BANK OF THE JAMES FINANCIAL GROUP INC

Proxy Solicitation & Information Statement • Apr 6, 2007

DEF 14A 1 ddef14a.htm DEFINITIVE PROXY STATEMENT Definitive Proxy Statement

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SCHEDULE 14A (Rule 14a-101) INFORMATION REQUIRED IN PROXY STATEMENT SCHEDULE 14A INFORMATION Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 (Amendment No. )
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BANK OF THE JAMES FINANCIAL GROUP, INC. (Name of Registrant as Specified in Its Charter)
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Dear Shareholders:

You are cordially invited to attend the Annual Meeting of Shareholders of Bank of the James Financial Group, Inc. (“Financial”), which will be held on May 15, 2007 at 4:00 p.m., on the 8 th Floor of the Bank of the James Building, 828 Main St., Lynchburg, Virginia 24504 (the “Meeting”). At the Meeting, the shareholders will elect four directors for terms of three years each, elect one director for a term of two years, and vote on a proposal to ratify Yount, Hyde & Barbour, P.C. as the independent auditors of Financial for the year ending December 31, 2007.

Your vote is important. Whether or not you plan to attend in person, it is important that your shares be represented at the Meeting. You may vote your shares via a toll-free telephone number, via the internet, or you may complete, sign, date, and mail the enclosed proxy card to StockTrans, Inc., 44 West Lancaster Avenue, Ardmore, PA 19003. A postage-paid return envelope is enclosed for your convenience. Instructions for all three methods of voting are contained with the proxy card. If you decide to attend the Meeting and vote in person, or if you wish to revoke your proxy for any reason prior to the vote at the Meeting, you may do so, and your proxy will have no further effect. We began mailing these proxy materials to you on or about April 6, 2007.

The board of directors and management of Financial appreciate your continued support and look forward to seeing you at the Meeting.

Sincerely,

/s/ Robert R. Chapman III
Robert R. Chapman III
President
Lynchburg, Virginia
April 3, 2007

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BANK OF THE JAMES FINANCIAL GROUP, INC.

828 Main Street

Lynchburg, VA 24504

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

To Be Held On May 15, 2007 at 4:00 p.m.

NOTICE IS HEREBY GIVEN that pursuant to its bylaws and call of its directors, the Annual Meeting (the “Meeting”) of the holders of shares of Common Stock (“Common Stock”) of Bank of the James Financial Group, Inc. (“Financial”) will be held at the Bank of the James Building, 828 Main St., 8th Floor, Lynchburg, Virginia 24504 on May 15, 2007 at 4:00 p.m. local time.

The purposes of the Meeting are to consider and act upon the following proposals:

1. Election of Directors . To elect four (4) directors to serve a term of three (3) years each and to elect one (1) director to serve a term of two (2) years.

2. Ratification of Selection of Auditors . To ratify the selection by Financial of Yount, Hyde & Barbour, P.C., independent public accountants to audit the financial statements of Financial for the fiscal year ending on December 31, 2007.

3. Other Business . To act upon such other matters as may properly come before the Meeting or any adjournment or postponement thereof.

Your attention is directed to the Proxy Statement accompanying this Notice for a more complete statement regarding the matters proposed to be acted upon at the Meeting.

Holders of shares of Common Stock of record at the close of business on March 23, 2007, will be entitled to vote at the Meeting or any postponements or adjournments thereof.

A copy of Financial’s Annual Report for the year ended December 31, 2006, a Proxy Statement, and a proxy card accompany this notice.

Regardless of whether you plan to attend the Meeting, we urge you to vote your shares via a toll-free telephone number, via the internet, or by completing, signing, dating, and mailing the enclosed proxy card in the enclosed envelope to StockTrans, Inc., 44 West Lancaster Avenue, Ardmore, PA 19003.

If you are present at the Meeting, you may vote in person even if you have already returned your proxy card.

Lynchburg, Virginia April 3, 2007
/s/ J. Todd Scruggs
J. Todd Scruggs, Secretary

YOU ARE CORDIALLY INVITED TO ATTEND THIS MEETING. IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED REGARDLESS OF THE NUMBER THAT YOU OWN. EVEN IF YOU PLAN TO BE PRESENT, YOU ARE URGED TO VOTE BY PROXY. IF YOU ATTEND THIS MEETING, YOU MAY VOTE EITHER IN PERSON OR BY YOUR PROXY. ANY PROXY GIVEN MAY BE REVOKED BY YOU IN WRITING OR IN PERSON AT ANY TIME PRIOR TO THE EXERCISE THEREOF.

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2007 PROXY STATEMENT

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GENERAL INFORMATION	1
PROPOSAL ONE - ELECTION OF DIRECTORS	3
Nominees for Election of Directors	3
Directors Continuing in Office	4
Corporate Governance and the Board of Directors and its Committees	5
Committees of the Board of Directors of Financial	6
Security Ownership of Management	8
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS	11
Executive Compensation	11
Summary Compensation Table—2006	11
Stock Option Plan	12
Compensation Discussion and Analysis	14
Compensation Committee Report	18
Compensation Committee Interlocks and Insider Participation	18
TRANSACTIONS WITH MANAGEMENT	18
AUDIT COMMITTEE REPORT	18
INDEPENDENT PUBLIC ACCOUNTANT	19
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE	20
PROPOSAL TWO - RATIFICATION OF INDEPENDENT AUDITORS	20
ANNUAL REPORT AND FINANCIAL STATEMENTS	21
DATE OF RECEIPT OF SHAREHOLDER PROPOSALS TO BE PRESENTED AT NEXT ANNUAL MEETING	21
COMMUNICATIONS WITH MEMBERS OF THE BOARD	21
OTHER MATTERS	21

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BANK OF THE JAMES FINANCIAL GROUP, INC.

828 Main Street

Lynchburg, VA 24504

PROXY STATEMENT

ANNUAL MEETING OF SHAREHOLDERS

May 15, 2007 at 4:00 p.m.

GENERAL INFORMATION

This Proxy Statement is furnished to holders of common stock, par value $2.14 per share (“Common Stock”), of Bank of the James Financial Group, Inc. (“Financial”) in connection with the solicitation of proxies on behalf of the board of directors of Financial. This Proxy Statement is to be used at the Annual Meeting of Shareholders to be held on May 15, 2007 at 4:00 p.m., on the 8 th Floor of the Bank of the James Building, 828 Main St., Lynchburg, Virginia 24504, and any adjournment or postponement thereof (the “Meeting”). In addition to solicitation by mail, Financial will request banks, brokers and other custodians, nominees and fiduciaries to send proxy materials to the beneficial owners and to secure their voting instructions, if necessary. Officers and regular employees of Bank of the James (the “Bank”) or Financial may solicit proxies personally, by telephone, facsimile, or otherwise, from some shareholders if proxies are not received promptly.

This Proxy Statement and the enclosed proxy card are being mailed to Financial’s shareholders on or about April 6, 2007.

