The following discussion and analysis of the financial condition and results of operations of the Company at and for the three months ended March 31, 2008 should be read in conjunction with the Company's Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements included in this report and in the 2007 Form 10K. It should also be read in conjunction with the "Caution About Forward Looking Statements" section at the end of this discussion.

Overview

The Company is headquartered in Middleburg, Virginia and conducts its primary operations through two wholly owned subsidiaries, Middleburg Bank and Middleburg Investment Group, Inc and a consolidated variable interest entity, Southern Trust Mortgage, LLC. Middleburg Bank is a community bank serving the Virginia counties of Loudoun, Fairfax and Fauquier with seven financial service centers and two limited service facilities. Middleburg Investment Group is a non-bank holding company with two wholly owned subsidiaries, Middleburg Trust Company and Middleburg Investment Advisors, Inc. Middleburg Trust Company is a trust company headquartered in Richmond, Virginia, and maintains offices in Williamsburg, Virginia and in several of Middleburg Bank's facilities. Middleburg Investment Advisors is a registered investment advisor headquartered in Alexandria, Virginia serving clients in 24 states. Southern Trust Mortgage is a regional mortgage company headquartered in Norfolk, Virginia and maintains offices in Virginia, Maryland, North Carolina and South Carolina.

The Company operates under a business model that makes all of its financial and wealth management services available to its clients at all of its financial service centers. Financial service centers are larger than most traditional retail banking branches in order to allow commercial, mortgage, retail and wealth management personnel and services to be readily available to serve clients. By working together in the financial service center and the market, the team at each financial service center becomes more effective in expanding relationships with current clients and new clients. The Company's goal is to assist in the creation, preservation and ultimate transfer of the wealth of its clients.

The Company generates a significant amount of its income from the net interest income earned by the Bank. Net interest income is the difference between interest income and interest expense. Interest income depends on the amount of interest-earning assets outstanding during the period and the interest rates earned thereon. The Company's cost of money is a function of the average amount of deposits and borrowed money outstanding during the period and the interest rates paid thereon. The quality of the assets further influences the amount of interest income lost on non-accrual loans and the amount of additions to the allowance for loan losses.

Middleburg Investment Group's subsidiaries, Middleburg Trust Company and Middleburg Investment Advisors, generate fee income by providing investment management and trust services to their clients. Investment management and trust fees are generally based upon the value of assets under management and, therefore, can be significantly affected by fluctuation in the values of securities caused by changes in the capital markets.

Soutbern Trust Mortgage generates fees from the origination and sale of mortgage loans. Southern Trust Mortgage also maintains a real estate construction portfolio and receives interest and fee income from these loans.

Net income for the three months ended March 31, 2008 decreased to $153,000 from $2.1 million for the three months ended March 31, 2007. Annualized returns on average assets and average equity for the three months ended March 31, 2008 were 0.5% and 5.9%, respectively, compared to 1.1% and 10.7%

for the same period in 2007. The Company recognized losses in its loan portfolio resulting in net charge-offs against the reserves for loan losses of $1.8 million during the three months ended March 31, 2008. As a result of the evaluation of the adequacy of the reserves for loan losses, subsequent to the recognition of net charge-offs, the Company increased its reserves for loan losses at Middleburg Bank through the recognition of bad debt expense by $1.9 million. The Company also increased its reserves for loan losses at Southern Trust Mortgage by $172,000. The Company has also experienced an increase in non-performing loans in the first quarter of 2008. Net charge-offs of $1.7 million and the increase in non-performing assets can be traced back to the portfolio of one lender, who is no longer with the company. Management believes this is an isolated incident reflective of one individual and not a larger systemic problem.

Total interest income increased $2.2 million or 18.9%, for the three months ended March 31, 2008, when compared to the same period in 2007. Funding costs have continued to increase a result of competition for deposits accounts and the Company's increased use of wholesale borrowings to fund asset growth. Total interest expense was $6.3 million for the three months ended March 31, 2008, compared to $4.9 million for the three months ended March 31, 2007. Other income increased $2.7 million to $4.8 million for the three months ended March 31, 2008, compared with the same period in 2007. The increase is due to the consolidation of fees on mortgages held for sale by Southern Trust Mortgage. Total other expense was $10.4 million for the three months ended March 31, 2008 compared to $5.7 million for the same period in 2007. During the first quarter of 2008, salary and employee benefits increased $3.2 million, which includes $2.4 million in salary and benefit expense at Southern Trust Mortgage. The consolidation of Southern Trust Mortgage has impacted several categories of the financial statements. The impact is described in greater detail in the Financial Condition and Results of Operations sections below, as necessary.

