UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                  FORM 10-KSB

                    ANNUAL REPORT UNDER SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                  For the fiscal year ended December 31, 1998

                       Commission File Number:  33-77568

                          VALLEY FINANCIAL CORPORATION

           VIRGINIA                                54-1702380
   (State of Incorporation)          (I.R.S. Employer Identification Number)

                             36 Church Avenue, S.W.
                            Roanoke, Virginia 24011
                    (Address of principal executive offices)

                                 (540) 342-2265
                (Issuer's telephone number, including area code)

Securities registered under Section 12(b) of the Exchange Act:  None
Securities registered under Section 12(g) of the Exchange Act: Common Stock, No
Par Value

Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.  Yes _X_   No ___

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.  [X]

The issuer's revenues for its most recent fiscal year were $7,034,000.

The aggregate market value of the voting stock held by non-affiliates of the
Company (603,309 shares) based on the $15.50 per share last trade price quoted
by the OTC Bulletin Board on March 19, 1999, was $9,351,290.  At March 19, 1999,
964,990 shares of the registrant's common stock were issued and outstanding.

                     Documents incorporated by reference: 

The issuer's Proxy Statement dated March 22, 1999 is incorporated by reference
into Form 10-KSB Part III, Items 9, 10, 11 and 12.

Transitional Small Business Disclosure Format (check one):  Yes ___   No _X_

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<PAGE>


                          VALLEY FINANCIAL CORPORATION
                                  FORM 10-KSB
                               December 31, 1998

                                     INDEX


PART I.
     Item 1.   Description of Business.                                   3
     Item 2.   Description of Property.                                  11
     Item 3.   Legal Proceedings.                                        12
     Item 4.   Submission of Matters to a Vote of Security Holders.      12

PART II.
     Item 5.   Market for Common Equity and Related                      12
                  Stockholder Matters.
     Item 6.   Management's Discussion and Analysis or Plan              13
                  of Operation.
     Item 7.   Financial Statements.                                     26
     Item 8.   Changes in and Disagreements With Accountants on          56
                  Accounting and Financial Disclosure.

PART III.
     Item 9.   Directors, Executive Officers, Promoters and Control      56
                  Persons; Compliance with Section 16(a) of the
                  Exchange Act.
     Item 10.  Executive Compensation.                                   56
     Item 11.  Security Ownership of Certain Beneficial Owners and       56
                  Management.
     Item 12.  Certain Relationships and Related Transactions.           56
     Item 13.  Exhibits and Reports on Form 8-K.                         57

SIGNATURES                                                               59

EXHIBIT INDEX                                                            61

                                       2
<PAGE>


                                    PART I.

Item 1. Description of Business.

Valley Financial Corporation (the "Company") was incorporated as a Virginia
stock corporation on March 15, 1994, primarily to own and control all of the
capital stock of Valley Bank, N.A. (the "Bank").  The Bank opened for business
on May 15, 1995, at its main office in the City of Roanoke, opened its second
office on September 11, 1995, in the County of Roanoke and its third office on
January 15, 1997, in the City of Roanoke.  In January 1998, the Bank opened a
loan production office in the City of Salem.  The Bank's fourth office in the
City of Salem is scheduled to open in April of 1999.

The Bank is a national banking association organized under the laws of the
United States, and engages in the business of commercial banking.  Its deposits
are insured by the FDIC and it is a member of the Federal Reserve System.  The
Company presently engages in no business other than owning and managing the
Bank. 

Location and Service Area

The Bank's primary service area consists of the cities of Roanoke and Salem and
Roanoke County, Virginia, where it conducts a general commercial banking
business while emphasizing the needs of small-to-medium sized businesses,
professional concerns and individuals.  The Bank operates from its main office
at 36 Church Avenue, SW in the City of Roanoke, its branch offices at 4467
Starkey Road, SW in the County of Roanoke and 2203 Crystal Spring Avenue, SW in
the City of Roanoke, and its loan production office at 302 East Main Street in
the City of Salem.  The Bank's fourth branch office in the City of Salem is
scheduled to open in April 1999.

The Roanoke Metropolitan Statistical Area is the regional center for southwest
Virginia, and is located approximately 165 miles west of Richmond, Virginia, 178
miles northwest of Charlotte, North Carolina, 178 miles east of Charleston, West
Virginia and 222 miles southwest of Washington, D.C.  Hollins University and
Roanoke College, with student enrollments of approximately 1,100 and 1,700,
respectively, are located in the Roanoke MSA.  Virginia Polytechnic Institute &
State University, with a student body of some 22,500, is approximately a 45-
minute drive away.

The population in the Roanoke MSA was estimated at 230,200 in 1998, of whom
125,669 were employed.  Although the Roanoke MSA's growth typically is slower
than that in the Commonwealth overall and in other key Virginia markets in
particular, the Virginia Employment Commission reported in 1997 that the area in
the previous three years enjoyed a 5.5% job growth rate compared with a 4.7%
growth rate for the state as a whole.  The Roanoke MSA had an unemployment rate
of 2.1% in December 1998, compared with 4.0% nationally and 2.7% for Virginia.

                                       3
<PAGE>


With 6,754 businesses in 1997, Roanoke City, Roanoke County and Salem City
combined ranked fourth in the Commonwealth in terms of the number of businesses.
The business community in the Roanoke MSA is well diversified by industry
group.  The principal components of the economy are retail trade, services,
transportation, manufacturing and finance, insurance and real estate.  The
Roanoke MSA's position as a regional center creates a strong medical, legal and
business professional community.  Carilion Health System and Lewis-Gale Hospital
are among Roanoke's largest employers.  Other large employers include Norfolk
Southern Corporation, General Electric Co., First Union Corporation, The Kroger
Co., Veterans Administration Hospital and American Electric Power.

Banking Services

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

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

The Bank's lending activities are subject to a variety of lending limits imposed
by federal laws and regulations.  While differing limits apply in certain
circumstances based on the type of loan or the nature of the borrower (including
the borrower's relationship to the Bank), in general the Bank is subject to a
loan-to-one borrower limit of an amount equal to (i) 15% of the Bank's
unimpaired capital and surplus in the case of loans which are not fully secured
by readily marketable collateral, or (ii) 25% of the unimpaired capital and
surplus if the excess over 15% is fully secured by readily marketable
collateral.  The Bank may not make any extensions of credit to any director,
executive officer, or principal shareholder of the Bank or the Company, or to
any related interest of such person, unless the extension of credit is approved
by the Board of Directors of the Bank and is made on terms not more favorable to
such person than would be available to an unaffiliated party.

Other Bank services include safe deposit boxes, certain cash management
services, travelers checks, direct deposit of payroll and social security checks
and automatic drafts for various accounts.  The Bank is associated with the
Honor, Cirrus and The Exchange shared networks of automated teller

                                       4
<PAGE>


machines that may be used by Bank customers throughout Virginia and other
regions.  The Bank also offers VISA and MasterCard credit card services.

The Bank does not plan to exercise trust powers during its initial years of
operation.  The Bank may in the future offer a full-service trust department,
but cannot do so without the prior approval of its primary federal regulator,
the Office of the Comptroller of the Currency (the "OCC").

Competition

The banking business is highly competitive.  The Bank competes as a financial
intermediary with other commercial banks, savings and loan associations, credit
unions, mortgage banking firms, consumer finance companies, securities brokerage
firms, insurance companies, money market mutual funds and other institutions
operating in the Roanoke MSA and elsewhere.  In addition, large borrowers
increasingly are obtaining financing directly by issuing commercial paper
without the involvement of banks.

The Bank's market area is a highly concentrated, highly branched banking market.
As of March 15, 1999, there were fifteen commercial banks and savings
associations operating a total of approximately 100 offices in Roanoke City,
Roanoke County and Salem City.  The only locally owned and operated commercial
banks are the Bank, and Salem Bank & Trust Company. Most competitors are
subsidiaries of holding companies headquartered in North Carolina, Georgia,
Tennessee, and Northern Virginia.  In addition, three out-of-town Virginia based
community banks have branched into the Bank's market area.

