SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-KSB

Annual Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the Fiscal Year Ended December 31, 2005

BANK OF THE JAMES FINANCIAL GROUP, INC.

(Name of Small Business Issuer in its charter)

Virginia	000-50548	20-0500300
(State or other jurisdiction of Incorporation or organization)	(Commission File Number)	(I.R.S. Employer Identification No.)

828 Main Street, Lynchburg, VA	24504
(Address of principal executive offices)	(Zip Code)

(434) 846-2000

(Issuer’s telephone number, including area code)

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

Common Stock, $2.14 par value

(Title of Class)

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

Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.  ¨

The issuer’s revenues for the fiscal year ended December 31, 2005 were $14,119,000.

The aggregate market value of the voting and non-voting common equity held by non-affiliates (for purposes of this calculation, “affiliates” are considered to be the directors and executive officers of the issuer) is approximately $34,684,000 (based on the March 21, 2006 trade price of $19.80 per share).

The number of shares outstanding of Common Stock, $2.14 par value as of March 21, 2006 was approximately 2,003,719.

Transitional Small Business Disclosure Format (check one)    Yes  ¨    No  x

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

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the 2006 Proxy Statement for the Annual Meeting of Shareholders, scheduled to be held on May 16, 2006, are incorporated by reference into Part III of this Form 10-KSB

BANK OF THE JAMES FINANCIAL GROUP, INC.

FORM 10-KSB

Fiscal Year Ended December 31, 2005

TABLE OF CONTENTS

PART I			1
	Item 1.	Description of Business.	1
	Item 2.	Description of Property.	10
	Item 3.	Legal Proceedings.	11
	Item 4.	Submission or Matters to a Vote of Security Holders.	11
PART II			11
	Item 5.	Market for Common Equity and Related Stockholder Matters.	11
	Item 6.	Management’s Discussion and Analysis or Plan of Operation.	12
	Item 7.	Financial Statements.	24
	Item 8.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.	52
	Item 8A.	Controls and Procedures.	52
	Item 8B.	Other Information.	52
PART III			52
	Item 9.	Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act.	52
	Item 10.	Executive Compensation.	53
	Item 11.	Security Ownership of Management.	53
	Item 12.	Certain Relationships and Related Transactions.	53
	Item 13.	Exhibits.	53
	Item 14.	Principal Accountant Fees and Services.	54
SIGNATURES			55
EXHIBIT INDEX			57

PART I

Item 1. Description of Business.

Overview and History

Bank of the James Financial Group, Inc. (“Financial”) is a one-bank holding company with its headquarters in Lynchburg, Virginia. Financial was incorporated at the direction of Bank of the James (the “Bank”) to serve as a bank holding company of the Bank. Financial acquired all of the shares of the Bank in a statutory share exchange on a one-for-one basis on January 1, 2004. The Bank is Financial’s only operating subsidiary and primary asset. As of the date hereof, Financial is in the process of forming a subsidiary corporation through which Financial intends to offer brokerage, fixed and variable annuity products, and related services to the public through a third party broker-dealer. See “Management’s Discussion and Analysis or Plan of Operation—Non-Interest Income of Financial” below.

The Bank is a Virginia banking corporation headquartered in Lynchburg, Virginia. The Bank was incorporated under the laws of the Commonwealth of Virginia as a state chartered bank in 1998 and began banking operations in July 1999. The Bank was organized to engage in general retail and commercial banking business. Bank of the James Financial Group, Inc. (“Financial”) was incorporated on October 3, 2003 under the laws of the Commonwealth of Virginia.

Following completion of the share exchange, Financial became the successor issuer to the Bank, pursuant to Rule 12g-3 (promulgated under the Securities Exchange Act of 1934). Prior to the share exchange, the Bank was subject to the information requirements of the Exchange Act and, in accordance with Section 12(i) thereof, was required to file reports and other financial information with the Board of Governors of the Federal Reserve System (the “Federal Reserve”). Such reports and other information filed by the Bank with the Federal Reserve may be inspected and copied at the public reference facilities maintained by the Federal Reserve in Washington, D.C. at the Freedom of Information Office, 1st Floor of the Martin Building, 20th & C Streets, and in Richmond, Virginia at the Research Library of the Federal Reserve Bank of Richmond, 701 East Byrd Street. The last financial report filed by the Bank with the Federal Reserve was its Form 10-QSB for the quarter ended September 30, 2003, filed on November 13, 2003.

As of the date hereof, the sole business of Financial is the ownership of the capital stock of the Bank. Financial had no business until January 1, 2004 and unless otherwise noted all of the financial statements and results referenced prior to that date refer to the results and statements of the Bank.

The Bank was organized in part as a response to the loss of many of the Central Virginia, Region 2000 area’s (as defined in “Market Area” below) local financial institutions through mergers with larger, non-local banks and bank holding companies. The organizers perceived that local customers who once relied on experienced personal attention were being forced to use 800 numbers, computerized menus, and persons in other localities who were not familiar with their needs.

The Bank opened for business on July 22, 1999 to fill this void left in the Region 2000 market. The Bank’s organizers recognized that an opportunity existed to create a banking institution designed exclusively for a market that expected personalized service. The idea was to build a financial institution staffed with experienced professionals who would place a high value on knowing their customers and serving their distinctive banking needs.

The Bank was capitalized by more than 2,400 shareholders that wanted a new local bank. These investors provided the initial customer base and are integral to the success of the Bank. Management believes that the key to the Bank’s success lies in providing Bank customers with personalized service while providing products and services that meet their banking needs.

The Bank is a community-oriented financial institution that provides varied banking services to individuals, small and medium-sized businesses, and professional concerns in Region 2000. The Bank provides a full range of services to meet the financial needs of its customers and strives to provide its customers with products comparable to statewide regional banks located in its market area, while maintaining the prompt response and level of service of a community bank. Management believes this operating strategy has particular appeal in the Bank’s market area. Management believes that the combination of local ownership and size allows the Bank to offer services and products specifically tailored to the needs of the community.

As of the date hereof, the Bank’s Principal Office is located at 828 Main Street, Lynchburg, Virginia 24504 and its telephone number is (434) 846-2000. The Bank also maintains a website at www.bankofthejames.com.

Principal Products of the Bank

The Bank currently conducts business from five full-service offices. Three of the full-service offices are located in Lynchburg, Virginia, one full-service location is located in Madison Heights, Virginia, and one is located in Forest, Virginia. The Bank established a mortgage loan origination division that conducts business under the name “Bank of the James Mortgage, a Division of Bank of the James” primarily from the full-service branch located in Forest, Virginia. The Bank has no operating subsidiaries.

Deposit Services. The Bank offers a full range of deposit services that are typically available in most banks and savings and loan associations including checking accounts, savings accounts and other time deposits of various types, ranging from daily money market accounts to longer-term certificates of deposit. The transaction accounts and time certificates are tailored to the Bank’s market area at rates competitive to those offered in the area. In addition, the Bank offers its customers Individual Retirement Accounts (IRAs). All deposit accounts are insured by the Federal Deposit Insurance Corporation (the “FDIC”) up to the maximum amount allowed by law (generally, $100,000 per depositor, subject to aggregation rules). The Bank solicits such accounts from individuals, businesses, associations and organizations, and governmental authorities.

Lending Services. The Bank also offers a full range of short-to-medium term commercial and personal loans. Commercial loans include both secured and unsecured loans for working capital (including inventory and receivables), business expansion (including acquisition of real estate and improvements), and purchase of equipment and machinery. Consumer loans include secured and unsecured loans for financing automobiles, home improvements, education and personal investments. Additionally, the Bank originates fixed and floating-rate mortgage loans and real estate construction and acquisition loans.

Consumer Residential Mortgage Origination. The Bank, through Bank of the James Mortgage, a Division of Bank of the James (the “Mortgage Division”) originates consumer residential mortgage loans. Through the Mortgage Division, the Bank originates conforming and non-conforming home mortgages in the Region 2000 area, as defined below. As part of the Bank’s overall risk management strategy, all of the loans originated and closed by the Mortgage Division are pre-sold to major national mortgage banking or financial institutions and at no time are carried on the Bank’s balance sheet.

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Other Services. Other services offered by the Bank include safe deposit boxes, travelers checks, direct deposit of payroll and social security checks, automatic drafts for various accounts, and credit card merchant services. The Bank also has become associated with a shared network of automated teller machines (ATMs) that may be used by Bank customers throughout Virginia and the United States. The Bank operates a deposit pick-up service (under the name “Better Business Banking”) pursuant to which the Bank will pick-up the non-cash deposits of its business customers as needed, up to once daily.

The Bank intends to introduce new products and services as permitted by the regulatory authorities or desired by the public. The Bank remains committed to meeting the challenges that require technology. The Bank provides its customers with access to the latest technological products, such as telephone banking and internet banking, including on-line bill pay. The services allow customers to handle routine transactions using a standard touch tone telephone and via the internet at the Bank’s website www.bankofthejames.com.

Market Area

The Bank’s market area primarily consists of Region 2000, which encompasses the seven jurisdictions of the Town of Altavista, Amherst County, Appomattox County, the City of Bedford, Bedford County, Campbell County, and the City of Lynchburg. Region 2000 supports a diverse, well-rounded economy. U.S. Routes 29, 60, 221, 460 and 501 and State Routes 24 and 40 all pass through the trade area and provide efficient access to other regions of the state. Regional airport service and rail service provide additional transportation channels.

Total population in the market area equals approximately 230,000. The area is serviced by one daily newspaper and a number of radio and television stations providing diverse media outlets. The City of Lynchburg, the location of 3 of the Bank’s branch offices, has the largest population base, with approximately 66,000 persons. Median family income has continued to increase in Region 2000 during the past ten years.

Region 2000 has a broad range of services, light industry, and manufacturing plants. Principal service, industrial, research and development employers include: Genworth Financial (life insurance and other financial products); Centra Health, Inc. (health care services); C.B. Fleet, Inc. (medical supplies); Framatome ANP, Inc. (nuclear maintenance and repairs); Frito-Lay, Inc. (snack foods); BWX Technologies, Inc. (nuclear fuel); Thomasville Furniture (furniture); as well as Randolph-Macon Woman’s College, Sweet Briar College, Liberty University, and Lynchburg College.

Employees

As of March 14, 2006, the Bank had approximately 90 full-time equivalent employees. None of its employees are represented by any collective bargaining agreements, and relations with employees are considered excellent.

Governmental Monetary Policies

The earnings and growth of the Bank are affected not only by general economic conditions, but also by the monetary policies of various governmental regulatory authorities, particularly the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). The Federal Reserve Board implements national monetary policy by its open market operations in United States government securities, control of the discount rate and establishment of reserve requirements against both member and nonmember financial institutions’ deposits. These actions have a significant effect on the overall growth and distribution of loans, investments and deposits, as well as the rates earned on loans, or paid on deposits.

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Management of the Bank is unable to predict the effect of possible significant changes in monetary policies upon the future operating results of the Bank.

Competition

The Bank competes as a financial intermediary with other commercial banks, savings institutions, credit unions, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market mutual funds and other financial institutions operating in the Region 2000 market area and elsewhere. Many of the Bank’s nonbank competitors are not subject to the same extensive federal regulations that govern federally-insured banks and state regulations governing state chartered banks. As a result, such nonbank competitors may have certain advantages over the Bank in providing certain services.

Virginia law permits statewide branching by banks. Consequently, the Bank’s market area is a highly competitive, highly branched banking market. Competition in the market area for loans to individuals, small businesses, and professional concerns, the Bank’s target market, is keen, and pricing is important. Most of the Bank’s competitors have substantially greater resources and lending limits than the Bank and offer certain services, such as extensive and established branch networks and trust services, that the Bank is not currently providing. Moreover, larger institutions operating in the Region 2000 market area have access to borrowed funds at a lower cost than are presently available to the Bank. Deposit competition is strong and comes from institutions in the market, U.S. Government securities, private issuers of debt obligations and suppliers of other investment alternatives for depositors, among other sources. As a result, the Bank has paid, and may in the future pay, above-market rates to attract deposits.

The adoption of legislation permitting nationwide interstate banking and branching and the use of financial holding companies may also increase competition in the Bank’s market area. See “Regulation of Financial” and “Regulation of the Bank” below.

Supervision and Regulation

As a bank holding company registered under the Bank Holding Company Act of 1956 (the “BHCA”), Financial is subject to regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). Financial is required to file with the Federal Reserve Board an annual report and such other additional information as the Federal Reserve Board may require pursuant to the BHCA. Financial must also provide the Virginia Bureau of Financial Institutions (the “Commission”) with information regarding Financial and the Bank. The Federal Reserve Board and the Commission may also examine Financial and the Bank.

The Federal Reserve Board has jurisdiction under the BHCA to approve any bank or non-bank acquisition, merger or consolidation proposed by a bank holding company. The BHCA generally limits the activities of a bank holding company and its subsidiaries to that of banking, managing or controlling banks, or any other activity that is so closely related to banking or to managing or controlling banks as to be a proper incident thereto.

Since September 1995, the BHCA has permitted bank holding companies from any state to acquire banks and bank holding companies located in any other state, subject to certain conditions, including nationwide and state imposed concentration limits. Banks are also able to branch across state

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lines, provided certain conditions are met, including that applicable state laws expressly permit such interstate branching. Virginia has adopted legislation that permits branching across state lines, provided there is reciprocity with the state in which the out-of-state bank is based.

Financial is also subject to the periodic reporting requirements of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), including the filing with the Securities and Exchange Commission (the “SEC”) of annual, quarterly and other reports on the financial condition and performance of the organization. As a reporting company under the Exchange Act, Financial is directly affected by the recently enacted Sarbanes-Oxley Act of 2002 (the “SOx”), which is aimed at improving corporate governance and reporting procedures and requires expanded disclosure of Financial’s corporate operations and internal controls. Financial intends to be in compliance with any applicable rules and regulations as they become effective. Management anticipates that compliance with SOx will be costly. The new legislation and its implementing regulations will potentially lead to an increase in certain outside professional costs.