The Company is not aware of any current recommendations by any regulatory authorities that, if they were implemented, would have a material effect on the registrant's liquidity, capital resources or results of operations.

Critical Accounting Policies

General

The financial condition and results of operations presented in the Consolidated Financial Statements, the accompanying Notes to Consolidated Financial Statements and this section are, to a large degree, dependent upon the accounting policies of the Company. The selection and application of these accounting policies involve judgments, estimates, and uncertainties that are susceptible to change.

Presented below is discussion of those accounting policies that management believes are the most important ("Critical Accounting Policies") to the portrayal and understanding of the Company's financial condition and results of operations. The Critical Accounting Policies require management's most difficult, subjective and complex judgments about matters that are inherently uncertain. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of materially different financial condition or results of operations is a reasonable likelihood.

Allowance for Loan Losses

The Company monitors and maintains an allowance for loan losses to absorb an estimate of probable losses inherent in the loan portfolio. The Company maintains policies and procedures that address the systems of controls over the following areas of maintenance of the allowance: the systematic methodology used to determine the appropriate level of the allowance to provide assurance the methodology is maintained in accordance with accounting principles generally accepted in the United

States of America; the accounting policies for loan charge-offs and recoveries; the assessment and measurement of impairment in the loan portfolio; and the loan grading system.

The Company evaluates various loans individually for impairment as required by SFAS No. 114, Accounting by Creditors for Impairment of a Loan, and SFAS No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures. Loans evaluated individually for impairment include non-performing loans, such as loans on non-accrual, loans past due by 90 days or more, restructured loans and other loans selected by management. The evaluations are based upon discounted expected cash flows or collateral valuations. If the evaluation shows that a loan is individually impaired, then a specific reserve is established for the amount of impairment. If a loan evaluated individually is not impaired, then the loan is assessed for impairment under SFAS No. 5, Accounting for Contingencies, with a group of loans that have similar characteristics.

For loans without individual measures of impairment, the Company makes estimates of losses for groups of loans as required by SFAS No. 5. Loans are grouped by similar characteristics, including the type of loan, the assigned loan grade and the general collateral type. A loss rate reflecting the expected loss inherent in a group of loans is derived based upon estimates of default rates for a given loan grade, the predominant collateral type for the group and the terms of the loan. The resulting estimate of losses for groups of loans are adjusted for relevant environmental factors and other conditions of the portfolio of loans, including: borrower and industry concentrations; levels and trends in delinquencies, charge-offs and recoveries; changes in underwriting standards and risk selection; level of experience, ability and depth of lending management; and national and local economic conditions.

The amount of estimated impairment for individually evaluated loans and groups of loans is added together for a total estimate of loan losses. This estimate of losses is compared to the allowance for loan losses of the Company as of the evaluation date and, if the estimate of losses is greater than the allowance, an additional provision to the allowance would be made. If the estimate of losses is less than the allowance, the degree to which the allowance exceeds the estimate is evaluated to determine whether the allowance falls outside a range of estimates. If the estimate of losses is below the range of reasonable estimates, the allowance would be reduced by way of a credit to the provision for loan losses. The Company recognizes the inherent imprecision in estimates of losses due to various uncertainties and variability related to the factors used, and therefore a reasonable range around the estimate of losses is derived and used to ascertain whether the allowance is too high. If different assumptions or conditions were to prevail and it is determined that the allowance is not adequate to absorb the new estimate of probable losses, an additional provision for loan losses would be made, which amount may be material to the Consolidated Financial Statements.

Intangibles and Goodwill

The Company had approximately $6.4 million in intangible assets and goodwill at March 31, 2008, an increase of $1.2 million since December 31, 2007. On April 1, 2002, the Company acquired Middleburg Investment Advisors, a registered investment advisor, for $6.0 million. Approximately $5.9 million of the purchase price was allocated to intangible assets and goodwill. In connection with this investment, a purchase price valuation (using SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets, as a guideline) was completed to determine the appropriate allocation to identified intangibles. The valuation concluded that approximately 42% of the purchase price was related to the acquisition of customer relationships with an amortizable life of 15 years. Another 19% of the purchase price was allocated to a non-compete agreement with an amortizable life of seven years. The remainder of the purchase price has been allocated to goodwill. Approximately $1.0 million of the $6.3 million in intangible assets and goodwill at March 31, 2008 was attributable to the Company's investment in Middleburg Trust Company. With the consolidation of Southern Trust Mortgage, the Company recognized $1.3 million in goodwill as part of its equity investment.