Also, numerous credit unions in the aggregate operate additional offices in the
Roanoke MSA.  Further, various other financial companies, ranging from local to
national firms, provide financial services to residents of the Bank's market
area.

The Company believes that the Bank will be able to compete effectively in this
market, and that the community will react favorably to the Bank's community bank
focus and emphasis on service to small businesses, individuals and professional
concerns. 

Employees

At December 31, 1998, the Bank had thirty full-time employees, including its
officers. The Company does not have any regular employees other than its
officers.


                           SUPERVISION AND REGULATION

The Company and the Bank are subject to state and federal banking laws and
regulations which impose specific requirements or restrictions on and provide
for general regulatory oversight with respect to virtually all aspects of
operations.  The following is a brief summary of certain statutes, rules and
regulations affecting the Company and the Bank.

                                       5
<PAGE>


The Company

Because it owns all of the outstanding common stock of the Bank, the Company is
a bank holding company within the meaning of the federal Bank Holding Company
Act of 1956, as amended (the "BHCA"), and Chapter 13 of the Virginia Banking
Act, as amended (the "Virginia Act"). 

The BHCA.  The BHCA is administered by the Board of Governors of the Federal
Reserve System (the "Federal Reserve"), and the Company is required to file with
the Federal Reserve periodic reports and such additional information as the
Federal Reserve may require. The BHCA, with limited exceptions,  requires every
bank holding company to obtain the prior approval of the Federal Reserve before,
(i) it or any of its subsidiaries (other than a bank) acquires substantially all
the assets of any bank, (ii) it acquires ownership or control of any voting
shares of any bank if after such acquisition it would own or control, directly
or indirectly, more than 5% of the voting shares of such bank, or (iii) it
merges or consolidates with any other bank holding company.

The BHCA and the Change in Bank Control Act, together with regulations
promulgated by the Federal Reserve, require that, depending on the particular
circumstances, either Federal Reserve Board approval must be obtained or notice
must be furnished to the Federal Reserve and not disapproved prior to any person
or company acquiring "control" of a bank holding company, such as the Company,
subject to certain exemptions for certain transactions.  Control is conclusively
presumed to exist if an individual or company acquires 25% or more of any class
of voting securities of the bank holding company.  Control is rebuttably
presumed to exist if a person acquires 10% or more but less than 25% of any
class of voting securities and either the company has registered securities
under Section 12 of the Securities Exchange Act of 1934 (the "Exchange Act") or
no other person will own a greater percentage of that class of voting securities
immediately after the transaction.  Under the BHCA, the Company is generally
prohibited from engaging in, or acquiring direct or indirect control of more
that 5% of the voting shares of any company engaged in nonbanking activities
unless the Federal Reserve, by order or regulation, has found those activities
to be so closely related to banking or managing or controlling banks as to be a
proper incident thereto. 

The Federal Reserve imposes certain capital requirements on the Company under
the BHCA, including a minimum leverage ratio and a minimum ratio of "qualifying"
capital to risk-weighted assets.  Subject to its capital requirements and
certain other restrictions, the Company is able to borrow money to make a
capital contribution to the Bank, and such loans may be repaid from dividends
paid from the Bank to the Company, although the ability of the Bank to pay
dividends is subject to regulatory restrictions.  The Company is also able to
raise capital for contribution to the Bank by issuing securities without having
to receive regulatory approval, subject to compliance with federal and state
securities laws.

The Virginia Act.  All Virginia bank holding companies must register with the
Bureau of Financial Institutions of the State Corporation Commission of Virginia
(the "Virginia Commission") under the Virginia Act.  A registered bank holding

                                       6
<PAGE>


company must provide the Virginia Commission with information with respect to
the financial condition, operations, management and intercompany relationships
of the holding company and its subsidiaries.  The Virginia Commission also may
require such other information as is necessary to keep itself informed about
whether the provisions of Virginia law and the regulations and orders issued
thereunder by the Virginia Commission have been complied with, and may make
examinations of any Virginia holding company and its subsidiaries.  Under the
Virginia Act, it is generally unlawful, without the prior approval of the
Virginia Commission, for any Virginia bank holding company to acquire direct or
indirect ownership or control of more than 5% of the voting shares of any
Virginia bank or any other bank holding company. 

Glass-Steagall Act.  The Company also is restricted in its activities by the
provisions of the Glass-Steagall Act, which prohibit the Company from owning
subsidiaries that are engaged principally in the issue, flotation, underwriting,
public sale or distribution of securities.  The interpretation and application
of the provisions of the Glass-Steagall Act have been the subject of review by
the bank regulators and the federal courts in recent years.  Congress has also
reviewed their continued viability in considering efforts to modernize the
financial services system.  The Company does not presently contemplate engaging
in securities-related activities in any material respect.

The Bank

General.  The Bank operates as a national banking association organized under
the laws of the United States and is subject to examination by the OCC.  The OCC
regulates or monitors all areas of the Bank's operations, including security
devices and procedures, adequacy of capitalization and loss reserves, loans,
investments, borrowings, deposits, mergers, issuances of securities, payment of
dividends, interest rates payable on deposits, interest rates or fees chargeable
on loans, establishment of branches, corporate reorganizations and maintenance
of books and records.  The Bank must maintain certain minimum capital ratios and
is subject to certain limits on aggregate investments in real estate, bank
premises and furniture and fixtures.  The Bank is required to prepare quarterly
reports on the Bank's financial condition and to conduct an annual audit of its
financial affairs in compliance with minimum standards and procedures prescribed
by the OCC.  The Bank also is required by the OCC to adopt internal control
structures and procedures in order to safeguard assets and monitor and reduce
risk exposure.  While considered appropriate for the safety and soundness of
banks, these requirements adversely impact overhead costs.

The FDIC establishes rates for the payment of premiums by federally insured
banks for deposit insurance.  A Bank Insurance Fund (the "BIF") is maintained
for commercial banks with insurance premiums from the industry used to offset
losses from insurance payouts when banks fail.  Due to the high rate of failures
in the late 1980's and early 1990's, the fees that commercial banks paid to the
BIF increased significantly.  In the mid 1990's, in light of the banking
industry's improved health and recapitalization of the FDIC insurance fund, the
FDIC lowered banks' deposit insurance premiums generally and eliminated them for
many banks, including the Bank. However, the Bank is charged a deposit-based
assessment by the FDIC in connection with the so-called FICO bonds issued by the

                                       7
<PAGE>


federal government to finance the savings and loan industry bailout.  The FICO
assessment was approximately $8,000 in 1998.  Future deposit insurance premiums
will vary with the strength of the banking industry and there can be no 
assurance that premiums will remain at their current low level.

Transactions with Affiliates.  The Federal Reserve Act restricts the amount and
prescribes conditions with respect to loans, investments, asset purchases and
other transactions (collectively, "Covered Transactions") between banks and
their affiliates.  In addition to limitations as to amount, each Covered
Transaction must meet specified collateral requirements.  Compliance also is
required with certain provisions designed to avoid the taking of low quality
assets.  Additionally, transactions, including Covered Transactions and service
contracts entered into between banks and certain affiliates must be on terms and
under circumstances that are substantially the same as those prevailing at the
time for comparable transactions involving nonaffiliated companies.  The
foregoing restrictions and conditions apply to certain transactions between the
Company and the Bank.

The Bank is subject to restrictions on extensions of credit to executive
officers, directors, principal shareholders, and their related interests.  Such
extensions of credit are limited in their aggregate amount and (i) must be made
on substantially the same terms and conditions, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
unaffiliated parties and (ii) must not involve more than the normal risk of
repayment or present other unfavorable features.