The Federal Reserve Board requires a bank holding company to act as a source of financial strength and to take measures to preserve and protect its bank subsidiaries. Financial would be compelled by the Federal Reserve Board to invest additional capital in the event the Bank experiences either significant loan losses or rapid growth of loans or deposits.

Capital Requirements. The Federal Reserve Board (“FRB”) had adopted capital adequacy guidelines pursuant to which it assesses the adequacy of capital in examining and supervising a bank holding company and in analyzing applications to it under the BHCA. The FRB’s capital adequacy guidelines are similar to those imposed on the Bank by the FRB. See “Regulation of the Bank – Capital Requirements.”

Limits on the Payment of Dividends. Financial is a legal entity, separate and distinct from the Bank. A significant portion of Financial’s revenues will be from dividends paid to it by the Bank. Both Financial and the Bank are subject to laws and regulations that limit the payment of dividends, including requirements to maintain capital at or above regulatory minimums. Banking regulators have indicated that Virginia banking organizations should generally pay dividends only (1) from net undivided profits of the bank, after providing for all expenses, losses, interest and taxes accrued or due by the bank and only (2) if the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality and overall financial condition. In particular, under the current supervisory practices of the Federal Reserve Board, prior approval from the Federal Reserve Board and a supermajority of the Bank’s shareholders is required if cash dividends declared in any given year exceed net income for that year plus retained earnings of the two preceding years. In addition, under the FDIA, insured depository institutions such as the Bank are prohibited from making capital distributions, including the payment of dividends, if, after making such distribution, the institution would become “undercapitalized” (as such term is used in the statute).

The Bank generated start-up losses in its beginning years; as such the organization had negative retained earnings and was not able to pay cash dividends until recently. Although Financial’s retained earnings are now positive, cash dividends are not planned at this time. Financial believes the additional capital can be used more effectively to support future growth of the organization.

Regulation of the Bank

The Bank is subject to various state and federal banking laws and regulations that impose specific requirements or restrictions on and provide for general regulatory oversight with respect to virtually all aspects of its operations. The following is a brief summary of the material provisions of certain statutes, rules and regulations that will affect the Bank. This summary is qualified in its entirety by reference to the particular statutory and regulatory provisions referred to below.

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General. The Bank is under the supervision of, and subject to regulation and examination by, the Federal Reserve Board, the FDIC, and the State Corporation Commission of Virginia Bureau of Financial Institutions (the “Commission”). As such, the Bank is subject to various statutes and regulations administered by these agencies that govern, among other things, required reserves, investments, loans, lending limits, acquisitions of fixed assets, interest rates payable on deposits, transactions among affiliates and the Bank, the payment of dividends, mergers and consolidations, and establishment of branch offices.

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

Deposit Insurance. Section 38 of the FDIA, as amended by the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), requires that the federal banking agencies establish five capital levels for insured depository institutions—”well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized”—and requires or permits such agencies to take certain supervisory actions as an insured institution’s capital level declines. In certain circumstances, a financial institution’s low capital position can lead to enhanced restrictions by the FDIC. An “adequately capitalized” institution is restricted from accepting brokered deposits, and a “significantly undercapitalized” institution must develop a capital restoration plan and is subject to a number of mandatory and discretionary supervisory actions. These powers and authorities are in addition to the traditional powers of the federal banking agencies to deal with undercapitalized institutions.

As an institution with deposits insured by the Bank Insurance Fund (“BIF”), the Bank also is subject to insurance assessments imposed by the FDIC. In 2005 and for the first semiannual assessment period of 2006, the FDIC continued the risk based BIF assessment rate schedule of 0.0% to 0.27% of an institution’s average assessment base. The actual assessment to be paid by each BIF member is based on whether the institution is considered “well capitalized”, “adequately capitalized,” or “undercapitalized”, as such terms have been defined in applicable federal regulations, and whether such institution is considered by its supervisory agency to be financially sound or to have supervisory concerns.

The Deposit Insurance Funds Act of 1996 (the “Funds Act”) was enacted on September 30, 1996. Among other provisions, the Funds Act (i) requires that certain depository institutions pay a one-time special assessment to the FDIC to capitalize the Savings Association Insurance Fund (“SAIF”) at its statutory required reserve ratio of 1.25% of insurable deposits, (ii) exempts certain depository institutions with SAIF-assessable deposits that meet any of several specified criteria from paying the special assessment and (iii) authorizes the Financing Corporation (“FICO”) to impose periodic assessments on depository institutions that are members of BIF, in addition to institutions that are members of the SAIF, in order to spread the cost of the interest payments on the outstanding FICO bonds over a larger number of institutions. Until this change in the law, only SAIF-member institutions bore the cost of funding these interest payments. FICO assessments are set quarterly and were set at 0.0144%, 0.0142%, 0.0134%, 0.0134%, and 0.0132% annually for the first, second, third, and fourth quarters of 2005 and the first quarter of 2006, respectively for both BIF and SAIF assessable deposits. The FDIC may change the rates for insurance in its discretion to ensure insurance fund solvency. Increases in FDIC insurance charges will have an adverse financial impact on the Bank.

Regulators have broad powers under current federal law to take prompt corrective action to resolve problems of insured depository institutions. The extent of the action depends on the capital adequacy and other features of the organization in question.

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Capital Requirements. The various federal bank regulatory agencies, including the Federal Reserve Board, have adopted risk-based capital requirements for assessing bank capital adequacy. In addition, Virginia chartered banks must also satisfy the capital requirements adopted by the Commission. The federal capital standards define capital and establish minimum capital requirements in relation to assets and off-balance sheet exposure, as adjusted for credit risk. The risk-based capital standards currently in effect are designed to make regulatory capital requirements more sensitive to differences in risk profiles among bank holding companies and banks, to account for off-balance sheet exposure and to minimize disincentives for holding liquid assets. Under these guidelines, assets and off-balance sheet items are assigned to broad risk categories, with each multiplied by one of several risk adjustment percentages. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items.

The minimum requirement for the ratio of total capital to risk-weighted assets (including certain off-balance sheet obligations, such as stand-by letters of credit) for a bank to be “adequately capitalized” is 8.0%. At least half of the risk-based capital must consist of stockholders’ equity (including retained earnings) and qualifying noncumulative preferred stock, less deductions for goodwill and various other intangibles (“Tier 1 capital”). The remainder (“Tier 2 capital”) generally consists of a limited amount of subordinated debt, certain hybrid capital instruments and other debt securities, preferred stock and a limited amount of the general valuation allowance for loan losses. No element of Tier 1 or Tier 2 capital may contain covenants, terms, or restrictions that are inconsistent with sound banking practices. The sum of Tier 1 capital and Tier 2 capital is “total risk-based capital.” The Tier 1 and total capital to risk-weighted asset ratios of the Bank as of December 31, 2005 were 9.5% and 10.7%, respectively, exceeding the minimums required.

The Federal Reserve Board also has adopted regulations that supplement the risk-based guidelines to include a minimum leverage ratio of Tier 1 capital to quarterly average assets (“Leverage ratio”) of 3.0%. The Federal Reserve Board has emphasized that the foregoing standards are supervisory minimums and that a banking organization will be permitted to maintain such minimum levels of capital only if it receives the highest rating under the regulatory rating system and the banking organization is not experiencing or anticipating significant growth. Such banks are expected to maintain capital ratios well above minimum levels. All other banking organizations are required to maintain a Leverage ratio of at least 4.0% to 5.0% of Tier 1 capital. These rules further provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain capital positions substantially above the minimum supervisory levels and comparable to peer group averages, without significant reliance on intangible assets. The tangible Tier 1 Leverage ratio is the ratio of a banking organization’s Tier 1 capital, less deductions for intangibles otherwise includable in Tier 1 capital, to total tangible assets. The Leverage ratio of the Bank as of December 31, 2005 was 7.8%, exceeding the minimums required.

Further, the Federal Reserve Board and other federal banking agencies have adopted regulations to ensure that banks with significant exposure to market risk maintain adequate capital to support that exposure. Under these rules, the Federal Reserve Board must explicitly include a bank’s exposure to declines in the economic value of its capital due to changes in interest rates as a factor in evaluating a bank’s capital adequacy.

Mergers and Acquisitions. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 authorizes the Federal Reserve Board to permit adequately capitalized and adequately managed bank holding companies to acquire all or substantially all of the assets of an out-of-state bank or bank holding company, subject to certain conditions, including nationwide and state concentration limits. Banks also are able to branch across state lines, provided certain conditions are met, including that applicable state law must expressly permit such interstate branching. Virginia law permits branching across state lines, provided there is reciprocity with the state in which the out-of-state bank is based.

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Financial Modernization. On November 12, 1999, financial modernization legislation known as the Gramm-Leach-Bliley Act (the “Act”) was signed into law. The Act, which was effective March 11, 2000, permits bank holding companies to become financial holding companies and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. A bank holding company may become a financial holding company by filing a declaration that the bank holding company wishes to become a financial holding company if each of its subsidiary banks (i) is well capitalized under regulatory prompt corrective action provisions, (ii) is well managed, and (iii) has at least a satisfactory rating under the Community Reinvestment Act (“CRA”). No regulatory approval will be required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board.

The Act defines “financial in nature” to include securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; and activities that the Board has determined to be closely related to banking. Subsidiary banks of a financial holding company must continue to be well capitalized and well managed in order to continue to engage in activities that are financial in nature without regulatory actions or restrictions, which could include divestiture of the financial in nature subsidiary or subsidiaries. In addition, a financial holding company or a bank may not acquire a company that is engaged in activities that are financial in nature unless each of the subsidiary banks of the financial holding company or the bank has a CRA rating of satisfactory or better.

Although the above laws may have a significant impact on the banking industry by promoting, among other things, competition, it is not possible for the management of the Bank to determine, with any degree of certainty, the impact of such laws on the Bank.

Community Reinvestment Act. The Bank is also subject to the requirements of the CRA. The CRA imposes on financial institutions an affirmative and ongoing obligation to meet the credit needs of their local communities, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of those institutions. Each financial institution’s efforts in meeting community credit needs currently is evaluated as part of the examination process pursuant to a number of assessment factors. These factors also are considered in evaluating mergers, acquisitions and applications to open branches.

Safety and Soundness. The federal banking agencies have broad powers under current federal law to take prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the institutions in question are “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized,” all such terms are defined under uniform regulations defining such capital levels issued by each of the federal banking agencies.

On December 19, 1991, the FDICIA was enacted into law. FDICIA requires each federal banking regulatory agency to prescribe, by regulation or guideline, standards for all insured depository institutions and depository institution holding companies relating to (i) internal controls, information systems and audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v) asset growth; (vi) compensation, fees and benefits; and (vii) such other operational and managerial standards as the agency determines to be appropriate. The compensation standards would prohibit employment contracts or other compensatory arrangements that provide excess compensation, fees or benefits or could lead to material financial loss. In addition, each federal banking regulatory agency must prescribe, by regulation or guideline, standards relating to asset quality, earnings and stock valuation as the agency determines to be appropriate. The federal banking agencies, including the Federal

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Reserve Board, have adopted regulations concerning standards for safety and soundness required to be prescribed by regulation pursuant to Section 39 of the FDIA. In general, the standards relate to (1) operational and managerial matters; (2) asset quality and earnings; and (3) compensation. The operational and managerial standards cover (a) internal controls and information systems, (b) internal audit systems, (c) loan documentation, (d) credit underwriting, (e) interest rate exposure, (f) asset growth, and (g) compensation, fees and benefits.

Activities and Investments of Insured State-Chartered Banks. The activities and equity investments of FDIC-insured, state-chartered banks are generally limited to those that are permissible for national banks. Under regulations dealing with equity investments, an insured state bank generally may not directly or indirectly acquire or retain any equity investment of a type, or in an amount, that is not permissible for a national bank. An insured state bank is not prohibited from, among other things, (i) acquiring or retaining a majority interest in a subsidiary, (ii) investing as a limited partner in a limited partnership the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation or new construction of a qualified housing project, provided that such limited partnership investments may not exceed 2% of the bank’s total assets, (iii) acquiring up to 10% of the voting stock of a company that solely provides or reinsures directors’, trustees’ and officers’ liability insurance coverage or bankers’ blanket bond group insurance coverage for insured depository institutions, and (iv) acquiring or retaining the voting shares of a depository institution if certain requirements are met. In addition, an insured state-chartered bank may not, directly, or indirectly through a subsidiary, engage as “principal” in any activity that is not permissible for a national bank unless the FDIC has determined that such activities would pose no risk to the insurance fund of which it is a member and the bank is in compliance with applicable regulatory capital requirements. Any insured state-chartered bank directly or indirectly engaged in any activity that is not permitted for a national bank must cease the impermissible activity.

Regulatory Enforcement Authority. Applicable banking laws include substantial enforcement powers available to federal banking regulators. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions against banking organizations and institution-affiliated parties. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions, including the filing of misleading or untimely reports with regulatory authorities, may provide the basis for enforcement action.

USA Patriot Act. The USA Patriot Act became effective on October 26, 2001 and provides for the facilitation of information sharing among governmental entities and financial institutions for the purpose of combating terrorism and money laundering. Among other provisions, the USA Patriot Act permits financial institutions, upon providing notice to the United States Treasury, to share information with one another in order to better identify and report to the federal government concerning activities that may involve money laundering or terrorists’ activities. Interim rules implementing the USA Patriot Act were issued effective March 4, 2002. The USA Patriot Act is considered a significant banking law in terms of information disclosure regarding certain customer transactions. Although it does create a reporting obligation, the Bank does not expect the USA Patriot Act to materially affect its products, services or other business activities.

