2, 2013. The initial interest rate was 3.57% with interest payments quarterly. There was a lock out date on the
interest rate until January 2, 2009 at which time the repurchase agreement could have been put back to MainStreet and can be called quarterly. The repurchase agreement is collateralized by agency mortgage backed securities. The interest rate
remained at 3.57% at December 31, 2008 and January 2, 2009.

Note 10  Income Taxes

The Corporation files income tax returns in the U.S. federal jurisdiction and the state of Virginia. With few exceptions, the Corporation is no longer subject to U. S.
federal, state and local income tax examinations by tax authorities for years prior to 2005. MainStreet is currently being audited by the Internal Revenue Service for tax years ending December 31, 2005 and 2006.

The Corporation adopted the provisions of FIN 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007 with no impact on the financial statements.

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. No valuation allowances were deemed necessary at December 31, 2008 and 2007. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred
tax assets and liabilities.

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



|                     |  |      |          |   |      |   |           |  
|-------------------- |  | ---- | -------- | - | ---- | - | --------- | -
|                     |  | 2008 |          |   | 2007 |  
|Current expense      |  | $    | 785,476  |   |      | $ | 1,236,610 |  
|Deferred tax benefit |  |      | (528,272 | ) |      |   | (28,195   | )
|                     |  |      |          |   |      |   |           |  
|Income Tax Expense   |  | $    | 257,204  |   |      | $ | 1,208,415 |  
|                     |  |      |          |   |      |   |           |  

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



|                                                |  |      |         |   |      |   |           |  
|----------------------------------------------- |  | ---- | ------- | - | ---- | - | --------- | -
|                                                |  | 2008 |         |   | 2007 |  
|Computed at the expected federal statutory rate |  | $    | 286,779 |   |      | $ | 1,264,548 |  
|Nondeductible meals & entertainment             |  |      | 1,629   |   |      |   | 2,727     |  
|Tax-exempt municipal interest                   |  |      | (5,583  | ) |      |   | (32,587   | )
|Bank owned life insurance                       |  |      | (42,008 | ) |      |   | (32,945   | )
|Incentive stock option expense                  |  |      | 15,462  |   |      |   | 7,560     |  
|Interest disallowance                           |  |      | 876     |   |      |   | 6,308     |  
|Other                                           |  |      | 49      |   |      |   | (7,196    | )
|                                                |  |      |         |   |      |   |           |  
|Income Tax Expense                              |  | $    | 257,204 |   |      | $ | 1,208,415 |  
|                                                |  |      |         |   |      |   |           |  



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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2008 and 2007



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



|                                                 |  |      |           |      |   |        
|------------------------------------------------ |  | ---- | --------- | ---- | - | -------
|                                                 |  | 2008 |           | 2007
|Allowance for loan losses                        |  | $    | 1,100,046 |      | $ | 647,943
|Indemnity loan accrual                           |  |      |          |      |   | 5,305  
|SERP accrual                                     |  |      | 79,525    |      |   | 32,641 
|Other                                            |  |      | 16,612    |      |   | 7,315  
|Unrealized losses on other real estate           |  |      | 41,566    |      |   |       
|                                                 |  |      |           |      |   |        
|Deferred tax assets                              |  |      | 1,237,749 |      |   | 693,204
|                                                 |  |      |           |      |   |        
|Prepaid service contracts and insurance          |  |      | 24,940    |      |   | 25,017 
|Depreciation and amortization                    |  |      | 117,635   |      |   | 103,820
|Unrealized gain on securities available-for-sale |  |      | 153,912   |      |   | 6,674  
|Other                                            |  |      | 9,310     |      |   | 6,775  
|                                                 |  |      |           |      |   |        
|Deferred tax liabilities                         |  |      | 305,797   |      |   | 142,286
|                                                 |  |      |           |      |   |        
|Net deferred tax assets                          |  | $    | 931,952   |      | $ | 550,918
|                                                 |  |      |           |      |   |        

Note 11  Net Income Per Share

The following shows the weighted average number of shares used in computing earnings per share and the effect on weighted average number of shares of diluted potential common stock. Potential dilutive common stock had
no effect on income available to common stockholders.



|                               |  |           |  |                 |     |        |           |                 |   |     
|------------------------------ |  | --------- |  | --------------- | --- | ------ | --------- | --------------- | - | ----
|                               |  | 2008      |  | 2007           
|                               |  | Shares    |  | Per ShareAmount |     | Shares |           | Per ShareAmount
|Earnings per share, basic      |  | 1,722,090 |  | $               | .34 |        | 1,772,355 |                 | $ | 1.42
|                               |  |           |  |                 |     |        |           |                 |   |     
|                               |  |           |  |                
|Effect of dilutive securities: |  |           |  |                 |     |        |           |                 |   |     
|Stock options                  |  | 33,858    |  |                 |     |        | 57,400    |                 |   |     
|                               |  |           |  |                 |     |        |           |                 |   |     
|Earnings per share, diluted    |  | 1,755,948 |  | $               | .33 |        | 1,829,755 |                 | $ | 1.37
|                               |  |           |  |                 |     |        |           |                 |   |     

In 2008 and 2007, stock options representing 27,523 shares and 27,523 shares, respectively, were not included in
the calculation of earnings per share because they would have been antidilutive.

Note 12Employee Benefit Plans

MainStreet funds certain costs for medical benefits in amounts determined at the discretion of management. 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 $74,080 and $71,803 for the years ended December 31, 2008 and 2007, respectively.

In addition, MainStreet has supplemental retirement benefits provided to its executive officers under a supplemental executive retirement plan executed in 2007. Although
technically unfunded, a Rabbi Trust and insurance policies on the lives of the covered executives are available to finance future benefits. The expense for 2008 and 2007 was $137,895 and $96,003, respectively. The following were significant
actuarial assumptions used to determine benefit obligations:



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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2008 and 2007



|                                              |  |                   |         |   |                   |   |        |  
|--------------------------------------------- |  | ----------------- | ------- | - | ----------------- | - | ------ | -
|                                              |  | December 31, 2008 |         |   | December 31, 2007 |  
|Actuarial Assumptions                         |  |                   |         |   |                   |   |        |  
|Weighted average assumed discount rate        |  |                   | 6.25    | % |                   |   | 6.25   | %
|Assumed rate of annual compensation increases |  |                   | 4.50    |   |                   |   | 4.50   |  
|                                              |  |                  
|                                              |  | December 31, 2008 |         |   | December 31, 2007 |  
|Changes in Projected Benefit Obligation above |  |                   |         |   |                   |   |        |  
|Projected benefit obligation January 1,       |  | $                 | 96,003  |   |                   | $ |       |  
|Service cost                                  |  |                   | 137,895 |   |                   |   | 96,003 |  
|Interest cost                                 |  |                   |        |   |                   |   |       |  
|Actuarial gain (loss)                         |  |                   |        |   |                   |   |       |  
|Benefits paid                                 |  |                   |        |   |                   |   |       |  
|                                              |  |                   |         |   |                   |   |        |  
|Projected benefit obligation, December 31     |  | $                 | 233,898 |   |                   | $ | 96,003 |  
|                                              |  |                   |         |   |                   |   |        |  

Note 13  Leases and Commitments

The Corporation has a lease agreement for its facility in Martinsville, Virginia. MainStreets executive office and operations area lease, which commenced on May 1, 2004, is for 3,000 square feet of space
located in the Patrick Henry Shopping Mall at Suite 30, 730 East Church Street in Martinsville, Virginia. The lease will expire April 30, 2009.