Revocation and Voting of Proxies

Any shareholder who executes a proxy has the power to revoke it at any time before it is voted by giving written notice of revocation to Financial, by executing and delivering a substitute proxy to Financial, or by attending the Meeting and voting in person. If a shareholder desires to revoke a proxy by written notice, such notice should be mailed or delivered, so that it is received on or prior to the Meeting date, to J. Todd Scruggs, Secretary, Bank of the James Financial Group, Inc., 828 Main Street, Lynchburg, Virginia 24504.

At the Meeting, the shareholders will take the following actions: 1) elect four (4) Group One directors for a term of three years each and one (1) Group Three director for a term of two years; 2) vote on a proposal to ratify Yount, Hyde & Barbour, P.C as the independent auditors of Financial for fiscal year 2007; and 3) take action on such other matters as properly may come before the Meeting or any postponement or adjournment thereof.

Voting Rights of Shareholders

The principal executive offices of Financial are located at 828 Main Street, Lynchburg, Virginia 24504. The board of directors has fixed the close of business on March 23, 2007 as the record date (the “Record Date”) for the determination of the holders of shares of Common Stock entitled to receive notice of and to vote at the Meeting. As of the record date, there were approximately 2,318,601 shares of Common Stock outstanding and entitled to vote, which shares were held by approximately 2,103 shareholders of record. Each share of Common Stock is entitled to one vote on all matters to be acted upon at the Meeting.

As of the Record Date, to the knowledge of Financial’s management, no person owned beneficially more than 5% of Financial’s outstanding Common Stock. As of the Record Date, directors and executive officers of Financial and their affiliates, as a group, owned of record and beneficially, inclusive of options that have vested or will vest within 60 days of March 15, 2007, a total of 410,634 shares of Common Stock, or approximately 16.63% of the shares of Common Stock deemed outstanding on such date. Directors and executive officers of Financial have indicated an intention to vote their shares of Common Stock FOR the election of the nominees set forth on the enclosed proxy and FOR the ratification of Yount, Hyde & Barbour, P.C. as independent auditors for 2007.

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Voting Matters

The presence in person or by proxy of at least a majority of the outstanding shares of Common Stock entitled to vote is necessary to constitute a quorum at the Meeting. With regard to the election of directors set forth in Proposal One, the proxy being provided by the board enables a shareholder to vote for the election of the nominees proposed by the board, to withhold authority to vote for the nominees being proposed, or to vote for the election of certain nominees. In the election of directors, those receiving the greatest number of votes will be elected even if they do not receive a majority. All other matters coming before the Meeting will be determined by majority vote of those present in person or by proxy and entitled to vote.

A shareholder may abstain or (only with respect to the election of directors) withhold his vote (collectively, “Abstentions”) with respect to each item submitted for shareholder approval. Abstentions will be counted for purposes of determining the existence of a quorum. Abstentions will not be counted as voting in favor of the relevant item.

If you hold your shares in “street name” through a broker or other nominee, your broker or nominee may not be permitted to exercise voting discretion with respect to some of the matters to be acted upon. Thus, if you do not give your broker or nominee specific instructions, your shares may not be voted on those matters and will not be counted for purposes of determining the number of shares necessary for approval. Shares represented by such “broker non-votes” will, however, be counted in determining whether there is a quorum.

Financial has retained StockTrans, Inc. (“StockTrans”) to oversee the mechanics of the solicitation of this proxy. StockTrans will prepare the mailing labels, place the proxy materials in envelopes, mail the proxy materials to shareholders of record, receive the proxies from the shareholders, tally the proxy votes, and present the final numbers to Financial. In exchange for this service, Financial will pay StockTrans an approximate amount of $20,000, inclusive of postage.

Shareholders of Financial are requested to vote their shares via a toll-free telephone number, via the internet at the following address on the World Wide Web: http://www.votestock.com, or by completing, dating, and signing the form of proxy and returning it promptly to StockTrans, Inc., 44 West Lancaster Avenue, Ardmore, PA 19003 in the enclosed envelope. If a proxy is properly executed and returned in time for voting, it will be voted as indicated thereon. If no voting instructions are given, the persons named as proxies thereon intend to vote all shares represented by such proxy as follows:

(1) FOR the election of the persons named in Proposal One herein as nominees for directors of Financial to hold office as stated and until their successors have been duly elected and qualified; and

(2) FOR ratification of Yount, Hyde & Barbour, P.C., independent public accountants, to audit the financial statements of Financial for the fiscal year ending on December 31, 2007; and

(3) In their discretion on the transaction of such other business as properly may come before the Meeting or any adjournments or postponements thereof.

The cost of soliciting proxies, including the fees paid to StockTrans, for the Meeting will be borne by Financial.

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PROPOSAL ONE - ELECTION OF DIRECTORS

Financial’s articles of incorporation provide that the board of directors is to be composed of no less than five and no more than twenty-five directors. The articles of incorporation further provide that the board of directors shall be divided into three groups (Groups One, Two, and Three), as nearly equal in number as possible with staggered terms. Financial’s board of directors currently consists of 12 persons. Since the last annual meeting Financial has appointed two members to fill vacancies in the board of directors, one of whom was appointed to Group One and one of whom was appointed to Group Three. Under Virginia law, the terms of these three directors expire at the 2007 annual meeting.

Thus, the current terms of office of all of the Group One directors and the one newly appointed Group Three director expire at the 2007 Annual Meeting. The terms of the Group Two directors will expire at the 2008 Annual Meeting and the term of the remaining Group Three directors will expire at the 2009 Annual Meeting. This proposal is designated as Item No. 1 in the enclosed Proxy.

At each subsequent Annual Meeting of Shareholders of Financial, one (1) group of directors, approximately one-third of the total, will be elected for a three year term. Directors will continue to serve until their successors are duly elected and qualified.

Each of the nominees is currently a director of Financial and is serving until the Meeting.

The following information sets forth the names, ages (as of May 15, 2007), the period during which each has served as a director, principal occupations, and business experience for the last five years concerning the nominees as well as the same information about the Group Two and Three directors who will continue in office until the 2008 and 2009 Annual Meetings of Shareholders, respectively:

THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE “FOR” THE NOMINEES SET FORTH BELOW.

Nominees for Election of Directors

Group One Directors (To Serve Until 2010 Annual Meeting of Shareholders) — Name and Age	Director Since (1)	Principal Occupation During Past Five Years
James F. Daly, 49	2007	Vice-President of Daly Seven, Inc., a company engaged primarily in hotel development and management.
Donald M. Giles, 65	1998	Chairman of the Board of Moore & Giles, Inc. Previously, Mr. Giles served as President and CEO of Moore & Giles, Inc.
Watt R. Foster, Jr., 47	2005	Owner and Vice President of Foster Fuels, Inc.
Thomas W. Pettyjohn, Jr., 60	1998	Vice Chairman of Financial since January 1, 2004 and the Bank since 1999. Investment Advisor at Davidson & Garrard, Inc., an investment advisory business.