Reporting Terrorist Activities. The Federal Bureau of Investigation (“FBI”) has sent, and will send, our banking regulatory agencies lists of the names of persons suspected of involvement in the September 11, 2001, terrorist attacks on New York City and Washington, DC. The Bank has been asked, and may be asked again, to search its records for any relationships or transactions with persons on those lists. If the Bank finds any relationships or transactions, it must file a suspicious activity report and contact the FBI. The Office of Foreign Assets Control (“OFAC”), which is a division of the Department of the Treasury is responsible for helping to ensure that United States entities do not engage in

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transactions with “enemies” of the United States, as defined by various Executive Orders and Acts of Congress. OFAC has sent, and will send, our banking regulatory agencies lists of names of persons and organizations suspected of aiding, harboring or engaging in terrorist acts. If the Bank finds a name on any transaction, account or wire transfer that is on an OFAC list, it must freeze such account, file a suspicious activity report and notify the FBI. The Bank has appointed an OFAC compliance officer to oversee the inspection of its accounts and the filing of any notifications. The Bank actively checks high-risk OFAC areas such as new accounts, wire transfers and customer files. The Bank performs these checks utilizing software, which is updated each time a modification is made to the lists provided by OFAC and other agencies of Specially Designated Nationals and Blocked Persons.

Mortgage Banking Regulation. The Bank’s mortgage banking subsidiary is subject to the rules and regulations of, and examination by the Department of Housing and Urban Development (“HUD”), the Federal Housing Administration (the “FHA”), the Department of Veteran Affairs and state regulatory authorities with respect to originating, processing, servicing and selling mortgage loans. Those rules and regulations, among other things, establish standards for loan origination, prohibit discrimination, provide for inspections and appraisals of property, require credit reports on prospective borrowers and, in some cases, restrict certain loan features, and fix maximum interest rates and fees. In addition to other federal laws, mortgage origination activities are subject to the Equal Credit Opportunity Act, Truth-in-Lending Act, Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, and the Home Ownership Equity Protection Act, and the regulations promulgated thereunder. These laws prohibit discrimination, require the disclosure of certain basic information to mortgagors concerning credit and settlement costs, limit payment for settlement services to the reasonable value of the services rendered and require the maintenance and disclosure of information regarding the disposition of mortgage applications based on race, gender, geographical distribution and income level.

Item 2. Description of Property.

As of March 14, 2006, the Bank conducted its business from the following five locations: i) a branch office located at 615 Church Street, Lynchburg, Virginia (the “Church Street Office”); ii) a branch office at 5204 Fort Avenue, Lynchburg, Virginia (the “Chestnut Hill Branch”); iii) a branch office located at 4698 S. Amherst Highway, Madison Heights, Virginia (the “Madison Heights Branch”); iv) a branch office located at 17000 Forest Road, Forest, Virginia (the “Forest Branch”); and v) 828 Main Street, Lynchburg, Virginia (the “Downtown Branch”), which also serves as the Bank’s main office. The Bank’s consumer mortgage division doing business as Bank of the James Mortgage, a Division of Bank of the James (the “Mortgage Division”) operates from the Forest Branch.

The Church Street Office. The Bank leases approximately 9,059 square feet of office space and the adjacent parking lot from W.C. English, Inc. under a Lease Agreement dated February 22, 1999. Under the terms of the lease, the Bank pays a net total of approximately $8,100 per month for the office space and the parking lot. This space includes the addition of 1,196 square feet as of April, 2000 and 1,537 square feet in July, 2001. The Bank has exercised its option to renew this lease, the term of which shall terminate on August 31, 2009.

The Chestnut Hill Branch. The Bank purchased the Chestnut Hill Branch on August 1, 2000 through the purchase of certain real estate and improvements along with certain furniture, fixtures, and equipment contained therein (“FFE”) from Wachovia Bank, N.A. Wachovia Bank, N.A. previously operated a branch of its banking operations at the Chestnut Hill Branch. The Bank received regulatory approval and opened the Chestnut Hill Branch on November 13, 2000. The purchase price for the Chestnut Hill Branch was $400,000 for the real estate and improvements and $10,000 for the FFE. In renovating the Chestnut Hill Branch for use as a branch, the Bank made certain capital improvements and purchased certain additional furniture, fixtures, and equipment at an approximate cost of $200,000.

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The Madison Heights Branch. In October, 2001, the Bank entered into a contract to purchase a site for a new branch bank located in Madison Heights, Virginia. Previously, Branch Banking & Trust operated a branch of its banking operations at the property acquired. The Bank purchased the Madison Heights Branch for $163,000 and spent an additional $650,000 for renovations, furniture, fixture, and equipment necessary to operate the Branch. The Bank received regulatory approval to operate this branch and opened the Branch in June, 2002.

The Forest Branch. In January 2003, the Bank purchased undeveloped real estate located in Forest, Virginia. The Bank has constructed facilities necessary to operate a branch Bank at this location. The net purchase price for the undeveloped real estate was $250,000. In addition, the Bank incurred costs of approximately $1,250,000 in constructing and equipping the Forest Branch. The Bank received regulatory approval and opened the Forest Branch in February 2004.

The Downtown Branch. By a lease dated October 9, 2003, the Bank agreed to lease certain space (increasing from approximately 17,000 square feet during years 1 through 6 of the Lease to approximately 29,000 square feet thereafter) in a building located at 828 Main Street, Lynchburg, Virginia. The lease is for a period of 10 years from the acceptance date of the lease. Provided that the Bank is not in default under the lease, the Bank shall have the option to extend the lease for two periods of five years, subject to certain rent increases set forth in the lease. Under the terms of the lease, the Bank will pay a net total of approximately $8,300 per month (subject to increases set forth in the lease) for the office space and parking spaces. The rent is subject to the increases set forth in the lease. Previously Wachovia Bank, N.A. had used the Downtown Branch as its main office for the Lynchburg market. The Downtown Branch opened on October 25, 2004.

Additional Real Property. As discussed in “Management’s Discussion and Analysis—Expansion Plans” the Bank has purchased real property and improvements thereto located in the Town of Amherst, Virginia and the Timberlake Road area of Campbell County (Lynchburg), Virginia as well as an option to purchase certain real property located in the City of Bedford, Virginia.

Management of the Bank continues to look for and evaluate additional locations for future branch growth and will consider opening an additional branch in the next 12 months if a suitable location is available on acceptable terms. The opening of all additional branches is contingent on the receipt of regulatory approval.

Item 3. Legal Proceedings.

The Bank is not involved in any pending legal proceedings at this time, other than routine litigation incidental to its business.

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

No matters were submitted to vote to the security holders of Financial during the quarter ended December 31, 2005.

PART II

Item 5. Market for Common Equity and Related Stockholder Matters.

The Common Stock of Financial is quoted on the Over the Counter Bulletin Board (OTCBB) under the symbol BOJF (BOJF.OB on some systems). The volume of trading of shares of Common Stock has not been extensive. Prior to January 2, 2004, the common stock of the Bank was traded on the

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OTCBB under the symbol BOTJ. The following table sets forth the quarterly high and low bid prices for each quarter in fiscal 2005 and 2004 for Financial and was obtained from the OTC Bulletin Board (www.OTCBB.com —”Trading Activity Reports”).

Fiscal 2005	High		Low
First Quarter	$	15.60	$	14.48
Second Quarter		16.08		13.20
Third Quarter		14.20		13.40
Fourth Quarter		15.80		13.64
Fiscal 2004	High		Low
First Quarter	$	13.06	$	11.22
Second Quarter		12.80		10.52
Third Quarter		13.86		12.00
Fourth Quarter		13.86		12.26

The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. The share prices set forth in the above table have been adjusted to give appropriate retroactive effect to each of the stock dividends declared by Financial.

As of March 21, 2006 (the most recent date available), the Common Stock traded for $19.80 per share. As of March 21, 2006, there were approximately 2,003,719 shares of Common Stock outstanding, which shares are held by approximately 1,974 shareholders of record. Neither Financial nor the Bank prior to the formation of Financial has declared or paid a cash dividend on its Common Stock.

Financial is subject to certain restrictions imposed by the reserve and capital requirements of federal and Virginia banking statutes and regulations. Additionally, Financial intends to follow a policy of keeping retained earnings, if any, for the purpose of increasing net worth and reserves of the Bank during its initial years of operation in order to promote the Bank’s growth and ability to compete in its market area. As a result, Financial does not anticipate paying a cash dividend on its Common Stock in 2005.

Item 6. Management’s Discussion and Analysis or Plan of Operation.

YEARS ENDED DECEMBER 31, 2005 AND DECEMBER 31, 2004

Cautionary Statement Regarding Forward-Looking Statements

This report contains statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. The words “believe,” “estimate,” “expect,” “intend,” “anticipate,” “plan” and similar expressions and variations thereof identify certain of such forward-looking statements which speak only as of the dates on which they were made. Financial undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those indicated in the forward-looking statements as a result of various factors. Such factors include, but are not limited to competition, general economic conditions, potential changes in interest rates, and changes in the value of real estate securing loans made by the Bank.

Subsequent Events

On January 13, 2005, Financial declared a 50% stock dividend (or 3 for 2 split) which was paid on March 4, 2005 to shareholders of record on February 4, 2005. On January 17, 2006, Financial declared a 25% stock dividend (or 5 for 4 split), which was paid on March 10, 2006 to shareholders of record on February 10, 2006.

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Critical Accounting Policies

Financial’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 Bank uses historical loss factors as one factor in determining the inherent loss that may be present in the loan portfolio. Actual losses could differ significantly from the historical factors that the Bank uses in estimating risk. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of Financial’s transactions would be the same, the timing of events that would impact the transactions could change.

The allowance for loan losses is an estimate of the losses that may be sustained in the Bank’s loan portfolio. The allowance is based on two basic principles of accounting: (i) SFAS No. 5, “Accounting for Contingencies,” which requires that losses be accrued when they are probable of occurring and estimable and (ii) SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” which requires that losses on impaired loans 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.

Because Financial has a relatively short operating history, historical trends alone do not provide sufficient information to judge the adequacy of the allowance for loan losses. Therefore, management considers industry trends, peer comparisons, as well as individual classified impaired loans, in addition to historical experience to evaluate the allowance for loan losses.

The method for determining the allowance for loan losses is discussed more fully under “Provision and Allowance for Loan Losses” below.

General

The Bank is a Virginia banking corporation headquartered in Lynchburg, Virginia. The Bank was incorporated under the laws of the Commonwealth of Virginia as a state chartered bank in 1998 and began banking operations in July, 1999.

The Bank is a community-oriented financial institution that provides varied banking services to individuals, small and medium-sized businesses, and professional concerns in the Central Virginia, Region 2000 area, which encompasses the seven jurisdictions of the Town of Altavista, Amherst County, Appomattox County, the City of Bedford, Bedford County, Campbell County, and the City of Lynchburg. The Bank strives to provide its customers with products comparable to statewide regional banks located in its market area, while maintaining the prompt response and level of service of a community bank. Management believes this operating strategy has particular appeal in the Bank’s market area.

The Bank’s mission is premised on growing a profitable banking operation in a prudent manner while maintaining high quality service to its customers in Region 2000. Management is committed to serving the banking needs of Region 2000 and has developed a marketing strategy that targets and appeals to individuals, small to medium sized businesses, and professional concerns. The Bank believes that it is currently meeting such needs and strives to create other mechanisms with which it will meet the challenges of servicing such customers in the future. Management realizes that to remain competitive, the

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Bank will need to open additional branches. As discussed in more detail below, the Bank current is evaluating the feasibility of several potential locations for additional bank branches. Management is cognizant of the fact that the population of the Bank’s market area continues to expand and the Bank should be able to grow its deposit base in the future and, as a result, increase its lending opportunities in such communities. Management also is attempting to mitigate interest rate risk by limiting the dollar amount of loans carried on its balance sheet that have fixed rates in excess of five years. Financial and the Bank are also mindful of its operating expenses and expect to keep such expenses at a low level. By adhering to the above policies, management intends to enhance the Bank’s profitability in the upcoming year.

The Bank began operating in July, 1999. The operating results of the Bank and Financial depend primarily upon the Bank’s net interest income, which is determined by the difference between (i) interest and dividend income on earning assets, which consist primarily of loans, investment securities and other investments, and (ii) interest expense on interest-bearing liabilities, which consist principally of deposits and other borrowings. The Bank’s net income also is affected by its provision for loan losses, as well as the level of its non interest income, including loan fees and service charges, and its non interest expenses, including salaries and employee benefits, occupancy expense, data processing expenses, Federal Deposit Insurance Corporation premiums, expense in complying with the Sarbanes-Oxley Act of 2002, miscellaneous other expenses, franchise taxes, and income taxes.

2005 Compared to 2004

The comparison of operating results for Financial between 2005 and 2004 should be read in the context of the relatively short operating history of the Bank. The Bank began operations on July 22, 1999, opened the Chestnut Hill Branch as its second location in November, 2000, opened the Madison Heights Branch as its third location in June, 2002, opened the Forest Branch in February, 2004 as its fourth location, opened the Downtown Branch as its fifth location in November 2004, and opened its Mortgage Division in March 2001. Thus, the results for the year ended December 31, 2004 include results from the Forest Branch for approximately 10 months and of the Downtown Branch for approximately 2 months whereas the results for the year ended December 31, 2005 reflect the results of these branches for a full year.

Earnings Summary for Financial

The net income for Financial for the year ended December 31, 2005 was $1,791,000 or $0.90 per basic and $0.86 per diluted share compared with net income of $1,472,000 or $0.77 per basic and $0.75 per diluted share for the year ended December 31, 2004. Note 10 of the Financial Statements provides additional information with respect to the calculation of Financial’s earnings per share. Per share amounts include additional outstanding shares related to all stock dividends declared by Financial, including the 25% stock split affected in the form of a stock dividend declared on January 17, 2006.

The increase in net income of $319,000 in 2005 compared to 2004 was due in large part to the following factors: i) Financial’s overhead was spread over a larger base of business; ii) an increase in non-interest income; and iii) an increase in the size of the loan portfolio, Financial’s primary method of investment.

The increase in net income was offset due to a loan loss provision of $803,000 for the year ended December 31, 2005 as compared with a loan loss provision of $754,000 for the year ended December 31, 2004. The increase may be attributed to additional loss provisions as a result of the Bank’s impairment review discussed below. Although the Bank currently has loans in excess of $261,000 classified as non- performing, management believes the impairment on these loans will be immaterial due to the fact that the potential losses associated with these loans have been provided for in the allowance for loan loss.