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, Westlake 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. Franklin Banks 220 North branch is located at 35 Shepherd Drive, Rocky Mount, Virginia. A director of Franklin Bank is a partner in the ownership of the
facility. The lease commenced June 1, 2007 and will expire June 1, 2012. 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 $277,000 and $243,000 for the years ended December 31, 2008 and 2007, respectively. Future rental payments under non-cancelable operating leases approximate $277,000, $270,000, $269,000, $236,000 and
$212,000 for the years ended December 31, 2009, 2010, 2011, 2012 and 2013, respectively. The total aggregate of lease payments after 2013 total approximately $983,000.

The Corporation and Franklin Bank have an employment agreement with Larry A. Heaton, President and Chief Executive Officer. This agreement has a rolling one year term that unless terminated 90 days prior to each
anniversary date, is extended automatically for an additional year. The Corporation also has an employment contract with its Executive Vice President and Chief Financial Officer. This agreement has a three-year term and is automatically extended by
one year if not terminated at least 90 days prior to each anniversary.

MainStreet and Franklin Bank entered into change in control agreements with its
Vice Presidents effective November 14, 2007. The agreements shall remain in effect until the termination of the officers employment, other than a termination of employment which results in a payment obligation, at which time it will
become null and void. The Franklin Bank agreements provide for a non competition obligation within a 50 mile radius of the office where the officer was principally located during the twelve months preceding the officers termination.



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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2008 and 2007



Note 14  Stock Options and
Warrants

Each organizer/director was granted one warrant for each share of stock that they purchased in the original common stock offering. These
warrants were granted on July 24, 2000 and totaled 96,250 warrants. Each warrant entitles the organizer/director to purchase, at anytime within ten years from the date of grant, an additional share at $9.09 per share. The right to exercise the
warrants vested for one-third (1/3) of the shares covered by the warrants on each of the first three anniversaries of the date Smith River Bank opened for business, so long as the organizer/director had served continuously as a director of
MainStreet or Smith River Bank from its opening until the particular anniversary and had attended a minimum of 75% of the Board of Directors meetings during the period. The warrants are detachable and the shares with which they were originally
issued as a unit may be separately transferred. The warrants are generally not transferable except by operation of law. BankShares has the right, upon notice from any regulatory authority, to require immediate exercise or forfeiture of the warrants
if the exercise is reasonably necessary in order to inject additional capital into the Bank. Of these warrants, 55,916 are fully vested, 12,834 have been forfeited and 27,500 have been exercised.

Options in the amount of 33,000, of which all are vested and exercisable, have been granted at the then fair market value of $9.55 to former employees.

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 approved by the Board of Directors on January 21, 2004 and remains in
effect, subject to the right of the Board of Directors to terminate the Plan, until January 21, 2009, at which time it terminates except with respect to awards made prior to and outstanding on that date which remain valid in accordance with
their terms. Option awards are generally granted with an exercise price equal to the market value of MainStreets stock at the date of grant. The options issued in 2007 and 2006 have a vesting period of 3 years and have a ten year contractual
term. The options issued in 2005 vested immediately upon grant and have a ten year contractual term. All share awards provide for accelerated vesting if there is a change in control (as defined in the Plan). The maximum number of shares that may be
issued under the Plan may not exceed 150,700. As of December 31, 2008, there were 136,527 options granted under this Plan of which 822 options have been exercised and 797 stock options have been forfeited and placed back into the Plan for
issuance. The Plan terminated January 21, 2009, except with respect to awards granted prior to that date.

The Corporation has reserved 238,794 shares
of authorized but unissued shares of common stock related to these option and warrant agreements as of December 31, 2008.

There were no stock option
grants during 2008. The per share weighted average fair value of stock options granted during 2007 was $5.61 on the date of grant utilizing the Black-Scholes option-pricing model with the following assumptions:



|                                   |  |             |  
|---------------------------------- |  | ----------- | -
|                                   |  | 2007 Grants |  
|Risk-free interest rate            |  | 4.61        | %
|Expected life of options           |  | 6.5 years   |  
|Expected volatility of stock price |  | 26          | %
|Expected dividend yield            |  | 0           | %

Expected volatilities are based on the historical volatility of MainStreets stock. Stock options granted in
2006 and forward are included in the calculation of compensation cost. The risk-free rate for the period within the contractual life of the stock option is based upon the ten year Treasury rate at the date of the grant. Expected life was calculated
using the simplified method based on the average of the vesting period and contractual life of the options.

MainStreet recorded $45,590 and $22,350 in
stock-based compensation during the year ended December 31, 2008 and 2007, respectively.



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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2008 and 2007



Following is a status and summary
of changes of stock options and warrants during the year ended December 31, 2008:



|                                 |  |         |   |  |                              |       |                                         |      |                         |   |          
|-------------------------------- |  | ------- | - |  | ---------------------------- | ----- | --------------------------------------- | ---- | ----------------------- | - | ---------
|                                 |  | 2008    |   |  | WeightedAverageExercisePrice |       | WeightedAverageRemainingContractualTerm |      | AggregateIntrinsicValue
|Outstanding at beginning of year |  | 229,324 |   |  | $                            | 11.37 |                                         |      |                         |   |          
|Granted                          |  |        |   |  |                              |      |                                         |      |                         |   |          
|Exercised                        |  | (5,500  | ) |  |                              | 9.09  |                                         |      |                         |   |          
|Forfeited                        |  |        |   |  |                              |      |                                         |      |                         |   |          
|                                 |  |         |   |  |                              |       |                                         |      |                         |   |          
|Outstanding at year-end          |  | 223,824 |   |  | $                            | 11.43 |                                         | 5.43 |                         | $ | 1,033,265
|                                 |  |         |   |  |                              |       |                                         |      |                         |   |          
|Exercisable at year-end          |  | 209,928 |   |  | $                            | 11.15 |                                         | 5.21 |                         | $ | 858,825  
|                                 |  |         |   |  |                              |       |                                         |      |                         |   |          

The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value
(the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on December 31, 2008. This amount
changes based on changes in the market value of the Corporations stock. The total intrinsic value of stock options and warrants exercised during the years ended December 31, 2008 and 2007 was $46,255 and $164,420, respectively.