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Group Three Director (To Serve Until 2009 Annual Meeting of Shareholders) — Name and Age	Director Since (1)	Principal Occupation During Past Five Years
J. Todd Scruggs, 39	2007	Secretary-Treasurer of Financial and the Executive Vice President and Chief Financial Officer of Bank of the James. He has served in these capacities since 2004 and 2003, respectively.
Previously, Mr. Scruggs was Vice President of Bank of the James with responsibilities in operations, investment, and financial analysis.

All of the above Board nominees have consented to being named in this Proxy Statement and have agreed to serve as directors of Financial if elected.

The following sets forth information concerning the current directors whose terms will continue after the Annual Meeting. Unless otherwise indicated, each person has held his or her principal occupation for more than five years.

Directors Continuing in Office

Group Two Directors (Serving Until 2008 Annual Meeting of Shareholders) — Name and Age	Director Since (1)	Principal Occupation During Past Five Years
Robert R. Chapman III, 44	1998	President of Financial since January, 2004 and President and Chief Executive Officer of the Bank since January, 2003. From July, 1999 to December 31, 2002, Mr. Chapman served as the Executive
Vice President of the Bank.
Donna Schewel Clark, 56	1998	Secretary and General Counsel of Schewel Furniture Co., Inc.
Richard R. Zechini, 68	1998	Orthodontist and President, Richard R. Zechini, D.D.S., Ltd.
Augustus A. Petticolas, Jr., 58	2005	Dentist, Dr. Augustus A. Petticolas, Jr., General Dentistry.

Group Three Directors (To Serve Until 2009 Annual Meeting of Shareholders) — Name and Age	Director Since (1)	Principal Occupation During Past Five Years
Lewis C. Addison, 55	2006	Senior Vice President and CFO of Centra Health, Inc.
William C. Bryant III, 42	2005	President of and Auctioneer at Ted Counts Realty & Auction Co., Inc.
Kenneth S. White, 67	1998	Of Counsel, Edmunds & Williams, P.C., Lynchburg, Virginia. From February, 2001 to February, 2004 Mr. White served as President, The Greater Lynchburg Community Trust. Previously, Mr. White
was a partner at Edmunds & Williams, P.C.

(1) All of the directors of Financial also serve as members of the Board of Directors of the Bank of the James. For all dates prior to 2004, all directorships were with the Bank only.

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Corporate Governance and the Board of Directors and its Committees

General

The business and affairs of Financial are managed under the direction of the board of directors in accordance with the Virginia Stock Corporation Act, Financial’s articles of incorporation, and Financial’s bylaws. Members of the board of directors are kept informed of Financial’s business through discussions with management, by reviewing materials provided to them, and by participating in meetings of the board of directors and its committees.

Independence of Directors

The following ten of the twelve members of the board of directors are “independent” as defined by the rules and regulations of the Securities and Exchange Commission and Marketplace Rule 4200(a)(15) of the National Association of Securities Dealers, Inc. (“NASD”):

Lewis C. Addison	Donald M. Giles
William C. Bryant III	Augustus A. Petticolas, Jr.
Donna S. Clark	Thomas W. Pettyjohn, Jr.
James F. Daly	Kenneth S. White
Watt R. Foster, Jr.	Richard R. Zechini

Meeting Attendance

Board and Committee Meetings

The board of directors of Financial held five (5) meetings during 2006. During 2006, each of the directors attended at least 75% of the meetings of the board of Financial and the committees of Financial on which they serve except Mr. Foster who attended 67%. The board of directors of the Bank, which consists of all members of the board of directors of Financial, met 12 times during 2006.

In 2006, each non-employee director received the following compensation: i) $550 for each board of directors meeting attended; and ii) $300 for each committee meeting attended, except that a) non-employee directors received only one board fee when the boards of Financial and the Bank met on the same day; and b) non-employee directors received only one committee fee when a committee of Financial and its corresponding committee of the Bank met on the same day. For 2007, Financial will not increase the above fees. In 2006, total fees paid to non-employee directors was approximately $117,000. Non-employee directors are not eligible to receive option grants.

The following table contains information regarding the compensation awarded or paid to, or earned by, Financial’s directors during the 2006 fiscal year.

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Name	Fees Earned or Paid in Cash ($)	Option Awards ($)	Non-Equity Incentive Plan Compensation ($)	All Other Compensation ($)	Total ($)
Lewis C. Addison	6,450	-	-	-	6,450
William C. Bryant III	12,900	-	-	-	12,900
Robert R. Chapman III (1)	-	-	-	-	-
Donna S. Clark	9,450	-	-	-	9,450
James F. Daly (2)	-	-	-	-	-
Watt R. Foster, Jr.	6,700	-	-	-	6,700
Donald M. Giles	17,100	-	-	-	17,100
Augustus A. Petticolas, Jr.	8,650	-	-	-	8,650
Thomas W. Pettyjohn, Jr.	17,700				17,700
J. Todd Scruggs (1) (2)	-	-	-	-	-
Kenneth S. White	18,600	-	-	-	18,600
Richard R. Zechini	16,450	-	-	-	16,450

(1) Messrs. Chapman and Scruggs are employee-directors and do not receive additional compensation for service on the board of Financial or the Bank.

(2) Messrs. Daly and Scruggs were appointed to the board of directors effective March 20, 2007.

Annual Meeting of Shareholders

Financial encourages each member of the board of directors to attend the Annual Meeting of Shareholders. Except for Mr. Giles, all of the directors then in office attended the 2006 Annual Meeting of Shareholders of Financial.

Committees of the Board of Directors of Financial

The board of directors of Financial has the following three standing committees to assist the board in the discharge of its duties: Executive Committee, Audit Committee, and Nominating Committee. In addition, the board of directors of the Bank has the following six (6) standing committees to assist it in the discharge of its duties: Executive Committee, Audit Committee, Nominating Committee, Loan Committee, Investment Committee, and Compensation Committee.

Executive Committees of Financial and the Bank

Each Executive Committee reviews extraordinary confidential issues, and serves as a forum for discussing executive decisions. Each Executive Committee has all the powers of its board in the management and the conduct of the business and affairs of the company in the intervals between meetings of the full board, except that neither Executive Committee may increase the number of directors, fill vacancies on the board, remove directors, approve an amendment to the articles of incorporation or

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bylaws, approve a plan of merger or consolidation, or take other actions that cannot by law be delegated by the board. During the fiscal year ended December 31, 2006, the Executive Committee of the board of directors of each of Financial and the Bank was comprised of Messrs. White, Chapman, Giles, and Pettyjohn and Ms. Clark. For the year ended December 31, 2006 the Executive Committee of each of Financial and the Bank had twelve (12) meetings. During 2006, Financial added Mr. Giles to the Executive Committees of Financial and the Bank.