The purchase price allocation process requires management estimates and judgment as to expectations for the life span of various customer relationships as well as the value that key members of management add to the success of the Company. For example, customer attrition rates were determined based upon assumptions that the past five years may predict the future. If the actual attrition rates, among other assumptions, differed from the estimates and judgments used in the purchase price allocation, the amounts recorded in the Consolidated Financial Statements could result in a possible impairment of the intangible assets and goodwill or require acceleration in the amortization expense.

In addition, SFAS No. 142 requires that goodwill be tested annually using a two-step process. The first step is to identify a potential impairment. The second step measures the amount of the impairment loss, if any. Processes and procedures have been identified for the two-step process.

When the Company completes its ongoing review of the recoverability of intangible assets and goodwill, factors that are considered important to determining whether impairment might exist include loss of customers acquired or significant withdrawals of the assets currently under management and/or early retirement or termination of key members of management. Any changes in the key management estimates or judgments could result in an impairment charge, and such a charge could have an adverse effect on the Company's financial condition and results of operations. The most recent review was performed in February 2008.

Financial Condition

Assets, Liabilities and Shareholders' Equity

Total assets for the Company increased to $923.1 million at March 31, 2008, compared to $841.4 million at December 31, 2007, representing an increase of $81.7 million or 9.7%. Total average assets increased 13.4% from $776.0 million for the three months ended March 31, 2007 to $880.0 million for the same period in 2008. Total liabilities were $842.1 million at March 31, 2008, compared to $763.5 million at December 31, 2007. Total average liabilities increased $99.8 million or 14.3% to $796.8 million at March 31, 2008, compared to the same period in 2007. Average shareholders' equity increased $187,000 over the same periods. The consolidation of Southern Trust Mortgage contributed $36.0 million to the increase in total assets, $26.3 million to the increase in total average assets and total average liabilities and $32.3 million to the increase in total liabilities.

Loans

Loans include both portfolio loans and mortgages held for sale. Total loans at March 31, 2008 were $689.4 million, an increase of $44.6 million from the December 31, 2007 amount of $644.8 million. The consolidation of Southern Trust Mortgage contributed $39.0 million to the increase in total loans, of which $31.1 million are mortgages held for sale. The remaining $7.9 million were real estate construction loans held by Southern Trust Mortgage. The Company continues to see increases in real estate construction loans, which were $118.4 million at March 31, 2008 or 17.2% of total loans, compared to $96.6 million at March 31, 2007. Real estate mortgage loans of $476.9 million at March 31, 2008 decreased from the December 31, 2007 amount of $481.6 million. The decrease in the real estate loans held by Middleburg Bank was due to a decline in demand as a result of the changes in the local economy. The decrease of $4.7 million in real estate mortgage loans held by Middleburg Bank was offset by the consolidation of $31.1 of real estate mortgage loans held for sale by Southern Trust Mortgage. Southern Trust Mortgage has a $5 million line of credit with Middleburg Bank, of which $4.7 million was outstanding at March 31, 2008. The line of credit is eliminated in the consolidation process and is not reflected in the Company's financial statements. Net charge-offs were $1.8 million for the three months ended March 31, 2008. The provision for loan losses for the three months ended March 31, 2007 was

$2.1 million compared to $152,000 for the same period in 2007. The allowance for loan losses was $8.7 million or 1.26% of total loans outstanding at March 31, 2008.

Securities

Securities increased to $157.2 million at March 31, 2008 compared to $129.1 million at December 31, 2007. The Company increased its securities portfolio in an effort to maintain a source of collateral for public fund deposits and repurchase agreements as well as to invest in earning assets to offset the decline in the loan demand. The Company sold $29.4 million securities and purchased $63.4 million securities during the three months ended March 31, 2008. The securities sold during the three months ended March 31, 2008, included $639,000 in securities previously reported as held-to-maturity in the 2007 Form 10K. The held-to-maturity securities had maturities of less than 14 months. The Company had the ability to hold these securities, but elected to sell them as part of an adjustment to the securities portfolio. The remaining held-to-maturity portfolio included two mortgage backed securities with a book value of $26,000 which the Company has transferred to available for sale. The Company will not maintain a held-to-maturity portfolio for the foreseeable future. The Company will continue to maintain its securities portfolio as a source of liquidity and collateral. At March 31, 2008, the tax equivalent yield on the securities portfolio was 5.61%.