As of December 31, 2008 and 2007, there was $67,876 and $113,466 of total unrecognized compensation cost related to nonvested share-based
compensation arrangements granted under the Plan. The original unrecognized compensation cost is expected to be recognized over a remaining weighted-average period of 3.0 years.

As of December 31, 2008, stock options and warrants outstanding and exercisable are summarized as follows:



|                        |               |                                                     |         |                          |     
|----------------------- | ------------- | --------------------------------------------------- | ------- | ------------------------ | ----
|Range ofExercise Prices |               | Stock Optionsand WarrantsOutstandingAnd Exercisable |         | RemainingContractualLife
|$                       | 9.09          |                                                     | 55,916  |                          | 1.60
|                        | 9.55          |                                                     | 33,000  |                          | 4.50
|                        | 12.09         |                                                     | 89,264  |                          | 6.90
|                        | 12.09         |                                                     | 18,121  |                          | 7.00
|                        | 15.00         |                                                     | 4,720   |                          | 8.95
|                        | 16.75         |                                                     | 8,907   |                          | 8.00
|                        |               |                                                     |         |                          |     
|$                       | 9.09 - $16.75 |                                                     | 209,928 |                          |     
|                        |               |                                                     |         |                          |     

Note 15  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. As of December 31, 2008 the aggregate amount of unrestricted funds which could be transferred from the Corporations bank subsidiary to the Parent
Corporation for payment of dividends to shareholders without prior regulatory approval, totaled $4,643,266 or 2.07% of the total consolidated assets.

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

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.



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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2008 and 2007



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, 2008 and 2007.

Actual capital amounts and ratios for MainStreet at December 31, 2008 and 2007 are presented in the following table:



|                                         |  |        |            |       |                     |   |        |                        |            |  |      |        |  |       |            |  |       |  
|---------------------------------------- |  | ------ | ---------- | ----- | ------------------- | - | ------ | ---------------------- | ---------- |  | ---- | ------ |  | ----- | ---------- |  | ----- | -
|                                         |  | Actual |            |       | For CapitalAdequacy |   |        | To Be Well Capitalized |           
|As of December 31, 2008                  |  | Amount |            | Ratio |                     |   | Amount |                        | Ratio      |  |      | Amount |  | Ratio |           
|Total capital (to risk weighted assets)  |  | $      | 23,467,758 |       | 12.30               | % |        | $                      | 15,267,000 |  | 8.00 | %      |  | $     | 19,084,000 |  | 10.00 | %
|Tier I capital (to risk weighted assets) |  |        | 21,068,494 |       | 11.04               |   |        |                        | 7,634,000  |  | 4.00 |        |  |       | 11,450,000 |  | 6.00  |  
|Tier I capital (to average assets)       |  |        | 21,068,494 |       | 9.32                |   |        |                        | 9,038,000  |  | 4.00 |        |  |       | 11,298,000 |  | 5.00  |  
|                                         |  |        |           
|                                         |  | Actual |            |       | For CapitalAdequacy |   |        | To Be Well Capitalized |           
|As of December 31, 2007                  |  | Amount |            | Ratio |                     |   | Amount |                        | Ratio      |  |      | Amount |  | Ratio |           
|Total capital (to risk weighted assets)  |  | $      | 23,098,746 |       | 12.99               | % |        | $                      | 14,226,000 |  | 8.00 | %      |  | $     | 17,782,000 |  | 10.00 | %
|Tier I capital (to risk weighted assets) |  |        | 21,012,154 |       | 11.82               |   |        |                        | 7,113,000  |  | 4.00 |        |  |       | 10,669,000 |  | 6.00  |  
|Tier I capital (to average assets)       |  |        | 21,012,154 |       | 10.21               |   |        |                        | 8,234,000  |  | 4.00 |        |  |       | 10,292,000 |  | 5.00  |  

Actual capital amounts and ratios for Franklin Bank at December 31, 2008 and 2007 are presented in the
following table:



|                                         |  |        |            |       |                     |   |        |                                                                |            |  |      |        |  |       |            |  |       |  
|---------------------------------------- |  | ------ | ---------- | ----- | ------------------- | - | ------ | -------------------------------------------------------------- | ---------- |  | ---- | ------ |  | ----- | ---------- |  | ----- | -
|                                         |  | Actual |            |       | For CapitalAdequacy |   |        | To Be Well CapitalizedUnder Prompt CorrectiveAction Provisions |           
|As of December 31, 2008                  |  | Amount |            | Ratio |                     |   | Amount |                                                                | Ratio      |  |      | Amount |  | Ratio |           
|Total capital (to risk weighted assets)  |  | $      | 22,583,855 |       | 11.86               | % |        | $                                                              | 15,238,000 |  | 8.00 | %      |  | $     | 19,048,000 |  | 10.00 | %
|Tier I capital (to risk weighted assets) |  |        | 20,189,003 |       | 10.60               |   |        |                                                                | 7,619,000  |  | 4.00 |        |  |       | 11,429,000 |  | 6.00  |  
|Tier I capital (to average assets)       |  |        | 20,189,003 |       | 8.95                |   |        |                                                                | 9,024,000  |  | 4.00 |        |  |       | 11,280,000 |  | 5.00  |  
|                                         |  |        |           
|                                         |  | Actual |            |       | For CapitalAdequacy |   |        | To Be Well CapitalizedUnder Prompt CorrectiveAction Provisions |           
|As of December 31, 2007                  |  | Amount |            | Ratio |                     |   | Amount |                                                                | Ratio      |  |      | Amount |  | Ratio |           
|Total capital (to risk weighted assets)  |  | $      | 20,693,633 |       | 11.66               | % |        | $                                                              | 14,195,000 |  | 8.00 | %      |  | $     | 17,744,000 |  | 10.00 | %
|Tier I capital (to risk weighted assets) |  |        | 18,607,041 |       | 10.49               |   |        |                                                                | 7,098,000  |  | 4.00 |        |  |       | 10,646,000 |  | 6.00  |  
|Tier I capital (to average assets)       |  |        | 18,607,041 |       | 9.06                |   |        |                                                                | 8,211,000  |  | 4.00 |        |  |       | 10,264,000 |  | 5.00  |  



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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2008 and 2007