Audit Committees of Financial and the Bank

Each Audit Committee reviews and approves compliance policies and procedures and assists and monitors general audits performed by federal and state agencies. Each Audit Committee is responsible for the selection and recommendation of the independent accounting firm for the annual audit. The Audit Committee of Financial reviews and accepts the reports of Financial’s independent auditors, internal auditor, and federal and state examiners. During the fiscal year ended December 31, 2006, the Audit Committee of the board of directors of each of Financial and the Bank was comprised of Ms. Clark and Messrs. Foster, White, Addison, and Drs. Petticolas and Zechini. For the year ended December 31, 2006, the Audit Committees of Financial and the Bank had three (3) meetings. The Audit Committee of Financial has a written charter, a copy of which is available at the “Investor Relations” section of the Bank’s website: www.bankofthejames.com. Financial’s board has determined that Lewis C. Addison is an “audit committee financial expert” as that term is defined by the Securities and Exchange Commission rules adopted pursuant to the Sarbanes-Oxley Act.. Mr. Addison and all other members of the Audit Committee are “independent” as defined by the rules and regulations of the Securities and Exchange Commission and Marketplace Rule 4200(a)(15) of the NASD.

Nominating Committees of Financial and the Bank

The Nominating Committees of the boards of Financial and the Bank review and recommend candidates for nomination to their respective boards for expired or otherwise vacant seats. During fiscal year ended December 31, 2006 the Nominating Committee of the board of directors of both Financial and the Bank was comprised of Mr. Giles. Drs. Petticolas and Zechini, and Ms. Clark. For the year ended December 31, 2006 the Nominating Committee had one (1) meeting.

All members of the Nominating Committee are “independent” as defined by the rules and regulations of the Securities and Exchange Commission and Marketplace Rule 4200(a)(15) of NASD. The Nominating Committee has a written charter, a copy of which is available at the “Investor Relations” section of the Bank’s website: www.bankofthejames.com. Currently, Financial does not consider candidates recommended by shareholders. This policy is based, among other things, on the fact that Financial has been an operating entity for less than four years and Financial’s sole business at this time is the ownership of the Bank and BOTJ Investment Group, Inc., each of which has been in existence for less than eight years and one year, respectively. The majority of the incumbent directors were organizers of the Bank. Financial believes it to be beneficial for the board of directors to be comprised of individuals with the types of expertise and scope currently represented on the board, and during these critical first years of the Bank and Financial, the Nominating Committees are best positioned to identify such individuals. The Nominating Committee considers share ownership, business experience and expertise, character, particular goals and needs of Financial for additional competencies or characteristics, educational background, and board experience in evaluating potential nominees.

Loan Committee of the Bank

The Loan Committee of the board of the Bank reviews and approves loan portfolio activities, reviews and makes recommendations on specific large loan requests, reviews and recommends action on

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requests by officers and directors of the Bank, and reviews and approves credit ratings assigned to specific loans within the loan portfolio. During fiscal year ended December 31, 2006, the Loan Committee of the board of directors was comprised of Messrs. Pettyjohn, Bryant, Chapman, Giles, White and Dr. Zechini. For the year ended December 31, 2006, the Loan Committee had twenty-five (25) meetings. For 2007, the Bank added Messrs. Scruggs and Daly to the Loan Committee.

Investment Committee of the Bank

The Investment Committee of the board of the Bank reviews, approves, and actively oversees the management of the Bank’s investment policy. In addition, the Investment Committee monitors the practices of the investment officer with regard to the Bank’s investment portfolio. During fiscal year ended December 31, 2006 the Investment Committee was comprised of Messrs. Chapman, Foster, Giles, Addison and Dr. Zechini. For the year ended December 31, 2006 the Investment Committee had three (3) meetings. For 2007, Financial has added Mr. Scruggs to the Investment Committee.

Compensation Committee of the Bank

The Compensation Committee of the board of the Bank reviews, recommends, and approves compensation for the employees of the Bank. The Compensation Committee is also responsible for reviewing and discussing with management the Compensation Discussion and Analysis to be included in Financial’s annual Proxy Statement and determining whether to recommend to the Board of Directors that the Compensation Committee Discussion and Analysis be included in the Proxy Statement. During fiscal year ended December 31, 2006, the Compensation Committee of the board of directors was comprised of Ms. Clark and Messrs. Foster and White. For the year ended December 31, 2006, the Compensation Committee had three (3) meetings. The Compensation Committee of Financial has a written charter, a copy of which is available at the “Investor Relations” section of the Bank’s website: www.bankofthejames.com.

Security Ownership of Management

The following table sets forth information as of March 15, 2007 regarding the number of shares of Common Stock of Financial beneficially owned by (1) each director, (2) each executive officer, and (3) directors and executive officers as a group. The address of each director and executive officer is c/o Bank of the James Financial Group, Inc., 828 Main Street, Lynchburg, VA 24504.

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	Common Stock Owned Beneficially (1)	Percentage of Class (2)
Lewis C. Addison	1,000	*
Director
William C. Bryant III (3)	9,407	*
Director
Robert R. Chapman, III (4)	93,782	3.80%
Director, President
Donna S. Clark (5)	30,013	1.22%
Director
James F. Daly (6)	29,750	1.20%
Director
Watt R. Foster, Jr. (7)	45,591	1.85%
Director
Donald M. Giles (8)	37,725	1.53%
Director
Augustus A. Petticolas, Jr.	1,531	*
Director
Thomas W. Pettyjohn, Jr.	5,156	*
Director
Kenneth S. White (9)	32,656	1.32%
Director
Richard R. Zechini (10)	33,930	1.37%
Director
J. Todd Scruggs (11)	51,793	2.10%
Director, Secretary, EVP and CFO of the Bank
Martin E. Waltemyer (12)	38,300	1.55%
EVP and COO of the Bank
Officers and Directors as a group (13)	410,634	16.63%

• Less than 1%

(1) For purposes of this table, beneficial ownership has been determined in accordance with the provision of Rule 13d-3 of the Securities Exchange Act of 1934 under which, in general, a person is deemed to be the beneficial owner of a security if he has or shares the power to vote or direct the voting of the security or the power to dispose of or direct the disposition of the security, or if he has the right to acquire beneficial ownership within sixty days. Beneficial ownership also includes any shares held in the name of an individual’s spouse, minor children or other relatives living in the individual’s home. Share totals include the 25% stock dividend declared on January 17, 2006 and paid on March 10, 2006, as well as all prior stock dividends declared by Financial.

(2) The ownership percentage of each individual is calculated based on the total of 2,318,601 shares of common stock that were outstanding as of March 15, 2007, plus the number of shares that can be issued to the individual within sixty days of March 15, 2007 upon the exercise of stock options held by the individual. Shares of common stock that are subject to exercisable stock options are deemed to be outstanding for the purpose of computing the percentage of outstanding common stock owned by any person or group but are not deemed outstanding for the purpose of computing the percentage of common stock owned by any other person or group.

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(3) Includes beneficial ownership of 3,375 shares held by Mr. Bryant as joint tenants with Mr. Bryant’s wife.

(4) Includes 68,001 shares purchasable upon exercise of options exercisable within 60 days of March 15, 2007.

(5) Includes beneficial ownership of aggregate of 4,126 shares held by Ms. Clark’s minor children.

(6) Includes beneficial ownership of 27,625 shares held in a revocable trust of which Mr. Daly and his wife are co-trustees.

(7) Includes beneficial ownership 39,590 shares held by Mr. Foster as joint tenants with his wife and an aggregate of 4,126 shares held by Mr. Foster’s minor children.