Branching. The Bank may branch without geographic restriction in Virginia.  The
Virginia Act permits statewide branching for Virginia state banks and, as a
national bank located in Virginia, these state branch banking laws also apply to
the Bank.  On September 29, 1994 the federal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Act") was enacted and became effective
in Virginia on July 1, 1995.  The Interstate Act allows bank holding companies
to acquire banks in any state, without regard to state law, except for state
laws relating to the minimum amount of time a bank must be in existence to be
acquired.  Under the Virginia Act, a Virginia bank or all the subsidiaries of a
Virginia bank holding company sought to be acquired must have been in continuous
operation for more than two years before the date of such proposed acquisition.

Community Reinvestment Act.  The federal Community Reinvestment Act ("CRA")
requires that, in connection with examinations of financial institutions within
their jurisdiction, the federal banking regulators evaluate the record of the
financial institutions in meeting the credit needs of their local communities,
including low and moderate income neighborhoods, consistent with the safe and
sound operation of those institutions.  These factors are also considered in
evaluating mergers, acquisitions and applications to open a branch or facility.
Recent legislative and regulatory changes have reduced the paperwork and
regulatory burden of CRA on smaller institutions such as the Bank.  The Bank
received a "Satisfactory" CRA rating from the OCC pursuant to its latest
examination.

Other Regulations.  Interest and certain other charges collected or contracted
for by the Bank are subject to state usury laws and certain federal laws
concerning interest rates.  These laws restrict the interest and charges which
the Bank may impose for certain loans and thereby affect the Bank's interest
income.  The Bank's loan operations also are subject to certain federal laws
applicable to credit transactions, such as the Truth in Lending Act governing
disclosures of credit terms to consumer borrowers, the Home Mortgage Disclosure
Act requiring financial institutions to provide information concerning their

                                       8
<PAGE>


obligation to help meet the housing needs of the local community, the Equal
Credit Opportunity Act prohibiting discrimination on the basis of race, creed or
other prohibited factors in extending credit, the Fair Credit Reporting Act
governing the use and provision of information to credit reporting agencies, and
the rules and regulations of the various federal agencies charged with the
responsibility of implementing such federal laws.  The deposit operations of the
Bank also are subject to the Truth in Savings Act, which governs disclosure and
advertisement of yields and costs of deposits and deposit accounts, the Right to
Financial Privacy Act, which imposes a duty to maintain confidentiality of
consumer financial records and prescribes procedures for complying with
administrative subpoenas of financial records, the Electronic Funds Transfer Act
and Regulation E issued by the Federal Reserve to implement that Act, which
govern automatic deposits to and withdrawals from deposit accounts and
customers' rights and liabilities arising from the use of automated teller
machines and other electronic banking services, the Expedited Funds Availability
Act and Regulation CC issued by the Federal Reserve to implement that Act, which
govern the availability of funds, return of checks, the settlement of checks,
check endorsement and presentment and notification of nonpayment, and the Bank
Secrecy Act, which requires reporting to the federal government of certain cash
transactions.  These and other similar laws result in significant costs to
financial institutions and create the potential for liability to consumers and
regulatory authorities.

Dividends.  At present, the Company's revenues consist of interest and dividends
on investments, and interest income on purchased loan participations.  In the
future, it is expected that the principal source of the Company's revenues will
be dividends received from the Bank.  The amount of dividends that may be paid
by the Bank to the Company will depend on the Bank's earnings and capital
position and is limited by federal law, regulations and policies.  A national
bank may not pay dividends from its capital; all dividends must be paid out of
undivided profits then on hand, after deducting expenses, including reserves for
losses and bad debts.  In addition, a national bank is prohibited from declaring
a dividend on its shares of common stock until its surplus equals its stated
capital, unless there has been transferred to surplus no less than one-tenth of
the bank's net profits of (i) the preceding two consecutive half-year periods
(in the case of an annual dividend) or (ii) the preceding half-year period  (in
the case of a quarterly or semi-annual dividend).  The approval of the OCC is
required if the total of all dividends declared by a national bank in any
calendar year exceeds the total of its net profits for that year combined with
its retained net profits for the preceding two years, less any required
transfers to surplus.  The Bank may not pay a dividend if, after giving effect
to the dividend, the Bank would be undercapitalized.  The Company does not
anticipate paying cash dividends to shareholders in the near term and therefore
does not anticipate the need for the Bank to pay a dividend to the Company
during such period.  See "Capital Regulations" below, "Item 5. Market for Common
Equity and Related Stockholder Matters" and Note 9 to the Consolidated Financial
Statements.

Capital Regulations.  The federal bank regulatory authorities impose certain
capital requirements on the Company and the Bank.  The requirements apply to a
bank holding company with more than $150 million in consolidated assets on a
bank-only basis with limited exceptions.  In addition to minimum capital levels
prescribed by regulation, the Federal Reserve and the OCC have authority to
require higher capital levels on a case-by-case basis as part of their
supervisory and enforcement powers, including approval of expansion programs.

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<PAGE>


In an effort to achieve a measure of capital adequacy that is more sensitive to
the individual risk profiles of financial institutions, the federal bank
regulatory authorities have adopted risk-based capital adequacy guidelines that
redefine traditional capital ratios to take into account assessments of risks
related to each balance sheet category, as well as off-balance sheet financing
activities.  Under the guidelines, banks' and bank holding companies' assets are
given risk weightings based on assumptions as to the relative risk inherent in
each asset category.  The total risk-weighted assets are equal to the sum of the
aggregate dollar value of assets and certain off-balance sheet items (such as
currency or interest rate swaps) in each category, multiplied by the weight
assigned to that category. The qualifying total capital base is divided by the
total risk-weighted assets to derive a ratio.

An institution's qualifying total capital consists of two components - Core or
Tier 1 capital and Supplementary or Tier 2 capital.  Tier 1 capital is
essentially equal to common stockholders' equity, qualifying perpetual preferred
stock and minority interests in equity accounts of consolidated subsidiaries,
less disallowed intangibles.  Tier 2 capital, generally includes certain types
of preferred stock and debt securities, hybrid capital instruments and a limited
amount, not to exceed 1.25% of gross risk-weighted assets, of the reserves for
loan and lease losses.

To supplement the risk-based capital guidelines, the federal bank regulatory
agencies also have imposed a leverage ratio, which is Tier 1 capital as a
percentage of certain average quarterly assets. The principal objective of the
leverage ratio is to place a constraint on the maximum degree to which a bank or
bank holding company may leverage its equity capital base.  Institutions
receiving less than the highest composite examination ratings are required to
maintain a leverage ratio of at least 100 basis points above the regulatory
minimum.

At December 31, 1998 the Company and the Bank had the following risk-based
capital and leverage ratios relative to regulatory minimums:

<TABLE>
<CAPTION>

          Ratio           Company           Bank            Minimum
          -----           -------           ----            -------
          <S>             <C>              <C>              <C>
          Tier 1           11.34%           9.77%             4%
          Total            12.24%          10.68%             8%
          Leverage          8.65%           7.47%             4%

</TABLE>


The regulations define five categories of compliance with regulatory capital
requirements, ranging from "well capitalized" to "critically undercapitalized."
To qualify as a "well capitalized" institution, a bank must have a leverage
ratio of no less than 5%, a Tier 1 risk-based ratio of no less than 6%, and a
total risk-based ratio of no less than 10%, and the bank must not be under any
order or directive from the appropriate regulatory agency to meet and maintain a
specific capital level.  As of December 31, 1998 the Company and the Bank
qualified as "well-capitalized" institutions (see Note 9 to the Consolidated
Financial Statements).