Note 16  Parent Company
Financial Information

CONDENSED BALANCE SHEETS



|                                               |  |                   |            |                   |   |           
|---------------------------------------------- |  | ----------------- | ---------- | ----------------- | - | ----------
|                                               |  | December 31, 2008 |            | December 31, 2007
|Assets                                         |  |                   |            |                   |   |           
|                                               |  |                  
|Cash and due from banks                        |  | $                 | 137,520    |                   | $ | 562,813   
|Interest-bearing deposits in other banks       |  |                   | 469,950    |                   |   | 1,747,797 
|Furniture, fixtures and equipment, net         |  |                   | 96,766     |                   |   | 118,175   
|Other assets                                   |  |                   | 24,834     |                   |   | 21,076    
|Investment in subsidiaries                     |  |                   | 20,719,640 |                   |   | 18,823,960
|                                               |  |                   |            |                   |   |           
|                                               |  |                  
|Total Assets                                   |  | $                 | 21,448,710 |                   | $ | 21,273,821
|                                               |  |                   |            |                   |   |           
|                                               |  |                  
|Liabilities and Shareholders Equity           |  |                   |            |                   |   |           
|                                               |  |                  
|Accrued interest payable and other liabilities |  | $                 | 81,445     |                   | $ | 248,711   
|                                               |  |                  
|Shareholders Equity                           |  |                   |            |                   |   |           
|                                               |  |                  
|Common shareholders equity                    |  |                   | 21,367,265 |                   |   | 21,025,110
|                                               |  |                   |            |                   |   |           
|                                               |  |                  
|Total Liabilities and Shareholders Equity     |  | $                 | 21,448,710 |                   | $ | 21,273,821
|                                               |  |                   |            |                   |   |           

CONDENSED STATEMENTS OF INCOME



|                                               |  |                             |           |   |                             |   |          
|---------------------------------------------- |  | --------------------------- | --------- | - | --------------------------- | - | ---------
|                                               |  | Year EndedDecember 31, 2008 |           |   | Year EndedDecember 31, 2007
|Income                                         |  |                             |           |   |                             |   |          
|Equity in undistributed income of subsidiaries |  | $                           | 94,865    |   |                             | $ | 1,626,426
|Dividends from subsidiaries                    |  |                             | 595,601   |   |                             |   | 882,174  
|Interest income                                |  |                             | 44,223    |   |                             |   | 75,912   
|Other income                                   |  |                             | 18,253    |   |                             |   | 85,552   
|Servicing fee income                           |  |                             | 150,619   |   |                             |   | 562,877  
|Affiliate fee income                           |  |                             | 1,024,569 |   |                             |   | 758,704  
|                                               |  |                             |           |   |                             |   |          
|Total Income                                   |  |                             | 1,928,130 |   |                             |   | 3,991,645
|Expenses                                       |  |                             |           |   |                             |   |          
|Salaries and employee benefits                 |  |                             | 723,280   |   |                             |   | 895,012  
|Occupancy and equipment expense                |  |                             | 124,302   |   |                             |   | 126,135  
|Professional fees                              |  |                             | 291,141   |   |                             |   | 200,084  
|Outside processing                             |  |                             | 82,202    |   |                             |   | 81,253   
|Other expenses                                 |  |                             | 151,179   |   |                             |   | 177,283  
|                                               |  |                             |           |   |                             |   |          
|Total Expenses                                 |  |                             | 1,372,104 |   |                             |   | 1,479,767
|                                               |  |                             |           |   |                             |   |          
|                                               |  |                            
|Net Income Before Tax                          |  |                             | 556,026   |   |                             |   | 2,511,878
|Income Tax Expense (Benefit)                   |  |                             | (30,238   | ) |                             |   | 1,034    
|                                               |  |                             |           |   |                             |   |          
|Net Income                                     |  | $                           | 586,264   |   |                             | $ | 2,510,844
|                                               |  |                             |           |   |                             |   |          



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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2008 and 2007



CONDENSED
STATEMENTS OF CASH FLOWS



|                                                                 |  |                             |            |   |                             |   |            |  
|---------------------------------------------------------------- |  | --------------------------- | ---------- | - | --------------------------- | - | ---------- | -
|                                                                 |  | Year EndedDecember 31, 2008 |            |   | Year EndedDecember 31, 2007 |  
|Cash Flows From Operating Activities:                            |  |                             |            |   |                             |   |            |  
|Net income from operations                                       |  | $                           | 586,264    |   |                             | $ | 2,510,844  |  
|Adjustments to reconcile net income to net cash from operations: |  |                             |            |   |                             |   |            |  
|Depreciation                                                     |  |                             | 45,583     |   |                             |   | 41,143     |  
|Stock option expense                                             |  |                             | 45,590     |   |                             |   | 22,350     |  
|Equity in undistributed income of subsidiaries                   |  |                             | (94,865    | ) |                             |   | (1,626,426 | )
|(Increase) decrease in other assets                              |  |                             | (3,758     | ) |                             |   | 39,235     |  
|Decrease in other liabilities                                    |  |                             | (80,572    | ) |                             |   | (84,045    | )
|Tax benefit from warrant exercise                                |  |                             | 15,727     |   |                             |   | 54,865     |  
|                                                                 |  |                             |            |   |                             |   |            |  
|Net Cash Provided by Operating Activities                        |  |                             | 513,969    |   |                             |   | 957,966    |  
|                                                                 |  |                             |            |   |                             |   |            |  
|Cash Flows From Investing Activities:                            |  |                             |            |   |                             |   |            |  
|Decrease in interest-bearing deposits                            |  |                             | 1,277,847  |   |                             |   | 428,828    |  
|Purchases of furniture and equipment                             |  |                             | (24,174    | ) |                             |   | (31,847    | )
|Capital contributed to subsidiary                                |  |                             | (1,515,000 | ) |                             |   | (215,000   | )
|                                                                 |  |                             |            |   |                             |   |            |  
|Net Cash Provided by (Used in) Investing Activities              |  |                             | (261,327   | ) |                             |   | 181,981    |  
|                                                                 |  |                             |            |   |                             |   |            |  
|Cash Flows from Financing Activities:                            |  |                             |            |   |                             |   |            |  
|Proceeds from issuance of common stock                           |  |                             | 49,995     |   |                             |   | 209,918    |  
|Repurchase of common stock                                       |  |                             | (383,330   | ) |                             |   | (792,840   | )
|Dividends paid                                                   |  |                             | (344,600   | ) |                             |   | (89,334    | )
|                                                                 |  |                             |            |   |                             |   |            |  
|Net Cash Used in Financing Activities                            |  |                             | (677,935   | ) |                             |   | (672,256   | )
|                                                                 |  |                             |            |   |                             |   |            |  
|Net Increase (Decrease) in Cash                                  |  |                             | (425,293   | ) |                             |   | 467,691    |  
|Cash at Beginning of Year                                        |  |                             | 562,813    |   |                             |   | 95,122     |  
|                                                                 |  |                             |            |   |                             |   |            |  
|Cash at End of Year                                              |  | $                           | 137,520    |   |                             | $ | 562,813    |  
|                                                                 |  |                             |            |   |                             |   |            |  

Note 17  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 sheets.