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These operating results represent a return on average shareholders’ equity of 12.95% for the year ended December 31, 2005 compared to 12.16% for the year ended December 31, 2004. Return on average assets for the year ended December 31, 2005 was 0.97% compared to 0.92% in 2004.

Financial Condition Summary of Financial

The Company’s total assets were $195,852,000 at December 31, 2005, an increase of $24,827,000 or 14.52% from $171,025,000 at December 31, 2004. The increase may be attributed to strong deposit growth from $153,834,000 for the period ended December 31, 2004 to $173,956,000 at the end of the same period in 2005, for an increase of 13.08%. Non- interest-bearing deposits increased $4,487,000 or 20.68% from $21,699,000 at December 31, 2004 to $26,186,000 at December 31, 2005. Interest-bearing deposits increased $15,635,000 or 11.83% from $132,135,000 at December 31, 2004 to $147,770,000 at December 31, 2005. In the fall of 2003, the Bank introduced a new savings account known as “Peaks Savings.” The Peaks Savings accounts have at times paid interest at above market rates and the product has been well received by Bank customers. The Peaks Savings product continues to attract deposits as do the traditional certificate of deposit products.

Loans, net of unearned income and the loan loss reserve, increased from $140,272,000 as of December 31, 2004 to $155,480,000 as of December 31, 2005, an increase of 10.84%. This increase can be attributed in part to an interest rate environment that made borrowing attractive to the Bank’s customers, the Bank’s increased presence in the market, and the Bank’s reputation for service. Cash and cash equivalents increased from $3,980,000 in 2004 to $9,236,000 in 2005. This increase was due primarily to an increase in federal funds sold from $0 on December 31, 2004 to $4,243,000 on December 31, 2005. This increase resulted from a shift in investment strategy towards shorter term investments. Because short term interest rates paid to the Bank are comparable to the rates paid on longer term instruments, management made the decision to leave surplus funds invested overnight so that the funds would be available to fund loan growth and other fixed-income investment opportunities as they are presented.

Securities available-for-sale increased $5,508,000 in 2005 to $16,420,000 from $10,912,000 at December 31, 2004. This increase occurred in large part in the first and second quarters of 2005. During those quarters, because of an increase in interest rates, the Bank attracted additional deposits and experienced an increase in the pre-payment of variable rate loans. Management invested a portion of these surplus funds in longer term fixed income securities. Securities held-to-maturity (not marked to market) decreased from $8,999,000 as of December 31, 2004 to $7,499,000 as of December 31, 2005. This decrease resulted primarily from called securities, which calls occurred in large part before the increase in interest rates.

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The following table summarizes the Bank’s holdings for both securities held-to-maturity and securities available-for-sale as of December 31, 2005 and December 31, 2004 (amounts in 000’s):

	December 31, 2005
	Amortized Costs		Gross Unrealized Gains Losses					Fair Value
Held-to-maturity
U.S. agency obligations	$	7,499	$	9	$	(141	)	$	7,367
Available-for-sale
U.S. agency obligations	$	14,039	$	—	$	(303	)	$	13,736
Mortgage - backed securities		2,746		2		(64	)		2,684
	$	16,785	$	2	$	(367	)	$	16,420
	December 31, 2004
	Amortized Costs		Gross Unrealized Gains Losses					Fair Value
Held-to-maturity
U.S. agency obligations	$	8,999	$	80	$	(33	)	$	9,046
Available-for-sale
U.S. agency obligations	$	9,636	$	7	$	(4	)	$	9,639
Mortgage - backed securities		1,295		6		(28	)		1,273
	$	10,931	$	13	$	(32	)	$	10,912

Stockholders’ equity increased $1,890,000, or 14.77% from $12,786,000 on December 31, 2004 to $14,676,000 on December 31, 2005. The increase resulted from Financial’s operating income and the exercise of options by employees but was partially offset by the unrealized loss on securities available-for-sale. As set forth in Note 15 to the Financial Statements, at December 31, 2005 the regulatory capital levels the Bank exceeded those established for well-capitalized institutions.

Net Interest Income and Net Interest Margin for Financial

The fundamental source of Financial’s revenue, net interest income, is defined as the difference between income on earning assets and the cost of funds supporting those assets. The significant categories of earning assets are loans, federal funds sold, and investment securities, while deposits represent interest bearing liabilities. The level of net interest income is impacted primarily by variations in the volume and mix of these assets and liabilities, as well as changes in interest rates when compared to previous periods of operation. Net interest income for 2005 increased $1,327,000 to $8,249,000 or 19.17% from net interest income of $6,922,000 in 2004. The growth in net interest income was due to the increase in interest rates paid to the Bank and an increase in average interest-earning assets which was the result of growth in the loan portfolio funded by the growth in deposits. The net interest margin increased to 4.73% in 2005 from 4.56% in 2004. The average rate on earning assets increased 71 basis points from 6.20% in

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2004 to 6.91% in 2005 and the average rate on interest-bearing liabilities decreased from 2.23% in 2004 to 2.32% in 2005. Although management cannot predict with certainty future interest rate decisions by the Federal Open Market Committee (“FOMC”), management believes that the rates being offered on both loans and deposits can be adjusted to maintain an acceptable spread between the average rate the Bank receives on assets and the average rate that the Bank pays on liabilities.

Non-Interest Income of Financial

Non-interest income increased to $2,081,000 (not including $10,000 in gains from sales of securities) in 2005 from $1,823,000 (not including $7,000 in gains from sales of securities) in 2004. The increase in non-interest income for 2005 was due to additional service charges on an increased number of deposit accounts, an increase in the fees generated by the Mortgage Division, and an increase in miscellaneous fees. During 2005, mortgage loan volume continued to be strong, driven largely by an increase in home purchases and an increase in average home prices and mortgage refinancing of adjustable rate mortgages to conventional mortgages stimulated by low interest rates on longer term conventional mortgages. In addition, the Mortgage Division provides opportunities to establish many new banking relationships by providing more bank services and products to new customers. The Mortgage Division originated 392 mortgage loans, totaling $51,101,000 in 2005 as compared with 380 loans totaling $42,039,000 during the year ended December 31, 2004. For the year ended December 31, 2005, the Mortgage Division accounted for 5.27% of Financial’s pre-tax income as compared with 5.67% of Financial’s pre-tax income for the year ended December 31, 2004.

For the year ended December 31, 2005 non-interest income represented 14.81% of Financial’s total revenues and decreased slightly when compared to the figure of 16.25% for the prior year. One of Financial’s goals is to continue to evaluate and identify new sources of non-interest income as well as enhance existing ones.

Financial has been exploring options to offer securities brokerage, fixed and variable annuity products, and related services (the “Brokerage Services”) to the Bank’s customers and the public, either through the Bank or through a subsidiary of Financial. Subject to regulatory considerations, Financial intends to form a subsidiary (the “Brokerage Subsidiary”) that will indirectly obtain an ownership interest in a broker-dealer (the “Broker-Dealer”). The Broker-Dealer will provide the Brokerage Services to Bank depositors, other customers and the general public, through the operation of service centers located within one or more of the Bank’s branches. The Brokerage Subsidiary will receive a commission on transactions generated and in some cases ongoing management fees such as mutual fund 12b-1 fees. Financial anticipates that it will begin offering the Brokerage Services no later than the second quarter of 2006. Although management cannot predict the financial impact of the Brokerage Subsidiary with certainty, management anticipates that the impact will be minimal in 2006.

Non-Interest Expense of Financial

Non-interest, or operating, expense was $6,826,000 in 2005 compared to $5,768,000 in 2004. The significant increase in expense can be attributed to increased occupancy expense, an increase in equipment depreciation expenses, an increase in outside expenses, and an increase in the number of employees necessary to accommodate the Bank’s growth. Total personnel expense, net of fees collected from borrowers to cover direct salary costs incurred in originating certain loans (in accordance with SFAS 91), increased to $3,245,000 in 2005 from $2,576,000 in 2004 primarily as a result of increased staffing of the Downtown Branch. Variable expenses, including data processing fees and credit expenses also increased because of the Bank’s growth.

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Because of the costs associated with increased staffing at the newest branches, Financial’s efficiency ratio (that is, the cost of producing each dollar of revenue) increased slightly from 65.90% in 2004 to 66.02% in 2005.

Provision and Allowance for Loan Losses for the Bank

Management’s policy is to maintain the allowance for loan losses at a level sufficient to absorb the estimated losses inherent in the loan portfolio. Both the amount of the provision and the level of the allowance for loan losses are impacted by many factors, including general economic conditions, actual and expected credit losses, loan performance measures, historical trends and specific conditions of the individual borrower.

In performing its loan loss analysis, the Bank assigns one of the following risk categories to each commercial loan in the Bank’s portfolio:

Risk Category	Classification
Risk 1	Excellent
Risk 2	Above Average
Risk 3	Satisfactory
Risk 4	Acceptable/Low Satisfactory
Risk 5	Special Mention
Risk 6	Sub-Standard
Risk 7	Doubtful
Risk 8	Loss

Management considers the following four components when calculating its loan loss reserve requirement.

• In accordance with SFAS 114, ”Accounting by Creditors for Impairment of a Loan,” the Bank performs an individual impairment analysis on all loans with a Risk Rating of 5 through 8. If the results of this analysis show no impairment, the Bank reserves between 0.75% and 2.00% of the principal balance to cover losses not recognized by the individualized impairment calculation.

• In accordance with SFAS 5, ”Accounting for Contingencies,” the Bank examines historical charge-off data and average life cycles by classification code in order to determine a portion of the reserve related to homogeneous pools. The Bank updates it historical charge-off data twice a year and adjusts the formulas accordingly. The Bank also adjusts the historical charge-off data based on the risk rated tiering system set forth above to more accurately reflect the Bank’s actual losses.

• The Bank applies various risk factors, including, for example, levels of trends in delinquencies, current and expected economic conditions, and levels of and trends in recoveries in prior charge-offs.

• The Bank applies factors to determine the general allowance for inherent losses related to the loan pool, including, for example, loan concentrations, regulatory examination results, and overall portfolio quality.

The Bank’s allowance for loan losses increased 25.23% from 2004 to 2005, as set forth in the following table:

	Allowance for Loan Losses		Total Loan Portfolio		Percentage of Total Loan Portfolio
December 31, 2005	$	1,777,000	$	157,257,000	1.13	%
December 31, 2004	$	1,419,000	$	141,691,000	1.00	%

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This increase resulted from application of the Bank’s commercial loan rating system and individual impairment calculations, as discussed above.

As in prior years, the Bank retained the services of an external loan review firm to examine its loan portfolio in April, 2005. After examination of approximately 70 customer relationships comprising 144 loans totaling $44,945,000 in exposure, or approximately 31.7% of the Bank’s total outstanding loan balances as of December 31, 2004, the results of the external loan review showed the Bank’s loan portfolio to be sound and the credit underwriting practices to be fully satisfactory as compared to peer group institutions.

The Bank again has retained the services of an external loan review firm to examine its loan portfolio beginning in April, 2006. Financial intends to provide the results of this review in the Quarterly Report on Form 10-QSB for the quarter ended June 30, 2006.

Income Tax Expense of Financial

For the year ended December 31, 2005, Financial had a federal income tax expense of $920,000. Note 9 of the Financial Statements provides additional information with respect to current federal income tax expense and the deferred tax accounts.

Liquidity

The liquidity of Financial depends primarily on the dividends paid to it by the Bank. Payment of cash dividends by the Bank is limited by regulations of the Federal Reserve Board and is tied to the regulatory capital requirements.

The objective of liquidity management for the Bank is to ensure the continuous availability of funds to meet the demands of depositors, investors and borrowers. Stable core deposits and a strong capital position are the components of a solid foundation for the Bank’s liquidity position.

Funding sources primarily include paid-in capital and customer-based deposits but also include borrowed funds and cash flow from operations. The Bank has in place several agreements that will provide alternative sources of funding, including but not limited to lines of credit, sale of investment securities, purchase of federal funds, term loans through the Federal Home Loan Bank and correspondents, and brokered certificate of deposit arrangements. Management believes that the Bank has the ability to meet its liquidity needs.

Capital Resources

Capital adequacy is an important measure of financial stability and performance. Management’s objectives are to maintain a level of capitalization that is sufficient to sustain asset growth and promote depositor and investor confidence.

Regulatory agencies measure capital adequacy utilizing a formula that takes into account the individual risk profiles of financial institutions. The guidelines define capital as Tier 1 (primarily common shareholders’ equity, defined to include certain debt obligations) and Tier 2 (the remainder generally

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consisting of a limited amount of subordinated debt, certain hybrid capital instruments and other debt securities, preferred stock and a limited amount of the general valuation allowance for loan losses). Note 15 of the Financial Statements shows the minimum capital requirements and the Bank’s capital position as of December 31, 2005 and 2004. As set forth in Note 15, the Bank’s regulatory capital levels exceed those established for well-capitalized institutions.

The Bank was initially capitalized through a public offering of its common stock, $4.00 par value per share (“Common Stock”), at $10.00 per share (the “Offering”). The Offering, which concluded in February, 1999, resulted in a capitalization of the Bank of $9,356,300. As a result of the Offering and funds generated from operations, Financial currently has sufficient liquidity and capital with which to operate. However, to fund future growth, Financial will consider raising additional capital through the issuance of Common Stock or otherwise.

At December 31, 2005, shareholders’ equity was $14,676,000 compared to $12,786,000 at December 31, 2004. As discussed more fully in “Financial Condition Summary” above, the increase in shareholders’ equity is due in large part to the net income earned in 2005.

Lending by Financial

The Bank has comprehensive policies and procedures which cover both commercial and consumer loan origination and management of credit risk. Loans are underwritten in a manner that focuses on the borrowers’ ability to repay. Management’s goal is not to avoid risk, but to manage it and to include credit risk as part of the pricing decision for each product.