The applicable federal bank regulatory agency can treat an institution as if it
were in the next lower category if the agency determines (after notice and an

                                       10
<PAGE>


opportunity for hearing) that the institution is in an unsafe or unsound
condition or is engaging in an unsafe or unsound practice.  The degree of
regulatory scrutiny of a financial institution will increase, and the
permissible activities of the institution will decrease, as it moves downward
through the capital categories.  Institutions that fall into one of the three
undercapitalized categories may be required to submit a capital restoration
plan, raise additional capital, restrict their growth, deposit interest rates
and other activities, improve their management, eliminate management fees to
parent holding companies, and even divest themselves of all or a part of their
operations.  Bank holding companies can be called upon to boost their subsidiary
banks' capital and to partially guarantee the institutions' performance under
their capital restoration plans.  If this occurs, capital which otherwise would
be available for holding company purposes, including possible distribution to
shareholders, would be required to be downstreamed to one or more subsidiary
banks.

Effect of Governmental Monetary Policies

The earnings of the Bank are affected by domestic economic conditions and the
monetary and fiscal policies of the United States government and its agencies. 
The Federal Reserve's monetary policies have had, and will likely continue to
have, an important impact on the operating results of commercial banks through
its power to implement national monetary policy in order, among other things, to
curb inflation or combat a recession.  The monetary policies of the Federal
Reserve have major effects upon the levels of bank loans, investments, deposits,
interest income and interest expense through its open market operations in
United States government securities and through its regulation of interest rates
and the reserve requirements against member bank deposits.  It is not possible
to predict the nature or impact of future changes in monetary and fiscal
policies.

Item 2.  Description of Property.

The Bank's main office is located in a seven story office building at 36 Church
Avenue, S.W., in downtown Roanoke, Virginia, 24011.  At December 31, 1998, the
Bank leased approximately 8,148 square feet of newly-renovated office space on
the first floor of this facility.  The lease commenced April 1, 1995 and has an
initial base term expiring December 31, 1999, renewable for two five-year terms
at the Bank's option.  Annual base rent on the leased space is $82,370 payable
in equal monthly installments of $6,864.  The Bank also is responsible for
paying a pro rata share of certain operating costs associated with the leased
space.  Under the lease, the Bank is granted a right of first refusal to lease
approximately 2,400 square feet of space on the mezzanine level, which right it
exercised effective March 1, 1999.  The cost of leasehold improvements to the
leased premises, net of accumulated amortization, was $190,621 at December 31,
1998. 

The Bank's Starkey Road office is a newly-constructed 2,700 square foot building
located on a one acre site at 4467 Starkey Road in southwest Roanoke County
(Tanglewood Mall area).  The Company acquired the site for cash in the amount of
$272,250, and total cost of the facility constructed thereon, net of accumulated
depreciation, was $424,333 at December 31, 1998. 

The Bank's South Roanoke Office is a newly-renovated 914 square foot facility
that the Bank leases at a 1998 annual rate of $10,620, payable in equal monthly
installments of $885.  For 1999, the annual rental will increase to $11,040,

                                       11
<PAGE>


payable in equal monthly installments of $920.  The Bank is also responsible for
utilities.  The lease commenced January 1, 1997, and has an initial term of
twelve years with one five-year renewal option.  The cost of leasehold
improvements to the leased premises, net of accumulated amortization, was $8,641
at December 31, 1998.

The Salem loan production office is in a downtown building converted to office
suites.  The Bank leases approximately 200 square feet for $100 per month on a
month-to-month lease.

The Bank's fourth office in the City of Salem is scheduled to open in April of
1999.  As of December 31, 1998 total costs associated with the construction of
the facility were $617,306.  Upon completion of the branch, the Salem loan
production office will be closed.

In the opinion of management of the Company, its properties are adequate for its
current operations and adequately covered by insurance.

Item 3.  Legal Proceedings.

Neither the Company nor the Bank is a party to, nor is any of their property the
subject of, any pending legal proceedings.

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

No matter was submitted to a vote of security holders during the fourth quarter
of the fiscal year covered by this report.


                                    PART II.

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

Market information.  The Company's Articles of Incorporation authorize it to
issue up to 10,000,000 shares of Common Stock, no par value, of which 964,990
shares were issued and outstanding at March 15, 1999. 

The Common Stock is quoted under the symbol VYFC on the OTC Bulletin Board, an
electronic quotation and trade reporting service of the National Association of
Securities Dealers. According to information obtained by Company management and
believed to be reliable, the quarterly range of closing prices per share for the
Common Stock during the last two fiscal years was as follows:

<TABLE>
<CAPTION>

           1998       Quarter Ended      High Close      Low Close
                      -------------      ----------      ---------
           <S>        <C>                <C>             <C>
                         03/31/98          $15.00          $12.00
                         06/30/98          $15.25          $13.75
                         09/30/98          $16.00          $14.00
                         12/31/98          $15.50          $14.00

                                       12
<PAGE>


           1997       Quarter Ended      High Close      Low Close
                      -------------      ----------      ---------
                         03/31/97          $11.50           $9.75
                         06/30/97          $11.25          $10.00
                         09/30/97          $14.00          $10.00
                         12/31/97          $13.00          $11.00

</TABLE>


Holders. At March 15, 1999 there were approximately 598 holders of record of the
Company's outstanding Common Stock.

Dividends.  The Company has not paid any dividends and does not anticipate
paying any cash dividends to shareholders in the near term.  The Bank's and the
Company's earnings will be retained for several years following the Bank's
opening, and perhaps longer, to expand the Bank's capital base and to support
future growth.  See "Supervision and Regulation" and Note 9 to the Consolidated
Financial Statements for restrictions on the payment of dividends.

Item 6.  Management's Discussion and Analysis (000's omitted, except for share
and per share information).

The following is management's discussion and analysis of the financial 
condition and results of operations of the Company as of and for the years 
ended December 31, 1998 and 1997.  The discussion should be read in 
conjunction with the Company's Consolidated Financial Statements and Notes 
thereto.

Overview

The Company was incorporated as a Virginia stock corporation on March 15, 1994,
primarily to own and control all of the capital stock of the Bank.  The Bank
opened for business on May 15, 1995. In July 1995, the Company completed its
initial public offering of 964,040 shares of its common stock, no par value, at
a price of $10.00 per share.  The Offering resulted in gross proceeds to the
Company of $9,640, reduced by $551 of direct stock issuance costs associated
with the Offering, for net proceeds of $9,089.  Of the net proceeds of the
Offering, $7,900 has been invested in the Bank as equity capital and the
remainder retained at the parent company for working capital needs and future
financial flexibility.

Total assets at December 31, 1998 were $105,186, up 41% from $74,677 at December
31, 1997.  The principal components of the Company's assets at the end of the
period were $26,118 in securities available-for-sale and $71,622 in gross loans.
Total liabilities at December 31, 1998 were $96,029, up 45% from $66,398 one
year earlier.  The largest component of this increase is represented by a 37% or
$24,438 growth in deposits over the previous year.  During 1998, there was also
a $5,000 long-term FHLB advance, which contributed the remaining 8% increase in
total liabilities.  Total shareholders' equity at December 31, 1998 was $9,157,
consisting of $9,089 in net proceeds from the Company's initial public offering,
$6 in proceeds from the exercise of stock options during 1998, reduced by the
accumulated deficit of $108 and including $170 of unrealized gains on securities

                                       13
<PAGE>


available-for-sale, net of related deferred tax expense.  At December 31, 1997
total shareholders' equity was $8,279.

The Company had net income of $758 for the year ended December 31, 1998,
compared with $883 for the year ended December 31, 1997.  Excluding the $397
income tax benefit associated with the recognition of deferred tax assets,
including the Company's available net operating loss carryforwards, net income
would have been $486 for 1997.  The substantial improvement in profitability
results from an improved net interest margin and a substantial increase in
noninterest income, partially offset by increased noninterest expenses in all
major categories.

Profitability as measured by the Company's return on average assets ("ROA") was
 .83% in 1998 and return on average equity (_ROE_) was 8.87% in 1998.  The ROA
and ROE ratios were 1.40% and 11.79% in 1997, respectively.  Excluding the
income tax benefit referred to in the preceding paragraph, ROA and ROE for 1997
would have been .77% and 6.48%, respectively. 