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, 2008 and 2007 outstanding commitments to extend credit including letters of
credit were $27,099,979 and $38,019,087 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.

Note 18  Concentrations of Credit Risk

For the most part, MainStreets business activity is with customers located in our
primary market area. Accordingly, operating results are closely correlated with the economic trends within the region and influenced by the significant industries within the region including 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 loan portfolio is diversified, but does have three areas classified as
concentrations of credit at December 31, 2008. The areas



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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2008 and 2007



of concentrations of credits are in loans for real estate to commercial borrowers with an outstanding balance of $35,152,304; loans for construction of
buildings with an outstanding balance of $25,911,163; and loans for construction of heavy and civil engineering buildings with an outstanding balance of $17,040,449. There were also three areas of concentrations at December 31, 2007. The areas
of concentrations of credits were in loans for real estate to commercial borrowers with an outstanding balance of $31,136,240; loans for construction of buildings with an outstanding balance of $25,473,907; and loans for construction of heavy and
civil engineering buildings with an outstanding balance of $18,805,124. The residential 1-4 family loan portfolio consists of first liens and junior liens on residential properties. The consumer loan portfolio consists primarily of loans to
individuals for home improvements, personal property, automobiles, and other consumer purposes.

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 19  Fair Value Measurements

MainStreet adopted SFAS
No. 157, Fair Value Measurements (SFAS 157), on January 1, 2008 to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. SFAS 157 clarifies that fair value of certain assets
and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

In February of 2008, the FASB issued Staff Position No. 157-2 (FSP 157-2) which delayed the effective date of SFAS 157 for certain nonfinancial assets and nonfinancial liabilities except for those items that are
recognized or disclosed at fair value in the financial statements on a recurring basis. FSP 157-2 defers the effective date of SFAS 157 for such nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008,
and interim periods within those fiscal years. Thus, MainStreet has only partially applied SFAS 157. Those items affected by FSP 157-2 include other real estate owned (OREO).

In October of 2008, the FASB issued Staff Position No. 157-3 (FSP 157-3) to clarify the application of SFAS 157 in a market that is not active and to provide key considerations in determining the fair value of a
financial asset when the market for that financial asset is not active. FSP 157-3 was effective upon issuance, including prior periods for which financials statements were not issued.

SFAS 157 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources,
while unobservable inputs reflect MainStreets market assumptions. The three levels of the fair value hierarchy under SFAS 157 based on these two types of inputs are as follows:



|          |  |                                                                                                                                                                                                                                                                                                                                                                   
|--------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Level 1  |  | Valuation is based on quoted prices in active markets for identical assets and liabilities.                                                                                                                                                                                                                                                                       
|          | 
|Level 2  |  | Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less
active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.
|          | 
|Level 3  |  | Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.                                                                                                                                                                                                                          



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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2008 and 2007



The following describes the
valuation techniques used by MainStreet to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements:

Securities available for sale: Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not
available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile
prices from various sources and may determine the fair value of identical or similar securities by using pricing models that considers observable market data (Level 2).

The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2008:



|                                |  |                               |            |                                                           |   |                                           |  |                                        |            |  |   |  
|------------------------------- |  | ----------------------------- | ---------- | --------------------------------------------------------- | - | ----------------------------------------- |  | -------------------------------------- | ---------- |  | - | -
|                                |  |                               |            | Fair Value Measurements at December 31, 2008 Using       
|Description                     |  | Balance as ofDecember 31,2008 |            | Quoted Pricesin ActiveMarkets forIdenticalAssets(Level 1) |   | SignificantOtherObservableInputs(Level 2) |  | SignificantUnobservableInputs(Level
3)
|Available-for-sale securities   |  | $                             | 21,588,488 |                                                           | $ |                                          |  | $                                      | 21,588,488 |  | $ | 
|                                |  |                               |            |                                                           |   |                                           |  |                                        |            |  |   |  
|Total assets at fair value      |  | $                             | 21,588,488 |                                                           | $ |                                          |  | $                                      | 21,588,488 |  | $ | 
|                                |  |                               |            |                                                           |   |                                           |  |                                        |            |  |   |  
|Total liabilities at fair value |  | $                             |           |                                                           | $ |                                          |  | $                                      |           |  | $ | 
|                                |  |                               |            |                                                           |   |                                           |  |                                        |            |  |   |  

Certain financial assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments
to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.

The
following describes the valuation techniques used by MainStreet to measure certain financial assets recorded at fair value on a nonrecurring basis in the financial statements:

Impaired Loans: Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan
agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Fair value is measured based on the value of the collateral
securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined
utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of MainStreet using observable market data (Level 2). However, if the collateral is a house or building in the process of
construction or if an appraisal of the real estate property is over two years old, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the
applicable business financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3).
Impaired loans allocated to the Allowance for Loan Losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.



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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2008 and 2007



The following table summarizes
MainStreets financial assets that were measured at fair value on a nonrecurring basis during the period.



|                                |  |                               |           |                                                           |   |                                           |  |                                        |         |  |   |          
|------------------------------- |  | ----------------------------- | --------- | --------------------------------------------------------- | - | ----------------------------------------- |  | -------------------------------------- | ------- |  | - | ---------
|                                |  |                               |           | Carrying value at December 31, 2008                      
|Description                     |  | Balance as ofDecember 31,2008 |           | Quoted Pricesin ActiveMarkets forIdenticalAssets(Level 1) |   | SignificantOtherObservableInputs(Level 2) |  | SignificantUnobservableInputs(Level
3)
|Impaired loans                  |  | $                             | 3,717,749 |                                                           | $ |                                          |  | $                                      | 771,846 |  | $ | 2,945,903
|                                |  |                               |           |                                                           |   |                                           |  |                                        |         |  |   |          
|Total assets at fair value      |  | $                             | 3,717,749 |                                                           | $ |                                          |  | $                                      | 771,846 |  | $ | 2,945,903
|                                |  |                               |           |                                                           |   |                                           |  |                                        |         |  |   |          
|Total liabilities at fair value |  | $                             |          |                                                           | $ |                                          |  | $                                      |        |  | $ |         
|                                |  |                               |           |                                                           |   |                                           |  |                                        |         |  |   |          

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 quoted market prices or dealer quotes.



|(c) | Restricted Equity Securities
|--- | ----------------------------

The carrying
value of restricted equity securities approximates fair value based on the redemption provisions of the appreciable entities.



|(d) | 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.



|(e) | Accrued Interest
|--- | ----------------

The carrying amounts of
accrued interest approximate fair value.



|(f) | Deposits
|--- | --------

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

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.



|(g) | Repurchase Agreements
|--- | ---------------------

The fair value of
repurchase agreements 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.



|(h) | Short-term Borrowings
|--- | ---------------------

The carrying
amount is a reasonable estimate of fair value.