Total loans, net of fees and premiums and discounts and the loan loss provision, increased to $155,480,000 as of December 31, 2005 compared to $140,272,000 as of December 31, 2004. As of December 31, 2005, the Bank had $261,000 in non-accrual loans compared with $380,000 at December 31, 2004. The Bank continues to pursue an aggressive charge off policy that also yields loan recoveries.

The Bank’s loan portfolio consists of commercial short-term lines of credit, term loans, mortgage financing and construction loans that are used by the borrower to build or develop real estate properties, and consumer loans. The consumer portfolio includes residential real estate mortgages, home equity lines and installment loans.

	December 31, 2005				December 31, 2004
	Amount		Percentage		Amount			Percentage
Commercial	$	30,853	19.62	%	$	35,163		24.82	%
Real estate construction		27,303	17.36	%		22,251		15.70	%
Real estate mortgage		78,058	49.64	%		63,215		44.61	%
Consumer		21,043	13.38	%		21,240		14.99	%
Other		—	0	%		(178	)	-0.12	%
Total loans	$	157,257	100.00	%	$	141,691		100.00	%

20

Management anticipates that the availability of alternative sources of funding discussed above will allow the Bank to continue to make loans and grow its loan portfolio. Continued loan growth is essential for the Bank to be viewed by its potential customers as a willing lender.

Investment Securities of Financial

The investment securities portfolio of the Bank is used as a source of income and liquidity. The portfolio of securities available-for-sale has increased to $16,420,000 as of December 31, 2005 from $10,912,000 as of December 31, 2004. The reasons for this increase are set forth in more detail above.

Deposited funds are generally invested in overnight vehicles (Fed Funds) until approved loans are funded. The decision to purchase investment securities is made based on several factors or a combination thereof, some of which are as follows:

a) The fact that yields on acceptably rated investment securities (S&P “A” rated or better) are significantly better than the overnight Fed Funds rate;

b) Whether demand for loan funding exceeds the rate at which deposits are growing, which leads to higher or lower levels of surplus cash;

c) Management’s target of maintaining approximately 6% of the Bank’s total assets in a combination of Fed Funds and investment securities (aggregate of available–for-sale and held-to-maturity portfolios); and

d) Whether the maturity or call schedule meets management’s asset/liability plan.

Available–for-sale securities (as opposed to held-to-maturity securities) may be liquidated at any time as funds are needed to fund loans. Liquidation of securities may result in a net loss or net gain depending on current bond yields available in the primary and secondary markets and the shape of the US Treasury yield curve. Management is cognizant of its credit standards policy and does not feel pressure to maintain loan growth at the same levels as deposit growth and thus sacrifice credit quality in order to avoid security purchases.

Securities held-to-maturity decreased from $8,999,000 as of December 31, 2004 to $7,499,000 as of December 31, 2005. The decision to invest in securities held-to-maturity is based on the same factors as the decision to invest in securities available-for-sale except that management invests surplus funds in securities held-to-maturity only after concluding that such funds will not be necessary for liquidity purposes during the term of such security. However, the held-to-maturity securities may be pledged for such purposes as short term borrowings and as collateral for public deposits.

The balancing of the above factors along with the investment policy that management currently has in place contributed to the increase in the investment securities portfolio during 2005.

Interest Rate Sensitivity

The most important element of asset/liability management is the monitoring of Financial’s sensitivity to interest rate movements. The income stream of Financial is subject to risk resulting from interest rate fluctuations to the extent there is a difference between the amount of Financial’s interest earning assets and the amount of interest bearing liabilities that prepay, mature or reprice in specified periods. Management’s goal is to maximize net interest income with acceptable levels of risk to changes in interest rates. Management seeks to meet this goal by influencing the maturity and re-pricing characteristics of the various lending and deposit taking lines of business and by managing discretionary balance sheet asset and liability portfolios.

21

Management also is attempting to mitigate interest rate risk by limiting the dollar amount of loans carried on its balance sheet that have fixed rates in excess of five years. The Bank established the Mortgage Division to serve potential customers that desired fixed rate loans in excess of five years. Financial does not hold such mortgage loans on its books and thus will not be subject to the interest rate risks inherent with longer term fixed rate loans.

Management believes that Financial has been successful in managing its net interest margin despite numerous adjustments by the FOMC since 2001. During 2005, the Bank’s prime rate increased from 5.25% to 7.25%. The Company’s net interest margin was under pressure in part because certain higher variable rate loans were paid in full in advance of the maturity date and the proceeds were reinvested in fixed rate loans during a rising interest rate environment. As a result, Financial’s spread on earning assets to interest bearing liabilities increased from 4.51% in 2004 to 4.69% in 2005. Management attempts to mitigate this pressure by constantly monitoring and repricing deposits.

Management monitors interest rate levels on a daily basis and meets in the form of the Asset/Liability Committee (“ALCO”) at a minimum of weekly or when a special situation arises (e.g., FOMC unscheduled rate change). The following reports and/or tools are used to assess the current interest rate environment and its impact on Financial’s earnings and liquidity: monthly and year-to-date net interest margin and spread calculations, monthly and year-to-date balance sheet and income statements versus budget (including quarterly interest rate shock analysis), quarterly net portfolio value analysis, a weekly survey of rates offered by other local competitive institutions, and gap analysis which matches maturities or repricing dates of interest sensitive assets to those of interest sensitive liabilities.

Financial currently subscribes to computer simulated modeling tools made available through its consultant, FinPro, to aid in asset/liability analysis. In addition to monitoring by the ALCO and Investment Committee, the board is informed of the current asset/liability position and its potential effect on earnings at least quarterly.

Current Trends

A variety and wide scope of economic factors affect Financial’s success and earnings. Although interest rate trends are one of the most important of these factors, Financial believes that interest rates cannot be predicted with a reasonable level of confidence and therefore does not attempt to do so with complicated economic models. Management believes that the best defense against wide swings in interest rate levels is to minimize vulnerability at all potential interest rate levels. Rather than concentrate on any one interest rate scenario, Financial prepares for the opposite as well in order to safeguard margins against the unexpected.

The upward trend in interest rates during 2005 was due to the actions of the FOMC resulting from an accelerating economy. Although it cannot be certain, management believes that interest rates will either remain stable or trend upward throughout the remainder of 2006. Given the FOMC’s recent statements, short term rates cannot be predicted. An increased long term interest rate is likely to have an adverse impact on the Mortgage Division, primarily due to reduced refinancing opportunities.

Off-Balance Sheet Arrangements

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

22

The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. A summary of the Bank’s commitments is as follows:

	Contract Amounts at December 31,
	2005		2004
Commitments to extend credit	$	33,363	$	30,344
Standby letters of credit	$	2,555	$	1,926
Total	$	35,918	$	32,270

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on its credit evaluation of the customer.

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Collateral is required in instances which the Bank deems necessary.

Management does not anticipate any material losses as a result of these transactions.

Expansion Plans

Subject to regulatory approval, the Bank anticipates opening additional branches during the next two fiscal years. The Bank currently is considering the following:

Boonsboro Area, Lynchburg, Virginia

In December, 2005, the Bank entered into a lease for improved real property located at 4935 Boonsboro Road, Lynchburg, Virginia. The Bank currently is renovating this property for use as a branch bank. The Bank anticipates that this branch will open in April, 2006. The Bank has filed an application with the Virginia Bureau of Financial Institutions requesting approval to open this branch.

The Town of Amherst, Virginia

On December 21, 2005, the Bank purchased certain improved real property located at 164 South Main St. in the Town of Amherst, Virginia. The property previously has served as a bank branch for other banking institutions. The Bank anticipates that renovations on this property will begin during the third quarter of 2006 and intends to apply for approval to open this branch in the fourth quarter of 2006.

23

Timberlake Road Area, Campbell County (Lynchburg), Virginia

The Bank has purchased certain real property located at the intersection of Turnpike and Timberlake Roads, Campbell County, Virginia. The Bank will evaluate the feasibility of using the current structures on the property as a bank branch. The Bank does not anticipate requesting approval to open a branch at this location prior to 2008.

City of Bedford, Virginia

The Bank has an option to purchase certain property located in the City of Bedford, Virginia. The Bank is evaluating the feasibility of this property as a location on which to open a branch. If the Bank exercises this option, it does not anticipate requesting approval to open a branch at this location prior to 2008.

Although the Bank cannot predict with certainty the financial impact of each new branch, management generally anticipates that each new branch will become profitable within 12 to 18 months of operation.

Item 7. Financial Statements.

The following financial statements are filed as a part of this report:

Consolidated Financial Statements

24

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Bank of the James Financial Group, Inc.

Lynchburg, Virginia

We have audited the accompanying consolidated balance sheets of Bank of the James Financial Group, Inc. and subsidiary as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in stockholders’ equity and comprehensive income, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Bank’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits 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 Bank of the James Financial Group, Inc. and subsidiary as of December 31, 2005 and 2004, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

/s/ Cherry, Bekaert & Holland, L.L.P.

Raleigh, North Carolina

February 28, 2006

25

BANK OF THE JAMES FINANCIAL GROUP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share amounts)

	December 31,
	2005			2004
Assets
Cash and due from banks	$	4,993		$	3,980
Federal funds sold		4,243			—
Total cash and cash equivalents		9,236			3,980
Securities held-to-maturity (fair value of $7,367 and $9,046 in 2005 and 2004)		7,499			8,999
Securities available-for-sale, at fair value		16,420			10,912
Loans, net		155,480			140,272
Premises and equipment, net		4,896			4,641
Community Banker’s Bank stock, at cost		56			56
Federal Reserve Bank stock, at cost		351			281
Federal Home Loan Bank stock, at cost		342			290
Interest receivable		1,076			983
Deferred tax asset		219			117
Other assets		277			494
Total Assets	$	195,852		$	171,025
Liabilities and Stockholders’ Equity
Deposits
Non-interest bearing demand	$	26,186		$	21,699
NOW, money market and savings		51,713			74,834
Time		96,057			57,301
Total deposits		173,956			153,834
Federal funds purchased		—			999
Income taxes payable		60			—
Interest payable		148			65
Repurchase agreements		6,957			3,259
Other liabilities		55			82
Total liabilities		181,176			158,239
Stockholders’ equity
Common stock $2.14 par value; authorized 10,000,000 shares, issued and outstanding 2,001,309 in 2005 and 1,935,824 in 2004		4,269			4,129
Additional paid-in-capital		7,424			7,237
Retained earnings		3,224			1,433
Accumulated other comprehensive gain (loss)		(241	)		(13	)
Total stockholders’ equity		14,676			12,786
Total liabilities and stockholders’ equity	$	195,852		$	171,025

See notes to the financial statements

26

BANK OF THE JAMES FINANCIAL GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(dollars in thousands)

	Years Ended December 31,
	2005			2004
Interest Income
Loans	$	10,904		$	8,490
Securities
US agency obligations		944			815
Mortgage backed		92			61
Dividends		30			25
Federal funds sold		58			42
Total interest income		12,028			9,433
Interest Expense
Deposits
NOW, money market and savings		1,074			889
Time Deposits		2,591			1,590
Federal funds purchased		28			5
Repurchase agreements		86			27
Total interest expense		3,779			2,511
Net interest income		8,249			6,922
Provision for loan losses		803			754
Net interest income after provision for loan losses		7,446			6,168
Other operating income
Mortgage fee income		1,265			1,062
Service charges and fees		589			588
Other		227			173
Gain on sale of securities		10			7
Total other operating income		2,091			1,830
Other operating expenses
Salaries and employee benefits		3,245			2,576
Occupancy		522			398
Equipment		779			734
Supplies		289			289
Professional, data processing and other outside expenses		843			824
Marketing		279			231
Credit expense		216			192
Other		561			524
Sarbanes-Oxley compliance		92			—
Total other operating expenses		6,826			5,768
Income before income taxes		2,711			2,230
Income tax expense		(920	)		(758	)
Net Income	$	1,791		$	1,472
Income per common share – basic	$	0.90		$	0.77
Income per common share – diluted	$	0.86		$	0.75

See notes to the financial statements

27

BANK OF THE JAMES FINANCIAL GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND

COMPREHENSIVE INCOME

(dollars in thousands)

	Total Shares Outstanding	Common Stock		Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Gain (Loss)			Total
Balance at December 31, 2003	1,930,358	$	4,118	$	7,218	$	(39	)	$	12		$	11,309
Net income	—		—		—		1,472			—			1,472
Change in net unrealized gains on securities available-for-sale net of deferred tax benefit of $(19)	—		—		—		—			(36	)		(36	)
Reclassification adjustment for gains included in net income, net of income tax expense of $6	—		—		—		—			11			11
Comprehensive Income	—		—		—		—			—			1,447
Exercise of stock options	5,466		11		19		—			—			30
Balance at December 31, 2004	1,935,824		4,129		7,237		1,433			(13	)		12,786
Net Income	—		—		—		1,791			—			1,791
Change in net unrealized losses on securities available-for-sale net of deferred tax benefit of $(124)	—		—		—		—			(242	)		(242	)
Reclassification adjustment for gains included in net income, net of income tax expense of $5	—		—		—		—			14			14
Comprehensive Income	—		—		—		—			—			1,563
Exercise of stock options	65,485		140		187		—			—			327
Balance at December 31, 2005	2,001,309	$	4,269	$	7,424	$	3,224		$	(241	)	$	14,676

See notes to the financial statements

28

BANK OF THE JAMES FINANCIAL GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

	Years Ended December 31,
	2005			2004
Cash flows from operating activities
Net income	$	1,791		$	1,472
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation		613			537
Net amortization and accretion of premiums and discounts on securities		90			236
Gain on sale of available-for-sale securities		(5	)		(7	)
Gain on call of held-to-maturity securities		(5	)		—
Provision for loan losses		803			754
Provision for deferred income taxes		16			138
Decrease in interest receivable		(93	)		(254	)
(Increase) decrease in other assets		239			(380	)
Increase (decrease) in income taxes payable		61			(38	)
Increase (decrease) in interest payable		83			(16	)
Decrease in other liabilities		(27	)		(15	)
Net cash provided by operating activities		3,566			2,427
Cash flows from investing activities
Purchases of securities held-to-maturity		(4,010	)		(5,537	)
Proceeds from maturities and calls of securities held-to-maturity		5,500			4,500
Purchases of securities available-for-sale		(15,320	)		(10,231	)
Proceeds from maturities and calls of securities available-for-sale		6,099			2,498
Proceeds from sale of securities available-for-sale		3,297			3,548
Purchases of Federal Home Loan Bank stock		(52	)		(110	)
Purchases of Federal Reserve Bank stock		(70	)		—
Origination of loans, net of principal collected		(16,052	)		(26,525	)
Recoveries on loans charged off		40			103
Purchases of premises and equipment		(890	)		(1,546	)
Net cash used in investing activities		(21,458	)		(33,300	)
Cash flows from financing activities
Net increase in deposits		20,122			20,348
Net increase (decrease) in federal funds purchased		(999	)		999
Net increase in repurchase agreements		3,698			3,259
Proceeds from exercise of stock options		327			30
Net cash provided by financing activities		23,148			24,636
Increase (decrease) in cash and cash equivalents		5,256			(6,237	)
Cash and cash equivalents at beginning of period		3,980			10,217
Cash and cash equivalents at end of period	$	9,236		$	3,980

29

BANK OF THE JAMES FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005 and 2004

(In thousands, except share and per share data)

Note 1 – Organization

Bank of the James Financial Group, Inc. (“Financial”), a Virginia corporation, was organized in 2003 and is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. Financial is headquartered in Lynchburg, Virginia. Financial conducts all of its business activities through the branch offices of its wholly owned subsidiary bank, Bank of the James (the “Bank”). Financial exists primarily for the purpose of holding the stock of its subsidiary, the Bank, and of such other subsidiaries as it may acquire or establish.