Results of Operations

Net Interest Income.  Net interest income is the amount by which interest and
fees generated from loans and investments exceeds the interest expense
associated with funding those assets, and represents the principal source of
earnings for the Company.  Changes in the volume and mix of earning assets and
interest-bearing liabilities, as well as their respective yields and rates, have
a significant impact on the level of net interest income.  Changes in the
interest rate environment and the Company's cost of funds also affect net
interest income. 

Net interest income was $3,258 for 1998 and is attributable to interest income
from loans and securities exceeding the cost of interest paid on deposits and
borrowed funds.  Net interest income increased $963 or 42% over the same period
in 1997. Total interest income was $6,770 for 1998 as compared to $4,806 in
1997, an increase of $1,964 or 41%.  This increase is attributable to the Bank's
reinvestment of deposit growth into loans and securities.  The net interest
margin was 3.86% for the year ended 1998 as compared to 3.80% for the year ended
1997.  This .06% increase in the margin from 1997 to 1998 is compared to a .29%
decrease in the margin from 1996 to 1997.  This slowed decrease in the margin is
largely attributable to lower deposit costs, as the cost of funds ratio
decreased from 4.55% in 1997 to 4.28% in 1998.

The following table presents the major categories of interest-earning assets,
interest-bearing liabilities and shareholders' equity with corresponding average
balances, related interest income or expense and resulting yields and rates for
the periods indicated.

                                       14
<PAGE>


<TABLE>
<CAPTION>

                        ANALYSIS OF NET INTEREST INCOME

                                         Years Ended December 31
                          -----------------------------------------------------
                                    1998                         1997
                          -------------------------   -------------------------
                          Average  Interest  Rate      Average Interest  Rate
Assets                    Balance  Income    Earned    Balance Income    Earned
-------------------------------------------------------------------------------
<S>                      <C>       <C>       <C>      <C>      <C>       <C>
Interest-earnings assets:
  Loans(2)               $59,175     5,059    8.55%   $41,080     3,558   8.66%
  Investment securities
     Taxable              20,888     1,365    6.53%    17,995     1,180   6.56%
     Nontaxable            4,104       295    7.19%         -         -
  Money market 
   investments             2,892       151    5.22%     1,276        68   5.33%
                         -----------------            -----------------
Total interest-earning
 assets                   87,059     6,870    7.89%    60,351     4,806   7.96%

Other Assets:
Reserve for loan losses     (571)                        (400)
Cash and due from banks    2,451                        2,437
Other assets, net          2,624                        1,168
                         -------                      -------
Total assets             $91,563                      $63,556
                         =======                      =======


                                         Years Ended December 31
                          -----------------------------------------------------
                                    1998                         1997
                          ------------------------    -------------------------
Liabilities and           Average  Interest  Rate      Average Interest  Rate
Stockholders' Equity      Balance  Expense   Paid      Balance Expense   Paid
-------------------------------------------------------------------------------
Interest-bearing liabilities:
  Savings and NOW         $25,461      866   3.40%    $13,539       485   3.58%
  Time                     42,995    2,391   5.56%     36,541     2,017   5.52%
  FHLB advances             4,137      208   5.03%          -         -
  Other borrowings            839       47   5.60%        154         9   5.84%
                          ----------------            -----------------
Total interest-bearing
 liabilities               73,432    3,512   4.78%     50,234     2,511   5.00%

Noninterest-bearing liabilities:
  Demand deposits           8,602                       4,931
  Other liabilities           910                         886
                          -------                     -------
Total liabilities          82,944                      56,051

Stockholders' equity        8,619                       7,505
                          -------                     -------
Total liabilities and
 stockholders' equity     $91,563                     $63,556
                          =======                     =======

Net interest income                 $3,358                       $2,295
                                    ======                       ======

Net interest margin(3)                       3.86%                        3.80%
                                             =====                        =====

</TABLE>

                                       15
<PAGE>


Legends for the table are as follows:
(1)    Averages are daily averages.
(2)    Loan interest income includes loan fees of $156 and $85 for the years 
       ended 1998 and 1997, respectively.
(3)    Nontaxable interest income is adjusted to its fully taxable equivalent 
       basis using a federal tax rate of 34 percent.
(4)    The net interest margin is calculated by dividing net interest income 
       (tax equivalent basis) by average total earning assets.

As discussed above, the Company's net interest income is affected by the change
in the amount and mix of interest-earning assets and interest-bearing
liabilities (referred to as "volume change") as well as by changes in yields
earned on interest-earning assets and rates paid on deposits and borrowed funds
(referred to as "rate change").  The following table presents, for the periods
indicated, a summary of changes in interest income and interest expense for the
major categories of interest-earning assets and interest-bearing liabilities and
the amounts of change attributable to variations in volumes and rates.  Changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.


<TABLE>
<CAPTION>

                              RATE/VOLUME ANALYSIS

                                               Year Ended December 31,
                                            ------------------------------
                                                 1998 compared to 1997
                                            ------------------------------
                                            Volume       Rate         Net
                                            ------------------------------
<S>                                         <C>          <C>         <C>
Interest earned on interest-earning assets:
   Loans                                    $1,547         (46)      1,501
Investment securities:
   Taxable                                     181           4         185
   Nontaxable                                  295           0         295
Money market investments                        85          (2)         83
--------------------------------------------------------------------------
Total interest earned on interest-
 earning assets                              2,108         (44)      2,064
--------------------------------------------------------------------------
Interest paid on interest-bearing
 liabilities:
   Savings and NOW                             417         (36)        381
   Time                                        355          19         374
   FHLB borrowings                             208           0         208
   Other borrowings                             38           0          38
--------------------------------------------------------------------------
Total interest paid on interest-
 bearing liabilities                         1,018         (17)      1,001
--------------------------------------------------------------------------
Change in net interest income               $1,090         (27)      1,063
--------------------------------------------------------------------------

</TABLE>

                                       16
<PAGE>


Provision for Loan Losses.  A provision for loan losses of $249 and  $131 was
provided during 1998 and 1997, respectively in recognition of management's
estimate of inherent risks associated with lending activities.  Due to the
Bank's limited operating history, this estimate is primarily based on industry
practices and consideration of local economic factors.  The amount of the
provision for loan losses is a charge against current earnings, and actual loan
losses are charges against the allowance for loan losses. The allowance for loan
losses was $708 and $459 as of December 31, 1998 and 1997, respectively and
represents approximately 1.00% and .99%, respectively of net loans outstanding
(see Note 4 to the Consolidated Financial Statements).  The increase in
provision expense is due to the increase in the rate of loan growth from 39% for
1997 to 54% for 1998.

No assurance can be given that unforeseen adverse economic conditions or other
circumstances will not result in increased provisions in the future. 
Additionally, regulatory examiners may require the Company to recognize
additions to the allowance based upon their judgment about the loan portfolio
and other information available to them at the time of their examinations.

Noninterest Income.  Noninterest income of $264 in 1998 consisted of service
charges and fees on accounts, securities gains and losses, and other
miscellaneous income, and represented an increase of $86 or 48% over the 1997
level.  Future levels of noninterest income are expected to increase as a direct
result of business growth and expansion. 

Noninterest Expense.  Noninterest expense for 1998 was $2,252, an increase of
$396 or 21% over 1997.  Noninterest expenses are expected to continue to
increase in future years as a direct result of business growth and expansion. 