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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2008 and 2007



|(i) | 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.



|(j) | 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, 2008 are as follows:



|                                         |  |                |             |            |   |            
|---------------------------------------- |  | -------------- | ----------- | ---------- | - | -----------
|                                         |  | Carrying Value |             | Fair Value
|FINANCIAL ASSETS:                        |  |                |             |            |   |            
|Cash and due from banks                  |  | $              | 2,767,176   |            | $ | 2,767,176  
|Interest-bearing deposits in other banks |  |                | 127,853     |            |   | 127,853    
|Federal funds sold                       |  |                | 280,000     |            |   | 280,000    
|Securities available-for-sale            |  |                | 21,588,488  |            |   | 21,588,488 
|Restricted equity securities             |  |                | 1,434,900   |            |   | 1,434,900  
|Loans, net                               |  |                | 190,005,521 |            |   | 190,557,250
|Accrued interest receivable              |  |                | 855,054     |            |   | 855,054    
|                                         |  |                |             |            |   |            
|Total Financial Assets                   |  | $              | 217,058,992 |            | $ | 217,610,721
|                                         |  |                |             |            |   |            
|                                         |  |               
|FINANCIAL LIABILITIES:                   |  |                |             |            |   |            
|Deposits:                                |  |                |             |            |   |            
|Non-interest bearing demand deposits     |  | $              | 16,235,463  |            | $ | 16,235,463 
|Interest bearing deposits                |  |                | 155,622,403 |            |   | 155,334,956
|Repurchase agreements                    |  |                | 13,500,000  |            |   | 14,610,150 
|Short-term borrowings                    |  |                | 16,711,375  |            |   | 16,711,375 
|Accrued interest payable                 |  |                | 608,111     |            |   | 608,111    
|                                         |  |                |             |            |   |            
|Total Financial Liabilities              |  | $              | 202,677,352 |            | $ | 203,500,055
|                                         |  |                |             |            |   |            

The estimated fair values of financial instruments at December 31, 2007 are as follows:



|                                         |  |                |             |            |   |            
|---------------------------------------- |  | -------------- | ----------- | ---------- | - | -----------
|                                         |  | Carrying Value |             | Fair Value
|FINANCIAL ASSETS:                        |  |                |             |            |   |            
|Cash and due from banks                  |  | $              | 2,745,795   |            | $ | 2,745,795  
|Interest-bearing deposits in other banks |  |                | 469,186     |            |   | 469,186    
|Federal funds sold                       |  |                | 970,000     |            |   | 970,000    
|Securities available-for-sale            |  |                | 22,569,594  |            |   | 22,569,594 
|Restricted equity securities             |  |                | 741,300     |            |   | 741,300    
|Loans, net                               |  |                | 170,696,127 |            |   | 170,495,422
|Accrued interest receivable              |  |                | 973,880     |            |   | 973,880    
|                                         |  |                |             |            |   |            
|Total Financial Assets                   |  | $              | 199,165,882 |            | $ | 198,965,177
|                                         |  |                |             |            |   |            
|                                         |  |               
|FINANCIAL LIABILITIES:                   |  |                |             |            |   |            
|Deposits:                                |  |                |             |            |   |            
|Non-interest bearing demand deposits     |  | $              | 18,430,757  |            | $ | 18,430,757 
|Interest bearing deposits                |  |                | 157,286,040 |            |   | 157,251,498
|Repurchase agreements                    |  |                | 7,500,000   |            |   | 7,706,250  
|Accrued interest payable                 |  |                | 762,175     |            |   | 762,175    
|                                         |  |                |             |            |   |            
|Total Financial Liabilities              |  | $              | 183,978,972 |            | $ | 184,150,680
|                                         |  |                |             |            |   |            



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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2008



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.

The Corporation assumes interest rate risk (the risk that general interest rate levels will change) as a result
of its normal operations. As a result, the fair values of the Corporations financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Corporation. Management attempts to
match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling
rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of
assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Corporations overall interest rate risk.

Note 20  Contingencies and Other Matters

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



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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

December 31, 2008



|Item 9. | Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
|------- | ------------------------------------------------------------------------------------

None.



|Item 9A(T). | Controls and Procedures
|----------- | -----------------------

MainStreets principal executive
officer and principal financial officer have reviewed MainStreets disclosure controls and procedures (as defined in 204.13a-15(e) and 204.15d-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. There have not been any changes in our internal control over financial reporting that occurred during the period that has materially affected, or is reasonably likely
to materially affect, internal control over financial reporting.

Managements Report on Internal Control Over Financial Reporting

To the Stockholders:

Management is responsible for the preparation
and fair presentation of the financial statements included in this annual report. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and reflect managements
judgments and estimates concerning effects of events and transactions that are accounted for or disclosed.

Management is also responsible for establishing
and maintaining adequate internal control over financial reporting. The Corporations internal control over financial reporting includes those policies and procedures that pertain to the Corporations ability to record, process, summarize
and report reliable financial data. Management recognizes that there are inherent limitations in the effectiveness of any internal control over financial reporting, including the possibility of human error and the circumvention or overriding of
internal control. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal
control over financial reporting may vary over time.

In order to ensure that the Companys internal control over financial reporting is effective,
management regularly assesses such controls and did so most recently for its financial reporting as of December 31, 2008. This assessment was based on criteria for effective internal control over financial reporting described in Internal
Control Integrated Framework issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Based on this assessment, management has concluded that the internal control over financial reporting was effective as of
December 31, 2008.

This annual report does not include an attestation report of the Companys registered public accounting firm regarding
internal control over financial reporting. Managements report was not subject to attestation by the Companys registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company
to provide only managements report in this Annual Report.



|Item 9B. | Other Information
|-------- | -----------------

None.