Bank of the James was incorporated on October 23, 1998, and began banking operations on July 22, 1999. The Bank is a Virginia chartered bank and is engaged in lending and deposit gathering activities in Region 2000, which includes the counties of Amherst, Appomattox, Bedford and Campbell and the cities of Bedford and Lynchburg, Virginia. It operates under the laws of Virginia and the Rules and Regulations of the Federal Reserve System and the Federal Deposit Insurance Corporation. The Bank’s five locations consist of three in Lynchburg, Virginia, one in Forest, Virginia which includes the Mortgage Division, and one in Madison Heights, Virginia.

Note 2 - Summary of significant accounting policies

The following is a description of the significant accounting and reporting policies the Bank follows in preparing and presenting its financial statements.

Consolidation

The consolidated financial statements include the accounts of Bank of the James Financial Group, Inc. and its wholly owned subsidiary. All material intercompany balances and transactions have been eliminated.

Basis of presentation and use of estimates

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

Cash and cash equivalents

Cash and cash equivalents include cash on hand, amounts due from banks (with original maturities of three months or less) and federal funds sold. Generally, federal funds are purchased and sold for one-day periods.

Securities

The Bank classifies its securities in three categories: (1) debt securities that the Bank has the positive intent and ability to hold to maturity are classified as “held-to-maturity securities” and reported at amortized cost; amortization of premiums and accretion of discounts are adjusted on a basis which approximates the level yield method; (2) debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as “trading securities” and reported at fair value, with unrealized gains and losses included in net income; and (3) debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as “available-for-sale securities” and reported at fair value, with unrealized gains and losses excluded from net income and reported in a separate component of stockholders’ equity, net of applicable deferred taxes.

30

BANK OF THE JAMES FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005 and 2004

(In thousands, except share and per share data)

Note 2 - Summary of significant accounting policies (continued)

The Bank does not engage in trading securities. Gains or losses on disposition of securities are based on the net proceeds and adjusted carrying values of the securities called or sold, using the specific identification method. Interest income and dividends on securities are recognized as revenue when earned.

A decline in the market value of any available-for-sale or held-to-maturity security below cost that is deemed other than temporary is charged to net income, resulting in the establishment of a new cost basis for the security.

Required Investments

As members of the Federal Reserve Bank (FRB) and the Federal Home Loan Bank of Atlanta (FHLB), the Bank is required to maintain certain minimum investments in the common stock of the FRB and FHLB, which are carried at cost. Required levels of investment are based upon the Bank’s capital and a percentage of qualifying assets.

Loans

Loans are carried at their principal amount outstanding. Interest income is recorded as earned on an accrual basis.

The Bank uses the allowance method in providing for possible loan losses. The provision for loan loss is based upon management’s estimate of the amount needed to maintain the allowance for loan losses at an adequate level to cover known and inherent risk of loss in the loan portfolio. In determining the provision amount, management gives consideration to current and anticipated economic conditions, the growth and composition of the loan portfolio, an analysis of impaired loans, the relationship of the allowance for loan losses to outstanding loans, and other factors. Management believes that the allowance for loan losses is adequate. While management uses the best information available to make evaluations, future adjustments may be necessary if economic and other conditions differ substantially from the assumptions used.

Interest related to non-accrual loans is recognized on the cash basis. Loans are generally placed on non-accrual status when the collection of principal and interest is 90 days or more past due.

In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments of information available to them at the time of their examination.

Management considers loans to be impaired when based on current information and events, it is probable that it will be unable to collect all amounts due according to the contractual terms of the loan agreement. Factors that influence management’s judgments include, but are not limited to, loan payment pattern, source of repayment, and value of collateral. A loan would not be considered impaired if an insignificant delay in loan payment occurs and management expects to collect all amounts due. The major sources for identification of loans to be evaluated for impairment include past due and non-accrual reports, internally generated lists of certain risk grades, and regulatory reports of examination. Impaired loans are measured using either the discounted expected cash flow method or the value of collateral method. When the ultimate collectibility of an impaired loan’s principal is in doubt, wholly or partially, all cash receipts are applied to principal.

31

BANK OF THE JAMES FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005 and 2004

(In thousands, except share and per share data)

Note 2 - Summary of significant accounting policies (continued)

Loan origination and commitment fees and certain related direct costs

Loan origination and commitment fees and certain direct loan origination costs charged by the Bank are deferred and the net amount amortized as an adjustment of the related loan’s yield. The Bank is amortizing these net amounts over the contractual life of the related loans or, in the case of demand loans, over the estimated life. Net fees related to standby letters of credit are recognized over the commitment period.

Property, equipment and depreciation

Property and equipment, including leasehold improvements, are stated at cost less accumulated depreciation. Depreciation is provided over the estimated useful lives of the respective assets on the straight-line basis. Leasehold improvements are amortized over a term which includes the remaining lease term and probable renewal periods. Expenditures for major renewals and betterments are capitalized and those for maintenance and repairs are charged to operating expenses as incurred.

Foreclosed properties

Foreclosed properties consist of properties acquired through foreclosure or deed in lieu of foreclosure. These properties are carried at the lower of cost or fair market value less estimated costs to sell. Losses from the acquisition of property in full or partial satisfaction of loans are charged against the allowance for loan losses. Subsequent write-downs, if any, are charged against expense. Gains and losses on the sales of foreclosed properties are included in determining net income in the year of the sale.

Income taxes

The Bank computes its income taxes in accordance with the provisions of Statement of Financial Accounting Standards No. 109 (SFAS 109). Under SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered in income.

Stock Options

In accordance with SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure – An Amendment of FASB Statement No. 123, Financial has adopted the disclosure-only option and elected to apply the provisions of APB No. 25 for financial statement purposes. No stock-based employee compensation cost is reflected in net income for these plans.

Reclassification

Certain 2004 amounts have been reclassified to conform to the 2005 presentation.

32

BANK OF THE JAMES FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005 and 2004

(In thousands, except share and per share data)

Note 2 - Summary of significant accounting policies (continued)

Pro forma information regarding net income and earnings per share have been determined as if Financial had accounted for its employee stock options using the fair value method, and is presented below.

	Years Ended December 31,
	2005			2004
Net income:
As reported	$	1,791		$	1,472
Deduct: total stock-based compensation cost determined under the fair value method, net of tax		(519	)		(105	)
Pro forma	$	1,272		$	1,367
Basic earnings per share:
As reported	$	0.90		$	0.77
Pro forma	$	0.64		$	0.71
Diluted earnings per share:
As reported	$	0.86		$	0.75
Pro forma	$	0.61		$	0.70

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for the year ended December 31, 2005; dividend yield of 0%, expected volatility of 40%, a risk-free interest rate of 4.47%, and expected lives of 7 years and for the year ended December 31, 2004; dividend yield of 0%, expected volatility of 10%, a risk-free interest rate of 4.08%, and expected lives of 7 years

Comprehensive income

Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS 130) establishes standards for reporting and presentation of comprehensive income and its components in a full set of general purpose financial statements. SFAS 130 was issued to address concerns over the practice of reporting elements of comprehensive income directly in equity.

The Bank is required to classify items of other comprehensive income (such as net unrealized gains (losses) on securities available-for-sale) by their nature in a financial statement and present the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. It does not require per share amounts of comprehensive income to be disclosed.

In accordance with the provisions of the SFAS 130, the Bank has included in the accompanying financial statements, comprehensive income resulting from such activities. Comprehensive income consists of the net income or loss and net unrealized income or losses on securities available-for-sale. These amounts are reported net of the income tax benefit less any related allowance for realization. Also, accumulated other comprehensive income is included as a separate disclosure within the statements of changes in stockholders’ equity in the accompanying financial statements.

33

BANK OF THE JAMES FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005 and 2004

(In thousands, except share and per share data)

Note 2 - Summary of significant accounting policies (continued)

Marketing

The Bank expenses advertising costs as incurred.

Note 3 - Restrictions on cash

To comply with Federal Reserve regulations, the Bank is required to maintain certain average cash reserve balances. The daily average cash reserve requirements were approximately $788 and $1,020 for the weeks including December 31, 2005 and 2004, respectively.

Note 4 - Securities

A summary of the amortized cost and carrying value of securities follows:

	December 31, 2005
	Amortized Cost		Gross Unrealized					Fair
			Gains		Losses			Value
Held to Maturity
U.S. agency obligations	$	7,499	$	9	$	(141	)	$	7,367
Available-for-sale
U.S. agency obligations	$	14,039	$	—	$	(303	)	$	13,736
Mortgage-backed securities		2,746		2		(64	)		2,684
	$	16,785	$	2	$	(367	)	$	16,420
	December 31, 2004
	Amortized Cost		Gross Unrealized					Fair Value
			Gains		Losses
Held to Maturity
U.S. agency obligations	$	8,999	$	80	$	(33	)	$	9,046
Available-for-sale
U.S. agency obligations	$	9,636	$	7	$	(4	)	$	9,639
Mortgage-backed securities		1,295		6		(28	)		1,273
	$	10,931	$	13	$	(32	)	$	10,912

34

BANK OF THE JAMES FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005 and 2004

(In thousands, except share and per share data)

Note 4 – Securities (continued)

The following tables show the gross unrealized losses and fair value of the Bank’s investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2005 and December 31, 2004:

	December 31, 2005
	Less than 12 months				More than 12 months				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Description of securities
U.S. agency obligations	$	16,123	$	336	$	3,971	$	108	$	20,094	$	444
Mortgage-backed securities		1,724		33		647		31		2,371		64
Total temporarily impaired securities	$	17,847	$	369	$	4,618	$	139	$	22,465	$	508
	December 31, 2004
	Less than 12 months				More than 12 months				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Description of securities
U.S. agency obligations	$	4,130	$	18	$	974	$	19	$	5,104	$	37
Mortgage-backed securities		—		—		808		28		808		28
Total temporarily impaired securities	$	4,130	$	18	$	1,782	$	47	$	5,912	$	65

At December 31, 2005, the Company does not consider the unrealized losses other-than-temporary losses due to the nature of the securities involved. The securities, which consist of six bonds, are S&P rated AAA and indirectly backed by the US Government. For these reasons, management believes the default risk to be minimal. The $22,465 in securities in which there is an unrealized loss of $508 include unrealized losses ranging from $6 to $43 or from 1.21% to 4.57% of the original cost of the investment.

At December 31, 2004, the Company does not consider the unrealized losses other-than-temporary losses due to the nature of the securities involved. The securities, which consist of six bonds, are S&P rated AAA and indirectly backed by the US Government. For these reasons, management believes the default risk to be minimal. The $5,912 in securities in which there is an unrealized loss of $65 include unrealized losses ranging from $1 to $28 or from 0.09% to 3.33% of the original cost of the investment.

35

BANK OF THE JAMES FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005 and 2004

(In thousands, except share and per share data)

Note 4 – Securities (continued)

The amortized costs and fair values of securities at December 31, 2005, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Held to Maturity				Available-for-Sale
	Amortized Cost		Fair Values		Amortized Cost		Fair Values
Due in one year or less	$	—	$	—	$	—	$	—
Due after one year through five years		2,000		1,956		6,461		6,321
Due after five years through ten years		1,006		994		5,224		5,113
Due after ten years		4,493		4,417		5,100		4,986
	$	7,499	$	7,367	$	16,785	$	16,420

The Bank sold $3.297 of securities available for sale in 2005 with realized gains totaling $10. The Bank sold $3,548 of securities available-for-sale in 2004 with realized gains on the sales totaling $7.

The amortized costs of securities pledged to collateralize public deposits were approximately $11,533 and $5,500 (fair value of $11,305 and $5,512) at December 31, 2005 and 2004, respectively.

Note 5 - Loans and allowance for loan losses

A summary of loans, net is as follows:

	December 31
	2005		2004
Real estate – residential	$	105,361	$	85,466
Commercial loans		30,853		35,163
Installment and other		21,043		21,062
Total loans		157,257		141,691
Less allowance for loan losses		1,777		1,419
Net loans	$	155,480	$	140,272

36

BANK OF THE JAMES FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005 and 2004

(In thousands, except share and per share data)

Note 5 - Loans and allowance for loan losses (continued)

The activity in the allowance for loan losses for 2005 and 2004 is summarized as follows:

	2005			2004
Balance at beginning of period	$	1,419		$	1,451
Provision charged to operations		803			754
Loan charge-off		(485	)		(889	)
Loan recoveries		40			103
Balance at end of period	$	1,777		$	1,419

At December 31, 2005 and 2004, the recorded investment in loans which have been identified as impaired loans, in accordance with Statement of Financial Accounting Standards No. 114, “Accounting for Creditors for Impairment of a Loan” (SFAS 114), totaled $261 and $380, respectively. The valuation allowance related to impaired loans on December 31, 2005 and 2004 is $58 and $34, respectively. At December 31, 2005 and 2004, the average investment of impaired loans was $286 and $538, respectively. The amount of interest income recorded by the Bank during 2005 and 2004 on impaired loans was approximately $5 and $6, respectively. There were no nonaccrual loans excluded from impaired loan disclosure at December 31, 2005 and December 31, 2004.