Year 2000.  The Year 2000 issue arises from computer programs being written
using two digits rather than four to abbreviate the year portion of dates. 
Computer hardware, software and devices with imbedded technology that are time-
sensitive may not recognize the abbreviation "0" as meaning the year 2000, but
instead read it as the year 1900.  This could result in system failures or
miscalculations causing disruption of normal operations including, among other
things, a temporary impairment of the ability to process transactions, calculate
interest payments correctly or engage in normal routine business activities. 
The Company has undertaken various initiatives intended to ensure that its
computer equipment and software will function properly with respect to dates in
the year 2000 and thereafter.  Included in the initiatives are information
technology ("IT") systems such as accounting, data processing, financial
transaction processing, ATM and telephone, and non-IT systems such as alarm
systems, fax machines, copiers, heating and air conditioning controls and
elevator controls.  Both IT and non-IT systems may contain imbedded technology.
The Company's initiatives include awareness of the problem, assessing the size
and complexity of the effort in the context of the Company's systems, renovation
of non-compliant systems through upgrade or replacement, validation through
testing of Year 2000 compliance and implementation of compliant systems.  The
Company also is taking steps to ascertain the Year 2000 compliance status of its
major customers and vendors, and to develop contingency plans in the event of
unexpected failure of one or more of its mission-critical systems. The awareness
and assessment phases of the Year 2000 project are 100% complete.

                                       17
<PAGE>


The Company does not operate its own mainframe computer system and has not
developed/supported software code for its information systems, so remediation
efforts have focused on achieving compliance from outside servicers and vendors,
and on internal testing of hardware and software systems.  The Company's banking
operations are highly dependent on one external service bureau for its data
processing and on one vendor for loan/deposit software.  The Company is
monitoring the Year 2000 compliance status of both these third-party providers,
and will validate their compliance through its own testing efforts.  A
comprehensive contingency plan has not yet been developed for dealing with the
most reasonably likely worst case scenario in the event of failure by the
Company or its primary third-party providers to achieve Year 2000 compliance on
a timely basis, and such scenario has not been clearly identified.  The Company
presently intends to complete such analysis and contingency planning by December
31, 1999.

The Company also is taking steps to assess the potential impacts of Year 2000
issues on its major commercial borrowers.  Should a commercial borrower fail to
deal adequately with Year 2000's impact on its computer systems, it operations
could be jeopardized and its ability to repay its loan threatened.  All
commercial borrowers in significant amounts have been sent questionnaires
concerning their Year 2000 preparedness.  Completed questionnaires are being
evaluated to identify moderate and high-risk credits.  Year 2000 risk factors
are being incorporated into the overall risk ratings for all new and renewed
commercial loans and, where appropriate, more stringent standards will be
imposed in underwriting criteria, loan covenants and required collateral.  As of
December 31, 1998 the Company expects that virtually all commercial borrowers
will be considered low Year 2000 risk by the end of the first quarter 1999.

As part of its board approved Year 2000 Action Plan, the Company established a
budget for Year 2000 compliance.  As of December 31, 1998 actual expenditures
have approximated $16.  Total expenditures, primarily for testing, software
upgrades and consultants, are not expected to exceed $100.  The costs of Year
2000 identification, assessment, remediation and testing efforts and the dates
on which the Company currently believes it will complete such efforts are based
upon management's best estimates, which were derived using numerous assumptions
regarding future events, including the continued availability of certain
resources, third-party remediation plans and other factors.  There can be no
assurance that these estimates will prove to be accurate, and actual results may
differ materially from those currently anticipated.  Specific factors that could
cause such material differences include, but are not limited to, the
availability and cost of personnel trained in Year 2000 issues, the ability to
identify, assess, remediate and test all relevant IT systems and imbedded
technology, and similar uncertainties.

The failure by the Company or a primary third-party provider to correct a
material Year 2000 problem could result in the interruption in, or failure of,
certain normal business activities or operations.  Such failure could have a
material adverse effect on the Company's results of operations, liquidity and
financial condition.  Due to the general uncertainty inherent in the Year 2000
problem, resulting in part from the uncertainty of the Year 2000 readiness of
third-party providers and customers, the Company presently is unable to provide
assurances that such material adverse impact will not be the case.  The Year
2000 project is expected to significantly reduce the Company's level of
uncertainty about the Year 2000 problem and, in particular, about the Year 2000
compliance and readiness of it primary third-party providers.  The Company

                                       18
<PAGE>


believes that, with the implementation of remediated IT systems and completion
of the Year 2000 project as scheduled, the possibility of significant
interruptions of normal business operations should be reduced.

Income Taxes.  During 1998, the Company recorded a federal income tax provision
in the amount of $263.  The Company recorded no expense in 1997 for federal or
state income taxes, due to the availability of net operating loss carryforwards
in both periods.  In 1997, the Company recognized an income tax benefit of $397
associated with recognition of deferred tax assets, including its available net
operating loss carryforwards.

Asset/Liability Management and Liquidity

Asset/liability management activities are designed to ensure that adequate
liquidity is available to meet loan demand or deposit outflows and, through the
management of the Company's interest sensitivity position, to manage the impact
of interest rate fluctuations on net interest income.

Liquidity.  Liquidity measures the ability of the Company to meet its maturing
obligations and existing commitments, to withstand fluctuations in deposit
levels, to fund its operations and to provide for customers' credit needs. 
Liquidity represents a financial institution's ability to meet present and
future financial obligations through either the sale or maturity of existing
assets or the acquisition of additional funds from alternative funding sources.

The Company's asset liquidity is provided by cash and due from banks, federal
funds sold, investments available for sale, and through the management of
investment maturities/prepayments and loan repayments.  The Company's ratio of
liquid assets to deposits and short-term borrowings was 35% at December 31, 1998
and 40% at December 31, 1997.  The ratio declined due to a 21% growth rate in
liquid assets as compared to a 37% growth rate in deposits in 1998 over 1997. 
The Company sells excess funds as overnight federal funds sold to provide an
immediate source of liquidity.  Federal funds sold at December 31, 1998 were
$1,699 compared to $1,440 at December 31, 1997.

The level of deposits may fluctuate, perhaps significantly so, due to seasonal
cycles of depositing customers and the promotional activities of competitor
financial institutions.  Similarly, the level of demand for loans may vary
significantly and at any given time may increase or decrease substantially. 
However, unlike the level of deposits, management has more direct control over
lending activities and if necessary can adjust the level of those activities
according to the amounts of available funds.

In addition to asset liquidity, the Company would have liquidity available to it
through increasing certain categories of liabilities.  It could purchase
overnight federal funds, borrow from correspondent banks, sell securities under
a repurchase agreement or obtain advances from the Federal Home Loan Bank.  As a
result of the Company's management of liquid assets and the ability to generate
liquidity through alternative funding sources, management believes the Company
maintains overall liquidity sufficient to meet its depositors' requirements and
satisfy its customers' credit needs.

                                       19
<PAGE>


Interest Rate Risk

Interest rate risk is the risk to earnings or capital generated by movement of
interest rates.  It can come from differences between the timing of rate changes
and the timing of cash flows (repricing risk); from changing rate relationships
among yield curves that affect bank activities (basis risk); from changing rate
relationships across the spectrum of maturities (yield curve risk); and from
interest rate related options imbedded in bank products (option risk). 

While no single measure can completely identify the impact of changes in
interest rates on net interest income, a commonly-used technique within the
industry is to assess the differences in the amounts of rate-sensitive assets
and rate-sensitive liabilities.  These differences or "gaps" provide an
indication of the extent to which net interest income may be affected by future
changes in interest rates.  A "positive gap" exists when rate-sensitive assets
exceed rate-sensitive liabilities and indicates that a greater volume of assets
than liabilities will reprice during a given period.  A positive gap may enhance
earnings in a rising interest rate environment and may inhibit earnings in a
declining interest rate environment.  Conversely, when rate-sensitive
liabilities exceed rate-sensitive assets (a "negative gap"), a greater volume of
liabilities than assets will reprice within the period.  In such a case, a
rising interest rate environment may inhibit earnings and a declining interest
rate environment may enhance earnings. 