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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

December 31, 2008



PART III



|Item 10. | Directors, Executive Officers and Corporate Governance
|-------- | ------------------------------------------------------

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 B Directors expires in 2009, the
term of the Class C Directors expires in 2010, and the term of the Class A Directors expires in 2011. The following tables set forth material information about MainStreets current executive officers and directors.



|                                       |  |                                                                                                                                                     
|-------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
|Name (Age)                             |  | Offices and Positions Held                                                                                                                          
|Class B Directors  Term Expires 2009 
|                                       | 
|Joseph F. Clark (46)                   |  | Director since July 2001                                                                                                                            
|                                       | 
|Charles L. Dalton (45)                 |  | Director since July 2001                                                                                                                            
|                                       | 
|Joel R. Shepherd (45)                  |  | Director since December 2002                                                                                                                        
|                                      
|Class C Directors  Terms Expires 2010
|                                       | 
|William L. Cooper, III (55)            |  | Director since February 2007                                                                                                                        
|                                       | 
|John M. Deekens (61)                   |  | Director since July 2001                                                                                                                            
|                                       | 
|Danny M. Perdue (63)                   |  | Director since December 2002                                                                                                                        
|                                      
|Class A Directors  Term Expires 2011 
|                                       | 
|Larry A. Heaton (51)                   |  | Director since October 2002 President/CEO of
MainStreet BankShares, Inc. since May 2006. President/CEO/Chairman of Franklin Bank since October 2002.
|                                       | 
|Michael A. Turner (55)                 |  | Director since December 2002                                                                                                                        

Joseph F. Clark is President of Clark Brothers Company, Inc., in Stuart, Virginia, of which he is a partial owner.
Mr. Clark is also a member and partial owner of CBC, LLC, a management business. He is a member and partial owner of Highland Park, LLC and Fairview Group, LLC. He is a member of the Stuart Rotary Club and the Stuart United Methodist Church.

William L. Cooper, III is partial owner and President of Cooper Classics, Inc. He is CEO and partial owner of CWP, Inc. He is a managing partner of Grassy
Hill Investment. Mr. Cooper is a trustee of North Cross School and is Vice President of the Rocky Mount Historic Foundation. He is also a past director of the BB&T Corporate Virginia State Board.

C. Laine Dalton is Vice President, General Manager and partial owner of Dalton Insurance Agency, Inc. in Stuart, Virginia. He has been a past member of the Stuart Rotary
Club, Patrick County Chamber of Commerce, Professional Insurance Agents of Virginia and Patrick County Dixie Youth Baseball.



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December 31, 2008



J. Mac Deekens was formerly the Plant Manager for Stuart Forest Products in Stuart, Virginia. Prior to that, he was the Quality Improvement Manager for Hooker Furniture
Corporation in Martinsville, Virginia. He is a member of the Stuart Rotary Club.

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

Danny M. Perdue is currently the owner of the Franklin Shopping Center. He is a partial owner and President of Redwood Minute Markets, Inc. He is a
partial owner of First Minute Markets, LLC. He is also an owner of Redwood Petroleum Products, Ferrum Petroleum Products, Franklin Petroleum Products, 604 Petroleum Products and Penhook Petroleum Products. He is Vice President of Perdue Properties,
Inc. Mr. Perdue is also a director of Franklin Community Bank, N.A. He is on the YMCA Board and the United Way Board. He is a member of the Rotary Club and a Ferrum College Trustee.

Joel R. Shepherd is a partial owner and President of Virginia Home Furnishings, Inc., Blue Ridge Antique Center, Inc., and 220 Self Storage, Inc. He is also a partial owner of Shepherd Properties, LLC, Orient Bay,
LLC, Wirtz Properties, LLC and Lake Marina, 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. He is also active in the United Way of Franklin County.

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, LC. 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. He is also a member of the Cool Branch Volunteer Rescue Squad, Franklin County Chamber of Commerce and the Smith Mountain Lake Chamber of Commerce.

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 (49)              |  | 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. Ms. Smith is a member of Pleasant Grove Christian Church and serves on the Safetynet Board of Trustees.

MainStreet
has a standing Audit Committee. The Audit Committee is responsible for the oversight of the Companys accounting policies, financial reporting and internal control. The Audit Committee of the Board of Directors is comprised entirely of outside
directors who are independent of management. The Audit Committee is responsible for the appointment and compensation of the independent auditor and approves decisions regarding the appointment or removal of the Companys



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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

December 31, 2008



Internal Auditor. It meets periodically with management, the independent auditors and the internal auditors to ensure that they are carrying out their
responsibilities. The Audit Committee is also responsible for performing an oversight role by reviewing and monitoring the financial, accounting and auditing procedures of the Company in addition to reviewing the Companys financial reports.
The independent auditors and the internal auditor have full and unlimited access to the Audit Committee, with or without management, to discuss the adequacy of internal control over financial reporting, and any other matter which they believe should
be brought to the attention of the Audit Committee. The members of the Audit Committee are C. Laine Dalton, J. Mac Deekens, Joel R. Shepherd (Chairman), Michael A. Turner, and Danny M. Perdue.

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. Because of our size and location, we have not pursued a financial expert and there is no certainty that one could be found.

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

Other information required by Item 10 of
Form 10-K appears on pages 7 through 8 of the Corporations 2009 Proxy Statement and is incorporated herein by reference.



|Item 11. | Executive Compensation
|-------- | ----------------------

The information required by Item 11 of
Form 10-K appears on pages 9 through 12 of the Corporations 2009 Proxy Statement and is incorporated herein by reference.



|Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|-------- | ----------------------------------------------------------------------------------------------

The information required by Item 12 of Form 10-K appears on pages 5 through 6 of the Corporations 2009 Proxy Statement and is incorporated herein by reference.



|Item 13. | Certain Relationships and Related Transactions, and Director Independence
|-------- | -------------------------------------------------------------------------

MainStreets executive officers and directors, and other corporations, business organizations, and persons with which some of MainStreets executive officers and directors are associated have banking relationships with Franklin
Bank and prior to its divestiture, Smith River Bank. All such transactions were made in the ordinary course of business on substantially the same terms, including interest rates and security for loans, as those prevailing at the time in comparable
transactions with others and did not involve more than the normal risk of collectibility or present other unfavorable features. None of such loans are classified as nonaccrual, past due, restructured or potential problem. Information related to
loans to MainStreets executive officers and directors and their related interests can be found in Part II, Item 8, Note 5 of this document. Deposit information related to MainStreets executive officers and directors and their
related interests can be found in Part II, Item 8, Note 7 of this document.

Franklin Community Bank, N.A., a subsidiary of MainStreet BankShares,
Inc., leases its main office in Rocky Mount, Virginia, its Westlake office and its 220 North office. The owners of the buildings are directors of Franklin Bank. The leases were made on market terms for those comparable at the time of the
transaction.

The information required by Item 13 of Form 10-K concerning director independence appears on page 12 of the Corporations 2009
Proxy Statement and is incorporated herein by reference.



|Item 14. | Principal Accountant Fees and Services
|-------- | --------------------------------------

The information required by
Item 14 of Form 10-K appears in the Corporations 2009 Proxy Statement under the Audit Committee Report and is incorporated herein by reference.



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MAINSTREET BANKSHARES, INC. AND SUBSIDIARIES

December 31, 2008



PART IV



|Item 15. | Exhibits and Financial Statement Schedules
|-------- | ------------------------------------------



| | a) | The following documents are filed as part of this report:
| | -- | ---------------------------------------------------------



| | 1. | Financial Statements:
| | -- | ---------------------

Report of Independent Registered
Public Accounting Firm.