(8) Includes 6,579 shares owned by Mr. Giles’ wife and 10,521 shares held in a revocable trust of which Mr. Giles is beneficiary and trustee.

(9) Includes beneficial ownership of 31,625 shares held in a revocable trust of which Mr. White is the trustee and beneficiary and 1,031 shares owned by Mr. White’s wife.

(10) Includes beneficial ownership of 3,294 shares held in trust for which Dr. Zechini serves as trustee.

(11) Includes 47,564 shares purchasable upon exercise of options exercisable within 60 days of March 15, 2007 and 104 shares owned by Mr. Scruggs’ wife.

(12) Includes 35,001 shares purchasable upon exercise of options exercisable within 60 days of March 15, 2007 and beneficial ownership of 2,681 shares held by Mr. Waltemyer as joint tenants with Mr. Waltemyer’s wife, 206 shares owned in joint tenancy with Mr. Waltemyer’s son, 206 shares owned by Mr. Waltemyer’s daughter, and 206 shares owned by Mr. Waltemyer’s granddaughter.

(13) See notes 1 through 12.

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Executive Officers Who are Not Directors

Name and Age	Executive Officer Since	Principal Occupation
Martin E. Waltemyer, 58	1999	Executive Vice President and Chief Operations Officer of the Bank since December, 2003. Mr. Waltemyer served as Senior Vice President of Operations of the Bank since 1999.

COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS

Executive Compensation

The officers of Financial presently are serving without compensation from Financial. They are, however, compensated by the Bank for services rendered as officers of the Bank. The table below summarizes certain information with respect to compensation paid by the Bank to certain employees of the Bank who perform policy-making duties for Financial for services rendered in all respects for the fiscal year ended December 31, 2006.

Summary Compensation Table—2006

Name and Principal Position	Year	Annual Compensation — Salary ($)	Bonus ($)	Long Term Compensation — Awards Options/ SARS ($)(1)	All Other Compensation ($)
Robert R. Chapman III President, CEO and President of the Bank	2006	$160,000	$ -	$ -	$ 5,110
J. Todd Scruggs Secretary, EVP and CFO of the Bank	2006	$130,000	$ -	$ -	$ 7,447
Martin E. Waltemyer EVP and COO of the Bank	2006	$115,000	$ -	$ -	$ 3,807

(1) For 2006, Financial did not grant options to any of the named executive officers. For 2006, no named executive officer executed any options.

(2) “All Other Compensation” consists entirely of matching contributions made under Bank’s 401(k) plan, life insurance premiums, and club dues.

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Stock Option Plan

The following table shows for each of the named executive officers (1) the number of stock options that were granted during 2006, (2) the number and percentage of options granted to the named executive officers individually and as a group, (3) the total number and percentage of options granted to all employees as a group, (4) the exercise price, and (5) the expiration date.

Option Grants During Year Ended December 31, 2006

	Number of Securities Underlying Options/SARs Granted (#)(1)	Percent of Total Options/SARs Granted to Employees in Fiscal Year (2)	Exercise or Base Price ($/Sh) (3)	Expiration Date
Name
Robert R. Chapman III	-	0.00%	$ -	n/a
J. Todd Scruggs	-	0.00%	$ -	n/a
Martin E. Waltemyer	-	0.00%	$ -	n/a
Named Executive Officers as a group	-	0.00%
All employees, as a group	2,300	100.00%

(1) Share totals are adjusted to reflect the 25% stock dividend declared on January 17, 2006 and paid on March 10, 2006 as well as all prior stock dividends declared by Financial.

(2) Options to purchase a total of 2,300 shares of Common Stock were granted to employees during the year ended December 31, 2006.

(3) Stock options were awarded at the fair market value of the shares of Common Stock at the date of award and adjusted to reflect the stock dividends declared by Financial.

In the year ended December 31, 2006, no stock options were exercised by any of the named executive officers. The following table sets forth the amount and value of stock options held by the named executive officers as of December 31, 2006.

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Outstanding Equity Awards at Fiscal Year End

The following table provides information as of December 31, 2006 regarding Financial’s stock based awards under Financial’s stock option plan. The named executive officers have not other outstanding equity awards.

Name and Date of Grant	Number of Securities Underlying Unexercised Options (#)(1) — Exercisable	Unexercisable	Option Exercise Price (1)	Option Expiration Date
Robert R. Chapman III
10-21-1999	14,438	-	$ 4.85	10-21-2009
12-05-2000	8,250	-	5.33	12-05-2010
12-13-2001	8,250	-	5.45	12-13-2011
12-12-2002	10,313	-	7.27	12-12-2012
12-17-2003	12,375	-	10.79	12-17-2013
12-09-2004	5,625	-	13.33	12-09-2014
12-05-2005	8,750	-	16.00	12-05-2015
J. Todd Scruggs
10-21-1999	12,376	-	$ 4.85	10-21-2009
12-05-2000	4,125	-	5.33	12-05-2010
12-13-2001	4,125	-	5.45	12-13-2011
12-12-2002	6,188	-	7.27	12-12-2012
12-17-2003	8,250	-	10.79	12-17-2013
12-09-2004	3,750	-	13.33	12-09-2014
12-05-2005	8,750	-	16.00	12-05-2015
Martin E. Waltemyer
10-21-1999	2,063	-	$ 4.85	10-21-2009
12-05-2000	4,125	-	5.33	12-05-2010
12-13-2001	4,125	-	5.45	12-13-2011
12-12-2002	4,125	-	7.27	12-12-2012
12-17-2003	6,188	-	10.79	12-17-2013
12-09-2004	5,625	-	13.33	12-09-2014
12-05-2005	8,750	-	16.00	12-05-2015

(1) Share totals and exercise price are adjusted to reflect the 25% stock dividend declared on January 17, 2006 and paid on March 10, 2006 as well as all prior stock dividends declared by Financial.

(2) The value of in-the-money options at fiscal year end is calculated by determining the difference between the closing price of a share of Common Stock of Financial of $18.95 as reported on the Over the Counter Bulletin Board on December 29, 2006 (the last day in 2006 in which a trade occurred) and the exercise price of the options.

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Securities Authorized for Issuance Under Equity Compensation Plans

The following table summarizes information concerning Financial’s equity compensation plans at December 31, 2006. All figures have been adjusted to reflect the 25% stock dividend declared on January 17, 2006 and paid on March 10, 2006 as well as all prior stock dividends declared by Financial.

| Plan Category | Number of Shares to be Issued Upon Exercise of Outstanding Options | Weighted Average Exercise Price of Outstanding Options | Number of Shares Remaining Available for Future Issuance Under Equity Compensation Plans
(Excluding Shares Reflected in First Column) |
| --- | --- | --- | --- |
| Equity compensation plans approved by shareholders - 1999 Stock Option Plan of Bank of the James Financial Group, Inc. | 306,179 | $10.39 | 5,679 |
| Equity compensation plans not approved by shareholders | N/A | N/A | N/A |
| Total | 306,179 | $10.39 | 5,679 |

Compensation Of Executive Officers

Compensation Discussion and Analysis

Overview

This Compensation Discussion and Analysis addresses Financial’s compensation policies, programs and practices for its executive officers, including the named executive officers. As used in this Proxy Statement, the term “named executive officers” refers to those individuals who served as the President of Financial (who also serves as the chief executive officer of the Bank), the Treasurer of Financial (who also serves as the chief financial officer of the Bank), and the Chief Operating Officer of the Bank during Financial’s 2006 fiscal year. Please also refer to the more detailed compensation disclosures beginning on page 11 of this Proxy Statement.