Some financial institutions evaluate their "gaps" strictly from a balance sheet
perspective, calculating the absolute difference between the volumes of assets
and liabilities that have the contractual ability to reprice within a given
period in response to changes in interest rates.  Company management believes
this "balance sheet gap" methodology does not adequately take into consideration
the differences in the way various balance sheet items react to changing
interest rates.  For example, the rate on savings accounts does not move in
direct tandem with changes in the prime rate, but typically increases or
decreases to a much lesser extent.  On the other hand, home equity lines and
many commercial loans are tied directly to prime and immediately reprice to the
full extent of any changes in the prime rate.  Accordingly, the Company utilizes
an "income statement gap" methodology that analyzes the various asset and
liability categories and assigns them a "change ratio" that estimates their
relative change in response to a change in the prime rate, based on industry
trends and the Company's own experience.

At least quarterly, the Company calculates the Bank's "income statement gap" to
estimate how many assets and liabilities would reprice, and to what extent,
within a one year period in response to changes in the prime rate.  Utilizing
this methodology and assuming a 200 basis point increase in prime, the Bank at
December 31, 1998 had a negative one-year gap of ($2,934) or 2.82% of total
assets.  At that same date and assuming a 200 basis point decrease in prime, the
Bank had a positive one-year gap of $7,839 or 7.54% of total assets.  The one-
year gaps under both interest rate scenarios are well within Company policy
parameters.

Impact of Inflation

The consolidated financial statements and notes thereto presented herein have
been prepared in accordance with generally accepted accounting principles, which
requires the measurement of financial position and operating results in terms of
historical dollars without considering changes in the relative purchasing power
of money over time due to inflation.  Unlike most industrial companies, nearly

                                       20
<PAGE>


all the assets and liabilities of the Company and the Bank are monetary in
nature. As a result, interest rates have a greater impact on the Company's
performance than do the effects of changes in the general rate of inflation and
changes in prices.  In addition, interest rates do not necessarily move in the
same direction or in the same magnitude as do the prices of goods and services.
Management seeks to manage the relationship between interest-sensitive assets
and liabilities in order to protect against wide interest rate fluctuations,
including those resulting from inflation.

Investment Portfolio

The Company's investment portfolio is used both for investment income and
liquidity purposes.  Funds not used for capital expenditures or lending
activities are invested in securities of the U.S. Government and its agencies,
mortgage-backed securities, municipal bonds, corporate bonds and equity
securities.  Obligations of the U.S. Government and its agencies include
treasury notes and callable or noncallable agency bonds.  Mortgage-backed
securities include pools issued by government agencies.  Municipal bonds include
taxable and tax-exempt general obligation and revenue issues.  Corporate bonds
are investment grade issue.  Equity securities include shares of the Federal
Reserve Bank of Richmond, Federal Home Loan Bank of Atlanta, Community Bankers
Bank and corporate preferred stocks.  The Company does not invest in derivatives
or other types of high-risk securities.  The entire investment portfolio is
classified as available-for-sale in order to provide maximum liquidity for
funding needs.

Investment securities at December 31, 1998 were $26,118, an increase of $4,974
or 24% from their level of $21,144 on December 31, 1997.  The increase was due
to the purchase of investment securities with the proceeds from a $5,000 FHLB
advance.

<TABLE>
<CAPTION>

                  INVESTMENT PORTFOLIO - MATURITY DISTRIBUTION

                                                     December 31, 1998
                                                ----------------------------
                                                Amortized    Fair
Available-for-sale                                Costs      Values    Yield
----------------------------------------------------------------------------
<S>                                              <C>         <C>       <C>
U.S. Treasury securities and obligations
 of U.S. Government corporations:
   Within one year                               $   250       250      6.78%
   After one but within five years                 7,300     7,333      5.93%
   After five but within ten years                 7,329     7,346      6.29%
   After ten years                                    --        --        --
Obligations of states and subdivisions:
   Within one year                                    --        --        --
   After one but within five years                   300       304      6.92%
   After five but within ten years                   158       161      6.82%
   After ten years                                 5,647     5,831      7.17%
Corporate securities:
   After one but within five years                   100       102      7.05%
Other securities:
   After one but within five years                   498       498      7.36%
   After ten years                                   437       442      6.86%
Mortgage-backed securities:                        3,841     3,851
------------------------------------------------------------------
Total available-for-sale                         $25,860    26,118
------------------------------------------------------------------

</TABLE>

                                       21
<PAGE>


For more information on the investment portfolio, see Note 3 to the consolidated
financial statements.

Loan Portfolio

The Company's net loans were $70,875 at December 31, 1998, an increase of
$24,725 or 54% from the $46,150 reported one year earlier.  The Company's ratio
of net loans to total deposits was 78.7% at December 31, 1998 and 70.4% at
December 31, 1997.  Management seeks to maintain the ratio of loans to deposits
in a range of 70% to 85%.

The loan portfolio primarily consists of commercial, real estate (including real
estate term loans, construction loans and other loans secured by real estate)
and loans to individuals for household, family and other consumer purposes.  The
Company adjusts its mix of lending and the terms of its loan programs according
to economic and market conditions, asset/liability management considerations and
other factors.  Loans typically (in excess of 90%) are made to businesses and
individuals located within the Company's primary market area, most of whom
maintain deposit accounts with the Bank.  There is no concentration of loans
exceeding 10% of total loans which is not disclosed in the consolidated
financial statements and the notes thereto or discussed below. The Company has
not made any loans to any foreign entities, including governments, banks,
businesses or individuals.  Commercial and construction loans and home equity
lines of credit in the loan portfolio are primarily variable rate loans and have
little interest rate risk.

Commercial Loans.  Commercial and industrial loans accounted for 25% of the loan
portfolio as of December 31, 1998 and stood at $17,794 versus $12,997 one year
earlier.  Such loans generally are made to provide operating lines of credit, to
finance the purchase of inventory or equipment, and for other business purposes.
The creditworthiness of the borrower is analyzed and re-evaluated on a periodic
basis.  Most commercial loans are collateralized with business assets such as
accounts receivable, inventory and equipment.  Even with substantial collateral
such as all the assets of the business and personal guarantees, commercial
lending involves considerable risk of loss in the event of a business downturn
or failure of the business.

Commercial Real Estate Loans.  Commercial real estate construction and
commercial real estate mortgages represent interim and permanent financing of
commercial properties that are secured by real estate, and were 31% of total
loans at December 31, 1998.   Outstanding loans in this category equaled $22,040
and $10,812 at December 31, 1998 and 1997, respectively.  The Company prefers to
make commercial real estate loans secured by owner-occupied properties.  Such
borrowers are generally engaged in business activities other than real estate,
and the primary source of repayment is not solely dependent on conditions in the
real estate market.

Residential Real Estate Loans.  Residential real estate loans are secured by
first deeds of trust on 1-4 family residential properties.  This category had
$19,140 in loans (27% of total loans) at December 31, 1998 and $13,502 in such
loans at December 31, 1997.  To mitigate interest rate risk, the Company 
usually limits the final maturity of residential real estate loans held for 
its own portfolio to 15-20 years and offers a bi-weekly payment option to 

                                       22
<PAGE>


encourage faster repayment.  Residential real estate lending involves risk 
elements when there is lack of timely payment and/or a decline in the value 
of the collateral.

Loans to Individuals. Loans to individuals include installment loans and home
equity lines of credit/loans secured by junior liens on residential real estate.
The loan proceeds typically are used to purchase vehicles, finance home
remodeling or higher education, or for other consumer purposes. Loans to
individuals totaled $12,648 (18% of total loans) at December 31, 1998 compared
to $9,336 one year earlier.

Loan Maturity and Interest Rate Sensitivity.  The following table presents loan
portfolio information related to the maturity distribution of commercial loans
and real estate construction loans based on scheduled repayments at December 31,
1998.

<TABLE>
<CAPTION>

                                 LOAN MATURITY

                                 Due Within   Due One to  Due After
                                 One Year     Five Years  Five Years    Total
-----------------------------------------------------------------------------
<S>                              <C>          <C>         <C>          <C>
Commercial and industrial loans      $7,075       7,663        3,056   17,794
Real estate - construction            1,883         790        2,038    4,711

</TABLE>


The following table presents the interest rate sensitivity of commercial loans
and real estate construction loans maturing after one year as of December 31,
1998.