Consolidated Balance Sheets as of December 31, 2008 and 2007.

Consolidated Statements of Income for the Years Ended December 31, 2008 and 2007.

Consolidated Statements of Shareholders Equity for the Years Ended December 31, 2008 and 2007.

Consolidated Statements of Cash Flows for the Years Ended December 31, 2008 and 2007.

Notes to Financial Statements.



| | 2. | Financial Statement Schedules:
| | -- | ------------------------------

All schedules are omitted
as the required information is not applicable or the information is presented in the Financial Statements or related notes.



| | 3. | Exhibits and Reports on Form 8-K:
| | -- | ---------------------------------

See Index to Exhibits.



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SIGNATURES

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



|                            |  |                                                       
|--------------------------- |  | ------------------------------------------------------
|MAINSTREET BANKSHARES, INC.
|                            | 
|By:                         |  | /s/ Larry A. Heaton                                   
|                            |  | Larry A. Heaton, President and Chief Executive Officer

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



|                           |  |  |  |                                                                                                 |  |      |  |         
|-------------------------- |  |  |  | ----------------------------------------------------------------------------------------------- |  | ---- |  | --------
|NAME                       |  |  |  | TITLE                                                                                           |  |      |  | DATE    
|                           |  |  |  |                                                                                                
|/s/ Larry A. Heaton        |  |  |  | President and Chief Executive Officer,
Director, President/CEO of Franklin Community Bank, N.A. |  |      |  | 03/23/09
|Larry A. Heaton            |  |  |  |                                                                                                 |  | Date
|                           |  |  |  |                                                                                                 |  |     
|                           |  |  |  |                                                                                                
|/s/ Brenda H. Smith        |  |  |  | Executive Vice President Chief Financial
Officer Corporate Secretary                            |  |      |  | 03/23/09
|Brenda H. Smith            |  |  |  |                                                                                                 |  | Date
|                           |  |  |  |                                                                                                 |  |     
|                           |  |  |  |                                                                                                
|/s/ Joseph F. Clark        |  |  |  | Director                                                                                        |  |      |  | 03/23/09
|Joseph F. Clark            |  |  |  |                                                                                                 |  |      |  | Date    
|                           |  |  |  |                                                                                                
|/s/ William L. Cooper, III |  |  |  | Director                                                                                        |  |      |  | 03/23/09
|William L. Cooper, III     |  |  |  |                                                                                                 |  |      |  | Date    
|                           |  |  |  |                                                                                                
|/s/ Charles L. Dalton      |  |  |  | Director                                                                                        |  |      |  | 03/23/09
|Charles L. Dalton          |  |  |  |                                                                                                 |  |      |  | Date    
|                           |  |  |  |                                                                                                
|/s/ John M. Deekens        |  |  |  | Director                                                                                        |  |      |  | 03/23/09
|John M. Deekens            |  |  |  |                                                                                                 |  |      |  | Date    
|                           |  |  |  |                                                                                                
|/s/ Danny M. Perdue        |  |  |  | Director                                                                                        |  |      |  | 03/23/09
|Danny M. Perdue            |  |  |  |                                                                                                 |  |      |  | Date    
|                           |  |  |  |                                                                                                
|/s/ Joel R. Shepherd       |  |  |  | Chairman of the Board                                                                           |  |      |  | 03/23/09
|Joel R. Shepherd           |  |  |  |                                                                                                 |  |      |  | Date    
|                           |  |  |  |                                                                                                
|/s/ Michael A. Turner      |  |  |  | Director                                                                                        |  |      |  | 03/23/09
|Michael A. Turner          |  |  |  |                                                                                                 |  |      |  | Date    



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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 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.                                                                                      
|         | 
|10.2#    |  | Employment agreement with Executive Vice President, Brenda H. Smith, dated October 1, 2002, filed with the Corporations Quarterly Form 10-QSB on November 7, 2002 and herein incorporated by
reference. Amendment to employment agreement filed on Form 8-K on April 24, 2006 and herein incorporated by reference.
|         | 
|10.3     |  | Administrative Services Agreement with Smith River Community Bank, N.A. incorporated by reference to the Corporations Form 8-K filed March 28, 2005.                                                                                                                                                               
|         | 
|10.4#    |  | Supplemental Executive Retirement Agreement by and between Franklin Community Bank, N.A. and Larry A. Heaton incorporated by reference to the Corporations Form 10-KSB filed March 6, 2008.                                                                                                                        
|         | 
|10.5#    |  | Supplemental Executive Retirement Agreement by and between Franklin Community Bank, N.A. and Brenda H. Smith incorporated by reference to the Corporations Form 10-KSB filed March 6, 2008.                                                                                                                        
|         | 
|10.6#    |  | Change in Control Agreement between MainStreet BankShares, Inc. and Lisa J. Correll incorporated by reference to the Corporations Form 10-KSB filed March 6, 2008.                                                                                                                                                 
|         | 
|10.7#    |  | Change in Control Agreement between MainStreet BankShares, Inc., Franklin Community Bank, N.A. and Carey D. Wrenn incorporated by reference to the Corporations Form 10-KSB filed March 6,
2008.                                                                                                                   
|         | 
|10.8#    |  | Change in Control Agreement between MainStreet BankShares, Inc., Franklin Community Bank, N.A. and Robert W. Shorter incorporated by reference to the Corporations Form 10-KSB filed March
6, 2008.                                                                                                                
|         | 
|10.9#    |  | Change in Control Agreement between MainStreet BankShares, Inc., Franklin Community Bank, N.A. and Debra B. Scott incorporated by reference to the Corporations Form 10-KSB filed March 6,
2008.                                                                                                                   
|         | 
|10.10#   |  | Change in Control Agreement between MainStreet BankShares, Inc., Franklin Community Bank, N.A. and Linda P. Adams incorporated by reference to the Corporations Form 10-KSB filed March 6,
2008.                                                                                                                   
|         | 
|14       |  | Code of Ethics filed March 13, 2006 on Form 10-K and herein incorporated by reference.                                                                                                                                                                                                                              
|         | 
|21       |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                                                     
|         | 
|31.1     |  | Certification of President and Chief Executive Officer Pursuant to Rule 13a-15(e) under the Securities and Exchange Act of 1934.                                                                                                                                                                                    
|         | 
|31.2     |  | Certification of Executive Vice President, Chief Financial Officer, and Corporate Secretary Pursuant to Rule 13a-15(e) under the Securities and Exchange Act of 1934.                                                                                                                                               
|         | 
|32       |  | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 USC 1350).                                                                                                                                                                                                                              



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

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

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

|# | Management contract or compensatory plan or agreement required to be filed as an Exhibit to this Form 10-K pursuant to Item 14(c).
|- | ----------------------------------------------------------------------------------------------------------------------------------



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