Objectives of Financial’s Compensation Programs

The primary objective of Financial’s compensation programs is to provide competitive compensation to attract, retain and motivate qualified employees who will contribute to the long-term success of Financial. In furtherance of this objective, Financial regularly evaluates the compensation provided to Financial’s executive officers to ensure that it remains competitive in relation to the compensation paid to similarly situated executive officers at other financial institutions of comparable size and performance. In addition, Financial endeavors to ensure that the compensation provided to Financial’s executive officers is internally equitable based upon the skill requirements and responsibilities associated with each executive position.

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What Financial’s Compensation Programs are Designed to Reward

Financial’s compensation programs are designed to reward each executive officer’s job performance and contributions to Financial. These factors are generally determined in the subjective judgment of the Compensation Committee for each of the named executive officers. With the benefit of performance reviews and salary recommendations by management, the Compensation Committee also recommends the compensation for other officers to the board of directors.

In making compensation decisions, the Compensation Committee places significant emphasis on Financial’s performance and focuses specifically on Financial’s net income year-over-year. The Compensation Committee generally has not considered stock price as an indicator of Financial’s performance in making compensation decisions because the price of Financial’s common shares is subject to a variety of factors outside Financial’s control.

How Executive Compensation is Determined

Financial’s compensation programs for its executive officers are generally administered by or under the direction and supervision of Financial’s Compensation Committee. Financial’s Compensation Committee is responsible for reviewing and recommending to the independent members of the Board of Directors for approval the salary, bonuses, and all other compensation and benefits to be provided to Financial’s named executive officers.

Financial’s Compensation Committee annually reviews the compensation and performance of each executive officer of Financial. The Compensation Committee then makes recommended compensation adjustments or makes modifications in its discretion. The Compensation Committee then makes its final recommendations to the independent members of the Board of Directors for approval.

In setting salaries for Financial’s executive officers and other employees, the Compensation Committee and Chief Executive Officer establish an appropriate compensation range, primarily based on publicly available market data regarding compensation paid to similarly situated executive officers and employees at other companies. We identify the compensation range based on information compiled by FinPro, Inc., our outside consulting firm, and by the salary survey compiled by the Virginia Bankers’ Association. Both resources utilize market data from public information such as proxy statements. Financial also relies on as well as questionnaires and independent studies. Compensation ranges are established and adjusted annually based in part on this information.

For each employee position or category within Financial, the compensation level that is established is derived from comparable averages, medians, and percentile target ranges of similar sized financial companies in comparable markets. Although the Compensation Committee generally does not target a specific point within the compensation range for executive officer salaries, the Compensation Committee strives to ensure that its executive officer compensation remains competitive with the compensation provided by other financial institutions with which Financial competes for executive talent.

Components of 2006 Executive Compensation

There are five general components to the annual compensation that Financial provides to its executive officers: 1) base salary; 2) cash bonuses; 3) participation in Financial’s 1999 stock option plan; 4) retirement, insurance, and health benefits; and 5) perquisites and other benefits.

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Base Salary

Base salary represents the primary component of annual compensation paid to Financial’s executive officers. When recommending an executive officer’s salary within the relevant compensation range, the Compensation Committee primarily considers the executive officer’s job performance and contribution to the objectives of Financial. As discussed above, these factors are determined in the subjective judgment of the Compensation Committee for the Chief Executive Officer and with the benefit of performance reviews and salary recommendations by the Chief Executive Officer for other executive officers of Financial and the Bank. The Compensation Committee also considers local and national economic conditions as well as future business prospects of Financial and its subsidiaries in setting base salary levels.

Cash Bonuses

Performance-Based Bonuses. For the 2007 fiscal year, the Bank has introduced a bonus plan for all employees, including the named executive officers. Pursuant to this program, in 2007 employees of Financial and its subsidiaries are eligible to receive a cash bonus based on the amount by which Financial’s actual net income exceeds budgeted net income. Financial will pay a percentage of this difference to named executive officers and other employees. Net income targets and bonus levels under the program are established at the start of the each fiscal year through a collaborative effort involving management and the Compensation Committee, and are subject to final approval by the Board of Directors.

Discretionary Bonuses . The Compensation Committee also retains the right to award discretionary bonuses to the named executive officers and other employees based on extraordinary contributions to Financial. These discretionary bonuses are subject to approval by the full board of directors. Messrs. Chapman, Scruggs, and Waltemyer received discretionary bonuses of $10,000, $5,000, and $5,000, respectively in 2005 and no bonus in 2004 or 2006.

Stock Options

Financial believes that its long-term interests are advanced by aligning the interests of its executives and non-executives with the interests of our shareholders. Accordingly, between 1999 and 2006, Financial granted options to our executives and other employees pursuant to the 1999 stock option plan, which was approved by shareholders in 2000 and amended with shareholder approval from time to time. Options under this stock option plan are intended to be qualified stock options granted at an exercise price equal to the then current-market price at the time the option is granted. The options have been awarded with vesting periods ranging from immediate vesting to three years. With certain exceptions, these options expire at the end of ten years from the date of grant. Approximately 5,700 shares remain under the plan that are available for grant. In light of recent accounting changes regarding the expensing of options, Financial is reevaluating whether stock options are the most cost effective way of providing incentive compensation to its employees. Financial currently has no plans to request that the shareholders approve either a) an amendment to the 1999 stock option plan to increase the number of authorized shares; or b) to approve a new stock option plan.

Option grants are generally recommended by the Chief Executive Officer of the Bank. While Financial’s stock option plan does not specify when options are granted, options have generally been granted annually in December based on the current year’s performance. The Compensation Committee then evaluates potential grant recipients on a number of objective and subjective factors, and allocates some or all of the options available for the year to potential participants. Our option grants are approved by our Compensation Committee and board of directors, which administers the stock option plan. The

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board awards grants based on a number of criteria including the relative rank of the executive within our company and his or her specific contributions to the success of Financial for the prior year based on subjective criteria.

Retirement and Death Benefits

All full time employees, including the executive officers of Financial, are eligible to participate in Financial’s 401(k) Profit Sharing Plan. For each executive officer or other employee who participates in the 401(k) Profit Sharing Plan, the Bank matches 50% of contributions up to 6% of the participant’s annual compensation, with a maximum match of 3% of annual compensation. Based on overall performance of Financial, although it did not do so in 2006, the board of directors has in the past retroactively to the beginning of the calendar year, matched 100% of 6% of the participant’s annual compensation. In 2006, the Bank made matching contributions to the 401(k) Profit Sharing Plan on behalf of Messrs. Chapman, Scruggs, and Waltemyer of $799, $3,890, and $3,447, respectively.