The Bank grants primarily commercial, real estate, and installment loans to customers throughout its market area, which consists primarily of Region 2000 which includes, the counties of Amherst, Appomattox, Bedford and Campbell and the cities of Bedford and Lynchburg, Virginia. The real estate portfolio can be affected by the condition of the local real estate market. The commercial and installment loan portfolio can be affected by the local economic conditions.

The Bank’s officers, directors and their related interests have various types of loan relationships with the Bank. The total outstanding balances of these related party loans at December 31, 2005 and 2004 were $2,534 and $895, respectively. During 2005, new loans and advances amounted to $2,439 and repayments amounted to $356. Other changes amounted to $444 in 2005, which represent loans to a deceased director and a retired director. The terms and interest rates of these loans are similar to those for comparable loans with other borrowers of the Bank.

37

BANK OF THE JAMES FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005 and 2004

(In thousands, except share and per share data)

Note 6 – Premises and equipment

Property and equipment at December 31, 2005 and 2004 are summarized as follows:

	December 31
	2005		2004
Land	$	542	$	461
Building and improvements		2,526		2,179
Construction in progress		107		22
Furniture and equipment		2,956		2,772
Leasehold improvements		1,131		960
		7,262		6,394
Less accumulated depreciation		2,366		1,753
Net property and equipment	$	4,896	$	4,641

Note 7 - Deposits

A summary of deposit accounts is as follows:

	December 31
	2005		2004
Demand
Non-interest bearing	$	26,186	$	21,699
Interest bearing		19,109		21,497
Savings		32,604		53,337
Time, $100,000 or more		27,532		13,701
Other time		68,525		43,600
	$	173,956	$	153,834

38

BANK OF THE JAMES FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005 and 2004

(In thousands, except share and per share data)

Note 7 – Deposits (continued)

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

Year Ending	Amount
2006	$	44,430
2007		19,113
2008		2,280
2009		7,533
2010 and thereafter		22,701
	$	96,057

The Bank held related party deposits of $3,892 and $1,892 at December 31, 2005 and 2004, respectively.

Note 8 – Other borrowings

Short-term borrowings consist of the following at December 31, 2005 and 2004:

	2005			2004
Securities sold under agreements to repurchase	$	6,957		$	3,259
Federal funds purchased		—			999
Total	$	6,957		$	4,258
Weighted interest rate		2.04	%		1.20	%

Short-term borrowings consist of securities sold under agreements to repurchase, which are secured transactions with customers and generally mature the day following the date sold. Short-term borrowings may also include Federal funds purchased, which are unsecured overnight borrowings from other financial institutions.

Unsecured federal fund lines and their respective limits are maintained with the following institutions: Community Bankers’ Bank, $4,900; Suntrust Bank, $3,000; and Compass Bank, $2,250. In addition, the Bank maintains a $3,000 reverse repurchase agreement with Suntrust whereby securities may be pledged as collateral in exchange for funds for a minimum of 30 days with a maximum of 90 days.

39

BANK OF THE JAMES FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005 and 2004

(In thousands, except share and per share data)

Note 9 - Income taxes

Income tax expense attributable to income before income tax expense is summarized as follows:

	December 31,
	2005			2004
Current federal income tax expense	$	1,131		$	612
Deferred federal income tax expense (benefit)		(211	)		146
Income tax provision	$	920		$	758

Income tax expense differed from amounts computed by applying the U.S. Federal income tax rate of 34% to income before income tax expense as a result of the following:

	2005			2004
Computed “expected” income tax provision	$	920		$	758
Increase in income tax expense resulting from non-deductible expenses		3			5
Effect of rate tiers		(3	)		(5	)
Income tax provision	$	920		$	758

The tax effects of temporary differences and the tax benefit from the net operating loss carryover result in deferred tax assets and liabilities as presented below:

	2005		2004
Deferred tax assets
Allowance for loan losses	$	195	$	309
Unrealized loss on available-for-sale securities		124		6
Gross deferred tax assets		319		315
Deferred tax liability
Depreciation		100		198
Gross deferred tax liability		100		198
Net deferred tax asset	$	219	$	117

40

BANK OF THE JAMES FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005 and 2004

(In thousands, except share and per share data)

Note 10 – Earnings per share

Basic EPS excludes dilution and is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, or resulted in the issuance of common stock that then shared in the earnings of the entity.

The basic and diluted earnings per share calculations are as follows:

	2005		2004
Numerator:
Net income available to Shareholders	$	1,791,000	$	1,472,000
Denominator:
Weighted-average shares outstanding		2,077,517		1,959,857
Basic EPS weighted average shares outstanding		1,988,118		1,914,666
Effect of dilutive securities:
Incremental shares attributable to Stock Option Plan		89,399		45,191
Diluted EPS weighted-average shares outstanding		2,077,517		1,959,857
Basic earnings per share	$	0.90	$	0.77
Diluted earnings per share	$	0.86	$	0.75

Note 11 – Defined contribution benefit plan

The Bank adopted a 401(k) defined contribution plan on October 1, 2000, which is administered by the Virginia Bankers Association. Participants have the right to contribute up to a maximum of 19% of pretax annual compensation or the maximum allowed under Section 401(g) of the Internal Revenue Code, whichever is less. In 2005 and 2004 the Bank made a matching contribution to the plan in the amount of 50% and 100%, respectively, of the first 6% of the elective contributions made by the participants. The Bank’s expense for the plan totaled $63 and $51 for 2005 and 2004, respectively.

41

BANK OF THE JAMES FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005 and 2004

(In thousands, except share and per share data)

Note 12 – Stock option plan

On October 21, 1999, the Board of Directors adopted the “1999 Stock Option Plan” for officers and employees. During the period ended December 31, 1999, 46,800 options were granted at an option exercise price of $10 per share, the fair market price on the date of the grant. The options granted vest over a three-year period in installments, with the first vesting having occurred upon approval by the stockholders. During the year ended December 31, 2001, 17,700 shares were awarded at $11.25 per share, fair market price on the date of the grant. The options granted vest over a two-year period commencing in 2002. During the year ended December 31, 2002, 1,000 and 23,550 shares were awarded at $14.25 and $15.00 per share, fair market price on the date of grant. The options vest over a two year period. During the year ended December 31, 2003, 1,000, 2,000 and 31,550 shares were awarded at $14.75, $19.35 and $22.25 per share, fair market price on the date of grant. In January 2004, a 10% dividend was paid affecting the aforementioned grants retroactively. During the year ended December 31, 2004, 2,000 and 26,400 shares were awarded at $22.50 and $25.00 per share, fair market price on the date of grant. The options vest over a two year period. In January 2005, a 50% dividend was paid affecting the aforementioned grants retroactively. During the year ended December 31, 2005, 1,400 and 59,650 shares were awarded at $28.40 and $19.80 per share, fair market price on the date of grant. The options vest over a two year period. In January 2006, a 25% dividend was declared affecting the aforementioned grants retroactively. (See Note 20)

	Available for Grant		Options Granted/ Outstanding
Balance December 31, 2003	12,581		276,169
Authorized	112,500		—
Forfeited	8,663		(8,663	)
Granted	(53,250	)	53,250
Exercised	—		(5,466	)
Balance December 31, 2004	80,494		315,290
Adjustment for dividend effect (rounding)	11		30
Authorized	—		—
Forfeited	1,984		(1,984	)
Granted	(77,199	)	77,199
Exercised	—		(65,485	)
Balance December 31, 2005	5,290		325,050

42

BANK OF THE JAMES FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005 and 2004

(In thousands, except share and per share data)

Note 12 – Stock option plan (continued)

The following summarized information concerning currently outstanding and exercisable options as adjusted for the 50% dividend paid in January 2005 and the 25% dividend declared in January 2006 (See Note 20):

Options Exercisable				Number of Options Vested
Exercise Price		Options Granted/ Outstanding	Remaining Contractual Life
$	4.85	31,972	3.8	31,972
$	4.85	2,063	4.3	2,063
$	5.33	25,781	4.9	25,781
$	5.45	32,901	6.0	32,901
$	7.27	42,494	7.0	42,494
$	9.39	4,125	7.8	4,125
$	10.79	56,933	8.0	56,933
$	12.00	3,750	8.3	1875
$	13.33	47,833	8.9	23931
$	15.15	2,625	9.1	—
$	16.00	74,574	10.0	74,574
		325,051		296,649

Note 13 – Stockholders’ equity

The Bank is subject to certain legal and regulatory restrictions on the amount of cash dividends it may declare.

On January 13, 2005, the Board of Directors of the Bank of the James Financial Group, Inc. declared a 50% stock split effected in the form of a dividend to its shareholders of record as of February 4, 2005. The dividend was paid on March 4, 2005 and increased the outstanding shares of common stock from 1,033,979 to 1,550,968. All per share amounts have been retroactively adjusted to reflect this dividend.

Note 14 – Supplemental cash flow and non-cash investing and financing activity information

The Bank paid $3,696 and $2,527 for interest for the years ended December 31, 2005 and 2004, respectively.

The Bank paid $865 and $834 for income taxes for the years ended December 31, 2005 and 2004, respectively.

43

BANK OF THE JAMES FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005 and 2004

(In thousands, except share and per share data)

Note 15 - Regulatory matters (all amounts in thousands)

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

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined). Management believes, as of December 31, 2005 that the Bank meets all capital adequacy requirements to which it is subject. The Bank’s actual regulatory capital amounts and ratios for December 31, 2005 and 2004 are also presented in the table below, dollars are in thousands.

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

	December 2005
	(dollars in thousands)
	Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total capital (to risk-weighted assets)	$	16,693	10.70	%	$	12,515	>8.0	%	$	15,644	>10.0	%
Tier I capital (to risk-weighted assets)	$	14,916	9.50	%	$	6,257	>4.0	%	$	9,386	>6.0	%
Tier I capital (leverage) (to average assets)	$	14,916	7.80	%	$	7,700	>4.0	%	$	9,625	>5.0	%

44

BANK OF THE JAMES FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005 and 2004

(In thousands, except share and per share data)

Note 15 - Regulatory matters (all amounts in thousands) (continued)

	December 2004
	(dollars in thousands)
	Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total capital (to risk-weighted assets)	$	14,217	10.20	%	$	11,106	>8.0	%	$	13,883	>10.0	%
Tier I capital (to risk-weighted assets)	$	12,798	9.20	%	$	5,553	>4.0	%	$	8,340	>6.0	%
Tier I capital (leverage) (to average assets)	$	12,798	7.50	%	$	6,829	>4.0	%	$	8,537	>5.0	%

Note 16 – Contingent liabilities

The Bank rents, under a non-cancelable lease, two of its banking facilities. The initial term of the lease for 615 Church Street is for five years with an additional renewal term of five years. The Bank chose to accept the additional renewal period of 5 years and has 3.5 years remaining on this lease.

The Bank entered into a lease agreement for 828 Main Street with Jamesview Investments, LLC of which a Board member is a 33% owner. The initial term of the lease is 10 years with two five year renewal options for a total of 20 years. The Bank has 18.5 years remaining on this lease. The total expense to be incurred by the Bank over the course of the lease, including options to extend, is $1,837. There are no amounts outstanding as of December 31, 2005.

Rental expenses under operating leases were $216 and $125 for the years ended December 31, 2005 and 2004, respectively.

45

BANK OF THE JAMES FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005 and 2004

(In thousands, except share and per share data)

Note 16 – Contingent liabilities (continued)

The current minimum annual rental commitments under the non-cancelable leases in effect at December 31, 2004 are as follows:

Year Ending	Amount
2006	$	252
2007		242
2008		247
2009		215
2010		219
Thereafter		1,019
	$	2,194

Note 17 - Financial instruments with off-balance-sheet risk

The Bank is not a party to derivative financial instruments with off-balance-sheet risks such as futures, forwards, swaps and options. The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These instruments may involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheets. The contract amounts of these instruments reflect the extent of involvement the Bank has in particular classes of financial instruments.

Credit risk is defined as the possibility of sustaining a loss because the other party to a financial instrument fails to perform in accordance with the terms of the contract. The Bank’s maximum exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of the instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

The Bank requires collateral or other security to support financial instruments when it is deemed necessary. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the counterparty. Types of collateral vary but may include marketable securities, accounts receivable, inventory, and property, plant and equipment.

46

BANK OF THE JAMES FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005 and 2004

(In thousands, except share and per share data)

Note 17 - Financial instruments with off-balance-sheet risk (continued)

Financial instruments whose contract amounts represent credit risk are as follows:

	Contract Amounts at December 31
	2005		2004
Commitments to extend credit	$	33,363	$	30,344
Standby letters of credit	$	2,555	$	1,926

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

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing arrangements. The credit risk involved in issuing standby letters of credit is generally less than that involved in extending loans to customers because the Bank generally holds deposits equal to the commitment. Management does not anticipate any material losses as a result of these transactions.

Note 18 – Concentration of credit risk

The Bank has a diversified loan portfolio consisting of commercial, real estate and consumer (installment) loans. Substantially all of the Bank’s customers are residents or operate business ventures in its market area consisting primarily of the Lynchburg metropolitan area. Therefore, a substantial portion of its debtors’ ability to honor their contracts and the Bank’s ability to realize the value of any underlying collateral, if needed, is influenced by the economic conditions in this market area.

The Bank maintains a significant portion of its cash balances with one financial institution. Accounts at this institution are secured by the Federal Deposit Insurance Corporation up to $100. Uninsured balances were approximately $781 and $829 at December 31, 2005 and 2004, respectively.