Premises and Equipment

Premises and equipment increased $1.0 million from $20.6 million at December 31, 2007 to $21.6 million at March 31, 2008. The consolidation of Southern Trust Mortgage contributed $193,000 to the increase. In February 2008, the Company's subsidiary, Middleburg Trust Company opened an office in Williamsburg which contributed $252,000 to the increase. The remaining increases are the result of the relocation of the Ashburn Financial Service Center and other renovations within the Company's existing facilities.

Other Assets

The other assets section of the balance sheet includes Bank Owned Life Insurance (BOLI), in the amount of $13.4 million at March 31, 2008. The Company had $2.9 million other real estate owned, which includes $439,000 due to the consolidation of Southern Trust Mortgage. The Company is currently working to sell these assets. Goodwill and identified intangibles of $6.4 million are also included in other assets as of March 31, 2008. The $6.4 million is related to the acquisitions of Middleburg Trust Company and Middleburg Investment Advisors, as well as the consolidation of Southern Trust Mortgage.

Deposits

As deposits increased $7.2 million to $596.0 million at March 31, 2008 from $588.8 million at December 31, 2007, average deposits for the quarter ended March 31, 2008 increased 4.9% or $27.7 million compared to average deposits for the quarter ended March 31, 2007. The increase in deposits is primarily due to increases in interest checking. Average interest bearing deposits were $479.6 million for the three months ended March 31, 2008 compared to $448.3 million for the three months ended March 31, 2007.

The Company has an interest bearing product, known as Tredegar Institutional Select, that integrates the use of the cash within client accounts at Middleburg Trust Company for overnight funding at the Bank. The overall balance of this product was $50.8 million at March 31, 2008 and is reflected in both the "savings and interest bearing demand deposits" and the "securities sold under agreements to repurchase" amounts on the balance sheet. Excluding the Tredegar Institutional Select product, savings and interest bearing demand deposits grew by $16.5 million from December 31, 2007 to March 31, 2008.

Time deposits decreased $19.8 million from December 31, 2007 to $210.4 million at March 31, 2008. Time deposits include brokered certificates of deposit, which decreased $18.7 million to $20.7 million at March 31, 2008 from the December 31, 2007 amount of $39.4 million. The decrease is a result of the Company's decision to use of wholesale funding as an alternative to higher cost time deposits in an effort to reduce funding costs while maintaining the ability to fund asset growth. The Company redeemed $5.8 million of its brokered certificates of deposit upon maturity during the three months ended March 31, 2008. The Company exercised its call option on $12.9 million of these deposits. The brokered certificates of deposit have maturities ranging from one month to three years. Securities sold under agreements to repurchase ("Repo Accounts") increased $1.3 million from $51.8 million at December 31, 2007 to $53.1 million at March 31, 2008. The Repo Accounts include certain long-term commercial checking accounts with average balances that typically exceed $100,000 and the Tredegar Institutional Select account which includes accounts maintained by Middleburg Trust Company's business clients.

Short-term Borrowings and Long-term Debt

Additional Federal Home Loan Bank ("FHLB") borrowings funded the Company's asset growth experienced during the three months ended March 31, 2008. FHLB overnight advances were $42.0 million at March 31, 2008 compared to $22.0 million at December 31, 2007. Southern Trust Mortgage has a line of credit that is primarily used to fund its mortgages held for sale. At March 31, 2008, this line had an outstanding balance of $31.7 million and is included in the total short-term borrowings. The line of credit is based on the London InterBank Offered Rate ("LIBOR"). Southern Trust Mortgage also has a $5.0 million line of credit with Middleburg Bank, of which $4.7 million was outstanding at March 31, 2008. The line of credit is eliminated in the consolidation process and is not reflected in the financial statements of the Company. Long-term debt increased to $104.0 million at March 31, 2008 from $88.0 million at December 31, 2007.