Life Insurance is provided by Financial at an amount equal to two times annual salary to all full time employees.

Perquisites and Other Benefits

Financial provides its executive officers with certain perquisites and other benefits that the Compensation Committee believes are reasonable to enable Financial to attract and retain qualified executive officers and to promote business development activities by the executive officers in the communities served by the Bank. In accordance with past practice, in 2006 Financial paid the monthly dues at Boonsboro Country Club for Messrs. Chapman and Scruggs. The Compensation Committee believes that these perquisites and other benefits are reasonable in amount and consistent with those provided by similarly situated financial institutions in Financial’s market area.

The executive officers of Financial are also eligible to participate in all of the employee benefit plans, such as medical, dental, group term life insurance, disability insurance, and long term care insurance which are generally available to all employees of Financial and the Bank on a non-discriminatory basis.

Employment Agreements

The Bank currently does not have employment agreements with any of its executive officers.

Tax Considerations

Under Section 162(m) of the Internal Revenue Code, a limitation is placed on the tax deductibility of executive compensation paid by publicly-held corporations for individual compensation to certain executive officers in excess of $1,000,000 in any taxable year. No executive officer of Financial received compensation during Financial’s 2006 fiscal year that would be non-deductible under Section 162(m).

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Compensation Committee Report

The Compensation Committee of Financial has reviewed and discussed with management the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K. Based on such review and discussions, the Compensation Committee recommended to the board of directors that the Compensation Discussion and Analysis be included in this Proxy Statement.

Submitted by the Compensation Committee,

Kenneth S. White—Chair

Donna S. Clark

Watt R. Foster, Jr.

Compensation Committee Interlocks and Insider Participation

None of the Compensation Committee members are employees of Financial or any of its subsidiaries, none was formerly an officer of Financial or any of it subsidiaries, and none had any business relationship required to be disclosed in this Proxy Statement.

TRANSACTIONS WITH MANAGEMENT

Some of the directors and officers of Financial and the Bank are at present, as in the past, customers of the Bank, and the Bank has had, and expect to have in the future, banking transactions in the ordinary course of its business with directors, officers, principal shareholders and their associates, on substantially the same terms, including interest rates and collateral on loans, as those prevailing at the same time for comparable transactions with others. These transactions do not involve more than the normal risk of collectibility or present other unfavorable features.

Any future transactions between the Bank and its officers and directors, as well as transactions with any person who acquires 5% or more of the Financial’s voting stock will be on substantially the same terms, including interest rates and security for loans, as those prevailing at the time for comparable transactions with others.

There are no legal proceedings to which any director, officer, principal shareholder or associate is a party that would be material and adverse to the Bank.

AUDIT COMMITTEE REPORT

The Audit Committee has reviewed and discussed the audited financial statements with management and the independent auditors for the year ended December 31, 2006, Yount, Hyde & Barbour, P.C. (“YHB”). Management represented to the Audit Committee that Financial’s financial statements were prepared in accordance with the standards of the Public Company Accounting Oversight Board (United States), and the Audit Committee has reviewed and discussed the financial statements with management and the independent auditors. The discussions with YHB also included the matters required by Statement on Auditing Standards No. 61 (Communication with Audit Committees).

YHB provided to the Audit Committee the written disclosures and the letter regarding its independence as required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees). This information was discussed with YHB.

Based on the discussions with management and YHB, the Audit Committee’s review of the representations of management and the report of YHB, the Audit Committee recommended to the board of directors that the audited financial statements be included in Financial’s Annual Report on Form 10-KSB to be filed with the Securities and Exchange Commission for the year ended December 31, 2006.

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Submitted by the Audit Committee of Financial’s Board of Directors.

Donna S. Clark—Chair

Lewis C. Addison

Watt R. Foster, Jr.

Augustus A. Petticolas, Jr.

Kenneth S. White

Richard R. Zechini

INDEPENDENT PUBLIC ACCOUNTANT

Cherry, Bekaert & Holland, LLP (“CBH”) served as independent auditors for Financial for the year 2005. Yount, Hyde & Barbour, P.C. (“YHB”) served as independent auditors for Financial for the year 2006. Representatives from YHB are expected to be present at the Meeting with the opportunity to make a statement and to answer any questions you may have.

CBH has advised Financial that neither it nor any of its members have any direct financial interest or material indirect financial interest in the securities of Financial or in connection with Financial and/or the Bank in the capacity of promoter, underwriter, voting trustee, director, officer or employee. YHB has advised Financial that neither it nor any of its members have any direct financial interest or material indirect financial interest in the securities of Financial or in connection with Financial and/or the Bank in the capacity of promoter, underwriter, voting trustee, director, officer or employee.

Fees Paid to Independent Auditors for 2006 and 2005 Fiscal Years

For the fiscal years ended December 31, 2006 and 2005, YHB and CBH respectively audited the financial statements included in Financial’s Annual Report on Form 10-KSB; reviewed Financial’s quarterly reports on Form 10-QSB; and provided certain tax services including tax compliance, tax advice (including procurement of tax credit), and tax planning.

The following table presents the aggregate fees paid or to be paid by Financial and the Bank for professional services rendered by YHB (2006) and CBH (2005) for the years 2006 and 2005:

	2006	2005
Audit Fees	$ 41,500	$ 35,100
Audit Related Fees	1,875	4,255
Tax Fees	3,500	4,300
Total	$ 46,875	$ 43,655

All Other Fees

During 2006, Financial paid CBH additional fees of $6,743 for the performance of post report review procedures, for review of subsequent events, and for consent to and review of the registration statement on Form SB-2 required to be filed in association with the follow-on stock offering concluded by Financial in December, 2006.

Other than that set forth above, neither YHB nor CBH billed Financial or the Bank for any other fees during either of the past two (2) years.

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Audit Committee Pre-Approval Policies and Procedures

It is the policy of the Audit Committee that Financial’s independent auditor may provide only those services that have been pre-approved by the Audit Committee. Unless a type of service to be provided by the independent auditor has received general pre-approval, it requires specific pre-approval by the Audit Committee. The term of any general pre-approval is 12 months from the date of pre-approval, unless the Audit Committee or a related engagement letter specifically provides for a different period. The Audit Committee will annually review and pre-approve the services that may be provided by the independent auditor without obtaining specific pre-approval.

Requests or applications to provide services that require specific approval by the Audit Committee must be submitted to the Audit Committee by both the independent auditor and the Chief Financial Officer, and must include a joint statement as to whether, in their view, the request or application is consistent with the Securities and Exchange Commission’s rules on auditor independence.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) requires the Bank’s executive officers and directors, and any persons who own more than 10% of the Bank’s common stock, to file reports of ownership and changes in ownership of Bank (as predecessor of Financial) common stock with the Federal Reserve Board for all transactions prior to January 1, 2004. For all transactions occurring on or after January 1, 2004, Section, 16(a) of the Exchange Act requires Financial’s executive officers and directors, and any persons who own more than 10% of Financial’s common stock, to file reports of ownership and changes in ownership of Financial’s common stock with the Securities and Exchange Commission. Based solely upon Financial’s review of the copies of the forms which it has received and any written representations from Financial’s directors, executive officers and 10% percent shareholders, Financial is not aware of any failure of any such person to comply with the requirements of Section 16(a) of the Exchange Act.