Note 19 – Disclosures about fair values of financial instruments

Statement of Financial Accounting Standards No. 107, Disclosures about Fair Value of Financial Instruments, requires the Bank to disclose estimated fair values of its financial instruments.

The following methods and assumptions were used to estimate the approximate fair value of each class of financial instrument for which is practicable to estimate fair value.

47

BANK OF THE JAMES FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005 and 2004

(In thousands, except share and per share data)

Note 19 – Disclosures about fair values of financial instruments (continued)

Cash and due from banks and federal funds sold

The carrying amount is a reasonable estimate of fair value.

Interest bearing deposits

The carrying amount is a reasonable estimate of fair value.

Securities

The fair value of securities, except certain state and municipal securities, is estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. The fair value of certain state and municipal securities is not readily available through market sources other than dealer quotations, so fair value estimates are based on quoted market prices of similar instruments, adjusted for differences between the quoted instruments and the instruments being valued.

Loans

Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type, such as commercial, real estate - residential, real estate - other, loans to individuals and other loans. Each loan category is further segmented into fixed and adjustable rate interest terms.

The fair value of 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 prepayments. The estimate of maturity is based on the Bank’s historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions.

Deposits

The fair values of non-interest-bearing demand deposits, interest-bearing demand deposits and savings deposits are equal to their carrying amounts since the amounts are payable on demand. The fair value of fixed maturity time deposits and certificates of deposit is estimated by discounting scheduled cash flows through maturity using interest rates currently offered for deposits of similar remaining maturities.

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 deferred fees arising from these unrecognized financial instruments. These deferred fees are not material at December 31, 2005 and 2004, and as such, the related fair values have not been estimated.

48

BANK OF THE JAMES FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005 and 2004

(In thousands, except share and per share data)

Note 19 – Disclosures about fair values of financial instruments (continued)

The carrying amounts and approximate fair values of the Bank’s financial instruments are summarized as follows:

	December 31, 2005				December 31, 2004
	Carrying Amounts		Approximate Fair Values		Carrying Amounts		Approximate Fair Values
Financial assets
Cash and due from banks	$	4,993	$	4,993	$	3,980	$	3,980
Federal funds sold & repos		4,243		4,243		—		—
Securities
Available for sale		16,420		16,420		10,912		10,912
Held to maturity		7,499		7,367		8,999		9,046
Loans, net		155,480		154,948		140,272		139,904
Total financial assets	$	188,635	$	187,971	$	164,163	$	163,842
Financial liabilities
Deposits	$	173,956	$	171,999	$	153,834	$	151,399
Federal funds purchased & repos		6,957		6,957		4,258		4,258
Total financial liabilities	$	180,913	$	178,956	$	158,092	$	155,657

Fair value estimates are made at a specific point in time, based on relevant market information and 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 Bank’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Bank’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-balance-sheet 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. Significant assets that are not considered financial assets include deferred income taxes and bank premises and equipment; a significant liability that is not considered a financial liability is accrued post-retirement benefits. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

49

BANK OF THE JAMES FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005 and 2004

(In thousands, except share and per share data)

Note 20 – Subsequent event

On January 17, 2006, the Board of Directors of Bank of the James Financial Group, Inc. declared a 25% stock split effected in the form of a dividend to its shareholders of record on January 10, 2006. The stock dividend was paid on March 10, 2006 and increased outstanding shares of common stock from 1,601,047 to 2,001,309. All per share amounts have been retroactively adjusted to reflect this dividend.

Note 21 - Impact of Recently Issued Accounting Standards

FASB Interpretation No. 46, Consolidation of Variable Interest Entities an interpretation of ARB No. 51 was issued in January 2003 and addresses consolidation by business enterprises of variable interest entities. The Bank does not have a variable interest entity as defined by this interpretation and therefore, the adoption of the provisions of this FASB Interpretation did not have a significant effect on financial position or results of operations of the Bank.

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123R, Share-Based Payment. SFAS No. 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. The primary focus of this statement is on accounting for transactions in which an entity obtains employee services in exchange for share-based payment transactions. This Statement is effective for the beginning of the first interim or annual reporting period that begins after December 15, 2005. SFAS No. 123R will be adopted by the Company January 1, 2006. Based on the unvested options outstanding at December 31, 2005, the Company expects that the adoption of SFAS 123R will result in additional before tax compensation expense of $90,032 during 2006. At this time, no additional awards have been planned that would create a material impact on before tax compensation expense during 2007. Therefore, based on information available at this time, the additional before tax compensation expense during 2007 is estimated at $0.

In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets. This Statement amends APB Opinion No. 29, Accounting for Nonmonetary Transactions, and is based on the principle that exchanges on nonmonetary assets should be measured based on the fair value of the assets exchanged. The provisions of this statement are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of FAS No. 153 is not expected to have a material impact on the consolidated financial statements of the Company.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3”. SFAS No. 154 changes the requirements for the accounting for and reporting of a change in accounting principle. It applies to all voluntary changes in accounting principle and to changes required by an accounting pronouncement that does not include specific transition provisions. This statement requires retrospective application to prior period financial statements of changes in accounting principle, unless it is impractical to determine either the period-specific or cumulative effects of the change. SFAS No. 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005. The adoption of this standard is not expected to have a material impact on the consolidated financial statements of the Company.

50

BANK OF THE JAMES FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005 and 2004

(In thousands, except share and per share data)

Note 21 - Impact of Recently Issued Accounting Standards (continued)

In November 2005, the FASB issued Staff Position (FSP) No. FAS 115-1 and FAS 124-1, The Meaning of Other Than Temporary Impairment and its Application to Certain Investments. FSP 115-1 addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of the impairment loss. This Staff Position is effective for periods beginning after December 15, 2005 with earlier application permitted. Implementation of this guidance is not expected to have a material impact on the consolidated financial statements of the Company.

51

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

None.

Item 8A. Controls and Procedures.

An evaluation was carried out under the supervision and with the participation of Financial’s management, including its principal executive officer and principal financial officer, of the effectiveness of Financial’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of December 31, 2005. Based on this evaluation, Financial’s principal executive officer and principal financial officer have concluded that the Bank’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) are effective.

As previously reported in a the Form 10-KSB/A filed on December 21, 2005, the Company restated certain portions of its audited consolidated financial statements as of December 31, 2003 and 2004 to properly account for the treatment of certain stock dividends paid in 2005 and 2004. In its financial statements included in the Form 10-KSB for the year ended December 31, 2004, the Company inadvertently failed to give retroactive effect to two stock dividends. This resulted in the Company understating the number of outstanding shares of common stock for 2003 and 2004 (which caused a miscalculation of earnings per share) and the failure to properly reclassify a portion of the Company’s retained earnings as additional paid-in capital for 2003. The restatement did not affect reported net income or total stockholders’ equity for any year.

In the fourth quarter of 2005, in an effort to remediate the material weakness in the Company’s internal control described above, management has implemented procedures and controls to aid in correctly classifying stock dividends. Specifically, the Company has sought and received advice from its external auditors regarding the proper accounting treatment of stock dividends. The Company will continue to consult with its external accountants (or, when limited by independence standards, with other public accountants) and other advisors when confronted with unusual or infrequent accounting transactions. In addition the Company has modified the internal review process so that additional employees and consultants review the recordation of certain transactions. Accordingly, management believes these changes will remediate the material weakness discussed above.

Except as set forth herein, there were no changes in the Company’s internal control over financial reporting in the quarter ended December 31, 2005 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 8B. Other Information.

None.

PART III

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

Part of the response to this Item will be included in the information set forth under the headings “Election of Directors,” “Executive Officers Who Are Not Directors,” “Corporate Governance and the Board of Directors and its Committees – Audit Committee,” and “Section 16(a) Beneficial Ownership

52

Reporting Compliance” in the Bank’s definitive Proxy Statement for its 2006 Annual Meeting of Shareholders, which Proxy Statement will be filed with the Federal Reserve Board within 120 days of the end of the Bank’s 2005 fiscal year (the “2006 Proxy Statement”), and such information is hereby incorporated by reference.

Financial had adopted a code of ethics that applies to Financial’s directors, executive officers (including the principal financial officer, principal accounting officer or controller, or persons performing similar functions), and senior officers. The code of ethics has been posted under the “Investor Relations” section on Financial’s website: www.bankofthejames.com.

Item 10. Executive Compensation.

The response to this Item will be included in the information set forth under the headings “Executive Compensation,” “Stock Option Plan,” “Option Grants During Year Ended December 31, 2005,” “Fiscal Year End Option Values,” and “Compensation and Other Employment Agreements” in the 2006 Proxy Statement and such information is hereby incorporated by reference.

Item 11. Security Ownership of Management.

Security Ownership of Management

The response to this Item will be included in the information set forth under the heading “Security Ownership of Management” in the 2006 Proxy Statement and is hereby incorporated by reference.

Securities Authorized for Issuance Under Equity Compensation Plans

The response to this Item will be included in the information set forth under the heading “Securities Authorized for Issuance Under Equity Compensation Plans” in the 2006 Proxy Statement and is hereby incorporated by reference.

Item 12. Certain Relationships and Related Transactions.

The response to this Item will be included in the information set forth under the heading “Transactions with Management” in the 2006 Proxy Statement and is hereby incorporated by reference.

Item 13. Exhibits.

(a) The following exhibits are filed as part of this Form 10-KSB:

No.	Description
3.1	Articles of Incorporation of Bank of the James Financial Group, Inc.*
3.2	Bylaws of Bank of the James*
4.1	Specimen Common Stock Certificate of Bank of the James Financial Group, Inc.**
10.2	1999 Bank of the James Stock Option Plan***
10.3	Lease Agreement Between W.C. English, Inc. and Bank of the James**

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10.6	Lease between Jamesview Investments LLC and Bank of the James dated October 9, 2003**
21.1	List of Subsidiaries
31.1	Certification pursuant to Rule 13a-14(a)/15d-14(a)
31.2	Certification pursuant to Rule 13a-14(a)/15d-14(a)
32.1	Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002

* Financial hereby incorporates by reference to the exhibit of identical index number filed with, and made a part of, Financial’s Form 8-K filed with the Securities Exchange Commission on January 12, 2004.

** Financial hereby incorporates by reference the exhibit of identical index number filed with, and made a part of, Financial’s Form 10-KSB filed the Securities Exchange Commission on March 26, 2004.

*** Financial hereby incorporates by reference to the exhibit of identical index number filed with, and made a part of, the Registration Statement of Bank of the James on Form 10-SB filed with the Federal Reserve Board on April 18, 2000.

(b) During the quarter ended December 31, 2005, Financial filed the following Current Reports on Form 8-K

Date Filed	Items Reported
October 24, 2005	Disclosure of Financial’s financial performance for Financial’s third quarter ended September 30, 2005 and accompanying press release.
November 7, 2005	Disclosure of change in certifying accountant from Cherry, Bekaert & Holland, L.L.P. to Yount, Hyde & Barbour, P.C.
November 21, 2005	Announcing the death of Ronald V. Dolan, member of the board of directors
November 23, 2005	Amendment to 8-K regarding disclosure of change in certifying accountant from Cherry, Bekaert & Holland, L.L.P. to Yount, Hyde & Barbour, P.C.
December 21, 2005	Announcing appointment of William C. Bryant III to board of directors

Item 14. Principal Accountant Fees and Services.

The response to this Item will be included in the information set forth under the heading “Independent Public Accountants” in the 2006 Proxy Statement and is hereby incorporated by reference.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

54

SIGNATURES

	BANK OF THE JAMES FINANCIAL GROUP, INC.
	/S/ Robert R. Chapman, III
Date: March 21, 2006	Robert R. Chapman III., President
	/S/ J. Todd Scruggs
Date: March 21, 2006	J. Todd Scruggs, Secretary and Treasurer

55

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 as of March 21, 2006.

Signature	Capacity
/s/ Robert R. Chapman III Robert R. Chapman III	President (Principal Executive Officer) and Director
/s/ J. Todd Scruggs J. Todd Scruggs	Secretary and Treasurer (Principal Financial Officer and Principal Accounting Officer)
/s/ Kenneth S. White Kenneth S. White	Director, Chairman
/s/ Lewis C. Addison Lewis C. Addison	Director
/s/ William C. Bryant III William C. Bryant III	Director
Donna Schewel Clark	Director
Watt R. Foster, Jr.	Director
/s/ Donald M. Giles Donald M. Giles	Director
/s/ James R. Hughes, Jr. James R. Hughes, Jr.	Director
/s/ Augustus A. Petticolas, Jr. Augustus A. Petticolas, Jr.	Director
/s/ Thomas W. Pettyjohn, Jr. Thomas W. Pettyjohn, Jr	Director
/s/ Richard R. Zechini Richard R. Zechini	Director

56

EXHIBIT INDEX

No.	Description
3.1	Articles of Incorporation of Bank of the James Financial Group, Inc.*
3.2	Bylaws of Bank of the James*
4.1	Specimen Common Stock Certificate of Bank of the James Financial Group, Inc.**
10.2	1999 Bank of the James Stock Option Plan***
10.3	Lease Agreement Between W.C. English, Inc. and Bank of the James**
10.6	Lease between Jamesview Investments LLC and Bank of the James dated October 9, 2003**
21.1	List of Subsidiaries
31.1	Certification pursuant to Rule 13a-14(a)/15d-14(a)
31.2	Certification pursuant to Rule 13a-14(a)/15d-14(a)
32.1	Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002

* Financial hereby incorporates by reference to the exhibit of identical index number filed with, and made a part of, Financial’s Form 8-K filed with the Securities Exchange Commission on January 12, 2004.

** Financial hereby incorporates by reference the exhibit of identical index number filed with, and made a part of, Financials Form 10-KSB filed the Securities Exchange Commission on March 26, 2004.

*** Financial hereby incorporates by reference to the exhibit of identical index number filed with, and made a part of, the Registration Statement of Bank of the James on Form 10-SB filed with the Federal Reserve Board on April 18, 2000.

57