Minority Interest in Consolidated Variable Interest Entity

The Company owns 42.3% of the issued and outstanding membership interest units in Southern Trust Mortgage. The remaining 57.7% of issued and outstanding membership interest units are owned by other partners. The ownership interest of these partners is represented in the financial statements as "Minority Interest in Consolidated Variable Interest Entity."

Capital

Shareholders' equity was $76.9 million at March 31, 2008. This amount represents a decrease of 1.3% from the December 31, 2007 amount of $77.9 million. The book value per common share was $16.99 at March 31, 2008 and $17.21 at December 31, 2007.

Results of Operations

Net Interest Income

Net interest income is the Company's primary source of earnings and represents the difference between interest and fees earned on earning assets and the interest expense paid on deposits and other interest bearing liabilities. Net interest income totaled $7.7 million for the first three months of 2008 compared to $6.8 million for the same period in 2007, an increase of 13.5%. Interest income increased 18.9% and interest expense increased 13.5% when comparing the three months ended March 31, 2008 to March 31, 2007. Average earning assets increased $106.6 million from $712.8 million for the three months ended March 31, 2007 to $819.4 million for the three months ended March 31, 2008. The consolidation of Southern Trust Mortgage increased average earning assets $27.4 million.

The following table reflects an analysis of the Company's net interest income using the daily average balances of the Company's assets and liabilities for the three month periods ended March 31, 2008 and 2007. Non-accrual loans are included in the loan balances.

            Average Balances, Income and Expenses, Yields and Rates

                                             Three Months Ended March 31,
                                       2008                                  2007
                        Average      Income/      Yield/      Average      Income/      Yield/
                        Balance      Expense     Rate (1)     Balance      Expense     Rate (1)
                                                (Dollars in thousands)
Assets
Securities:
Taxable                 $  98,025   $    1,242    5.10%     $    93,377      $ 1,223    5.31%
Tax-exempt (2) (3)         42,818          723    6.79%          41,182          737    7.26%
Total securities       $  140,843   $    1,965    5.61%      $  134,559      $ 1,960    5.91%
Loans:
Taxable                $  666,776   $   12,159    7.33%      $  573,281      $ 9,983    7.06%
Tax-exempt (2)                 12           --    0.00%              20           --    0.00%
Total loans            $  666,788   $   12,159    7.33%      $  573,301      $ 9,983    7.06%
Federal funds sold          7,854           65    3.33%           4,351           54    5.03%
Interest-bearing
deposits in
other financial
institutions                3,948           34    3.46%             568            6    4.28%
Total earning assets   $  819,433   $   14,223    6.98%      $  712,779     $ 12,003    6.83%
Less: allowances for
credit losses             (8,487)                               (5,608)
Total nonearning
assets                     69,044                                68,787
Total assets           $  879,990                            $  775,958

Liabilities
Interest-bearing
deposits:
Checking               $  154,814    $     854    2.22%      $  146,104    $     918    2.55%
Regular savings            54,305          289    2.14%          51,020          231    1.84%
Money market savings       41,683          113    1.09%          60,101          162    1.09%
Time deposits:
$100,000 and over         137,087        1,573    4.62%         128,192        1,582    5.00%
Under $100,000             91,690        1,117    4.90%          62,846          625    4.03%
Total interest-bearing
deposits               $  479,579   $    3,946    3.31%      $  448,263   $    3,518    3.18%

Short-term borrowings  $   41,657    $     785    7.58%      $   36,417    $     426    4.74%
Securities sold under
agreements
to repurchase              54,399          385    2.85%          45,597          506    4.50%
Long-term debt             98,078        1,130    4.63%          41,766          486    4.72%
Federal Funds
purchased                     679            4    2.37%             519            8    6.25%
Total interest-bearing
liabilities            $  674,392   $    6,250    3.73%      $  572,562   $    4,944    3.50%
Non-interest bearing
liabilities:
Demand deposits           113,880                               117,498
Other liabilities           8,495                                 6,920
Total liabilities      $  796,767                            $  696,980
Minority interest in
consolidated variable
interest entity             4,058                                    --
Shareholders' equity       79,165                                78,978
Total liabilities and
shareholders'
equity                 $  879,990                            $  775,958

Net interest income                 $    7,973                            $    7,059

Interest rate spread                              3.25%                                 3.33%
Interest expense as a
percent of
average earning assets                            3.07%                                 2.81%
Net interest margin                               3.91%                                 4.02%
. . .