PROPOSAL TWO - RATIFICATION OF INDEPENDENT AUDITORS

The Audit Committee of the board of Financial has appointed, subject to ratification by the shareholders, Yount, Hyde & Barbour, P.C., Winchester, Virginia (“YHB”) as independent public accountant to audit the books of Financial for the fiscal year ending December 31, 2007. On November 2, 2005, the Audit Committee of Financial approved the dismissal of CBH as its independent accountants and approved the appointment of YHB as the Registrant’s new independent accountants. The determination followed Financial’s decision to seek proposals from independent accountants to audit Financial’s financial statements for the fiscal year ending on December 31, 2006.

The board has determined that it would be desirable to request the shareholders to ratify the board’s selection of YHB as independent public accountants to audit the books and accounts of Financial for the fiscal year ending December 31, 2007. This proposal is designated as Item No. 2 in the enclosed Proxy.

THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE “FOR” RATIFICATION OF YOUNT, HYDE & BARBOUR, P.C. AS INDEPENDENT AUDITORS FOR THE FISCAL YEAR ENDING DECEMBER 31, 2007.

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ANNUAL REPORT AND FINANCIAL STATEMENTS

A copy of Financial’s Annual Report to Shareholders for the year ended December 31, 2006 has been furnished to the shareholders. Financial’s Annual Report on Form 10-KSB for the year ended December 31, 2006 is available without charge to any shareholder requesting the same. Additional copies of the Annual Report to Shareholders and copies of the Annual Report on Form 10-KSB may be obtained from Financial’s website (www.bankofthejames.com) or by written request to J. Todd Scruggs, Secretary of the board of directors at 828 Main Street, Lynchburg, VA 24504. The Form 10-KSB is not a part of the proxy solicitation materials.

DATE OF RECEIPT OF SHAREHOLDER PROPOSALS TO BE PRESENTED AT NEXT

ANNUAL MEETING

All shareholder proposals intended to be presented at the 2008 Annual Meeting of the Shareholders must be received by Financial at its principal office for inclusion in Financial’s proxy statement and form of proxy relating to that meeting no later than January 1, 2008. If such proposal complies with all the requirements of Rule 14a-8 of the Exchange Act, it will be included in the Proxy Statement and set forth in the proxy card issued for the next Annual Meeting of Shareholders. It is urged that any such proposals be sent by certified mail, return receipt requested.

COMMUNICATIONS WITH MEMBERS OF THE BOARD

Shareholders may communicate with the board of directors by mailing written communications to the attention of J. Todd Scruggs, Secretary to the board of directors at the principal office of Financial at 828 Main St., Lynchburg, VA 24504. All such communications are reviewed by the Secretary to the board and submitted to the board of directors unless they are deemed non-substantive.

OTHER MATTERS

The board of directors is not aware of any matters to be presented for action at the Meeting other than as set forth herein. However, if any other matters properly come before the Meeting, or any adjournment thereof, the person or persons voting the proxies will vote them in accordance with their best judgment.

Lynchburg, Virginia April 3, 2007
/s/ J. Todd
Scruggs
J. Todd Scruggs, Secretary

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BANK OF THE JAMES FINANCIAL GROUP, INC. ANNUAL MEETING OF SHAREHOLDERS – TUESDAY, MAY 15, 2007

THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS

The undersigned hereby appoints ROBERT R. CHAPMAN III, AUGUSTUS A. PETTICOLAS, JR., and RICHARD R. ZECHINI, any one of whom may act, as proxies, each with full power of substitution, and hereby authorizes each of them to represent and vote, as designated below, all of the shares of Common Stock of Bank of the James Financial Group, Inc. held of record by the undersigned on March 23, 2007 at the Annual Meeting of Shareholders to be held on May 15, 2007 at 4:00 p.m. or any postponement or adjournment thereof, as follows:

1. To elect as directors the persons set forth as nominees below for the terms set forth below:

Election of Director Serve until the 2009 Annual Meeting:	01 – J. Todd Scruggs
Election of Director to Serve until the 2010 Annual Meeting:	02 – James F. Daly,	03 – Donald M. Giles,
	04 – Watt R. Foster, Jr.,	05 – Thomas W. Pettyjohn, Jr.

¨ FOR ¨ WITHHOLD ¨ FOR ALL EXCEPT

Instruction: To withhold authority to vote for any individual nominee, mark “For All Except” and strike out that nominee’s name above.

1. To ratify the appointment of Yount, Hyde & Barbour, P.C. as independent auditors for the year ending December 31, 2007.

¨ FOR ¨ AGAINST ¨ ABSTAIN

The Board of Directors recommends a vote “FOR” each of the above propositions.

This proxy will be voted as directed, but if no directions are specified, this signed proxy will be voted for the propositions stated. If any other business is presented at such meeting, this proxy will be voted by those named in the proxy in their best judgment.

Should the undersigned be present and elect to vote at the Meeting, or any postponements or adjournments thereof, and after notification of the undersigned’s decision to terminate this proxy is provided to the Secretary of the Board of Directors at the Meeting, the power of said proxies will be deemed terminated and of no further force and effect. The undersigned may also revoke this proxy by filing a subsequently dated proxy or by notifying the Secretary of the Board of Directors of his or her decision to terminate this proxy.

¨ PLEASE CHECK HERE IF YOU PLAN TO ATTEND THE MEETING.

Signature
Signature
Please sign exactly as your name appears on this proxy card, date, and mail this proxy promptly in the enclosed postage-prepaid envelope. When signing as an attorney, executor,
administrator, trustee, or guardian, please give your full title. If shares are held jointly, each holder should sign.

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YOUR VOTE IS IMPORTANT

VOTE TODAY IN ONE OF THREE WAYS:

1. VOTE BY INTERNET:

Log-on to www.votestock.com

Enter your control number printed below

Vote your proxy by checking the appropriate boxes

Click on “Accept Vote”

OR

1. VOTE BY TELEPHONE: After you call the phone number below, you will be asked to enter the control number at the bottom of the page. You will need to respond to only a few simple prompts. Your vote will be confirmed and cast as directed.

Call toll-free in the U.S. or Canada at

1-866-626-4508 on a touch-tone telephone

OR

1. VOTE BY MAIL: If you do not wish to vote by telephone or over the internet, please complete, sign, date and return the above proxy card in the pre-paid envelope provided.

YOUR CONTROL NUMBER IS:

You may vote by telephone or Internet 24 hours a day, 7 days a week. Telephone and Internet voting is available through 11:59 p.m., prevailing time, May 14, 2007 on . Your telephone or Internet vote authorizes the named proxies to vote in the same manner as if you marked, signed and returned your proxy card.