                           INTEREST RATE SENSITIVITY

Fixed interest rates                                           $10,626
Variable interest rates                                          2,921
----------------------------------------------------------------------
Total maturing after one year                                  $13,547
----------------------------------------------------------------------


Nonperforming Assets.  The Company had no nonperforming assets at December 31,
1998.

Allowance for Loan Losses.  The allowance for loan losses was $708 as of
December 31, 1998 and represented approximately 1.00% of net loans outstanding.
The Bank had no nonperforming assets at December 31, 1998.  However, the Bank
had one loan in the amount of $200 ninety days or greater past due which was
still accruing interest at December 31, 1998.  Management believes the allowance
is adequate to provide for any inherent losses in the portfolio as of December
31, 1998 and periodically evaluates the adequacy of the allowance considering
the specific nature of the portfolio, historical operating trends as available
and other economic and industry factors.  See Note 4 to the consolidated
financial statements.

Deposits

As of December 31, 1998 total deposits were $90,026, an increase of $24,438 or
37% from their level of $65,588 one year earlier.  Average deposits were $77,058

                                       23
<PAGE>


for 1998, an increase of $22,047 or 40% over 1997's average deposits of $55,011.
The increase in average deposits during 1998 was primarily due to increases in
previously existing accounts as well as new accounts opened during the year. 

For the year ended December 31, 1998, average noninterest bearing demand
deposits were $8,602 or 11% of average total deposits.  For the prior year,
average noninterest bearing demand deposits were $4,931 or 9% of average total
deposits.  Nonmaturity deposits (noninterest bearing demand deposits, interest
bearing demand deposits, money market accounts and savings accounts) averaged
$34,063 or 44% of average total deposits in 1998, up from $18,470 or 34% of
average total deposits in 1997.  Total interest bearing deposits averaged
$68,456 for the year ended December 31, 1998, an increase of $18,376 or 37% 
over their level of $50,080 for the year ended December 31, 1997.

The levels and mix of deposits are influenced by such factors as customer
service, interest rates paid, service charges and the convenience of banking
locations.  Competition for deposits is intense from other depository
institutions and money market funds, some of which offer interest rates higher
than those paid by the Company.  Management attempts to identify and implement
pricing and marketing strategies designed to control the overall cost of
deposits and to maintain a stable deposit mix.  Through these pricing and
marketing strategies, management in 1998 was successful in reducing the ratio of
certificates of deposit to total deposits from 59% at December 31, 1997 to 51%
at December 31, 1998.

The following table presents the maturity schedule of certificates of deposit of
$100,000 or more as of December 31, 1998.


                     CERTIFICATES OF DEPOSIT OVER $100,000

Three months or less                                            $1,882
Over three through six months                                    1,637
Over six through 12 months                                       2,993
Over 12 months                                                   1,536
----------------------------------------------------------------------
Total                                                           $8,048
----------------------------------------------------------------------


Financial Ratios

The following table presents certain financial ratios for the periods indicated.


<TABLE>
<CAPTION>

                          RETURN ON EQUITY AND ASSETS

                                                         Years Ended
                                                         December 31,
                                                         ------------
                                                       1998        1997
------------------------------------------------------------------------
<S>                                                   <C>         <C>
Return on average assets                               .83%        1.40%*
Return on average equity                              8.87%       11.79%**
Average equity to average assets                      9.32%       11.84%

</TABLE>

*.77% excluding income tax benefit
**6.48% excluding income tax benefit
------------------------------------

                                       24
<PAGE>


Capital Resources

The Company's financial position at December 31, 1998 reflects liquidity and
capital levels currently adequate to fund anticipated future business expansion.
Capital ratios are well in excess of required regulatory minimums for a well-
capitalized institution.  The adequacy of the Company's capital is reviewed by
management on an ongoing basis.  Management seeks to maintain a capital
structure adequate to support anticipated asset growth and serve as a cushion to
absorb potential losses.  See "Supervision and Regulation - Capital Regulations"
and Note 9 to the consolidated financial statements.

Total shareholders' equity was $9,157 at December 31, 1998 compared with $8,279
at December 31, 1997, an increase of $878 or 11%.  The increase is attributable
to 1998's net income of $758, a $114 increase in unrealized gains on available-
for-sale investment securities over their level at December 31, 1997 and
proceeds from the issuance of common stock under the Company's Incentive Stock
Plan in the amount of $6 during 1998.

Future Accounting Considerations

In June 1998, the Financial Accounting Standards Board (_FASB") issued Statement
of Financial Accounting Standards (_SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities.  In October 1998, SFAS No. 134, Accounting
for Mortgage-Backed Securities Retained after the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise, was issued.  SFAS No. 133
provides guidance for accounting for all derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities.  SFAS No. 134 amends SFAS No. 65 to conform the subsequent
accounting (under SFAS No. 115) for securities retained after the securitization
of mortgage loans by a mortgage banking enterprise to the accounting applicable
to nonmortgage banking enterprises.  SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999, while SFAS No. 134 is effective for the first
fiscal quarter beginning after December 15, 1998.  Neither statement is expected
to have a material effect on the consolidated financial position or results of
operations of the Company.

                                       25
<PAGE>


Item 7.  Financial Statements and Supplementary Data.

Index to Financial Statements

Independent Auditors' Report.                                       27

Consolidated Balance Sheets as of December 31, 1998 and 1997.       28

Consolidated Statements of Income and Comprehensive Income for
  the Years Ended December 31, 1998 and 1997                        29

Consolidated Statements of Changes in Shareholders' Equity for
  the Years Ended December 31, 1998 and 1997.                       30

Consolidated Statements of Cash Flows for the Years Ended
  December 31, 1998 and 1997.                                       31

Notes to Consolidated Financial Statements.                         32

                                       26
<PAGE>


                          Independent Auditors' Report


The Board of Directors
Valley Financial Corporation:


We have audited the accompanying consolidated balance sheets of Valley Financial
Corporation and subsidiary as of December 31, 1998 and 1997, and the related
consolidated statements of income and comprehensive income, changes in
shareholders' equity and cash flows for the years then ended.  These
consolidated financial statements are the responsibility of the Company's
management.  Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Valley Financial
Corporation and subsidiary as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.

                                              KPMG LLP


Roanoke, Virginia
January 22, 1999

                                       27
<PAGE>


<TABLE>
<CAPTION>

                          VALLEY FINANCIAL CORPORATION

                          Consolidated Balance Sheets

                           December 31, 1998 and 1997

                       (In thousands, except share data)

                                                              1998       1997
                  Assets                                    --------   -------
<S>                                                        <C>         <C>
Cash and due from banks (notes 2 and 13)                   $  3,462      3,324
Money market investments (note 13):
   Federal funds sold                                         1,699      1,440
   Interest-bearing deposits in other banks                      44         33
Securities available-for-sale (notes 3 and 13)               26,118     21,144

Loans (notes 4 and 13):
   Commercial loans                                          17,794     12,997
   Commercial real estate loans                              22,040     10,812
   Residential real estate loans                             19,140     13,502
   Loans to individuals                                      12,648      9,336
                                                           --------     ------
           Total loans                                       71,622     46,647

   Less unearned fees                                           (39)       (38)
   Less allowance for loan losses                              (708)      (459)
                                                           --------     ------
Loans, net                                                   70,875     46,150

Premises and equipment, net (note 5)                          1,830      1,315
Accrued interest receivable                                     804        636
Other assets                                                    277        501
Organizational expenses, net                                     77        134
                                                           --------     ------
           Total assets                                    $105,186     74,677
                                                           ========     ======
                  Liabilities and Shareholders' Equity

Noninterest-bearing deposits                               $ 10,437      7,956
Interest-bearing demand deposits                             32,513     18,395
Savings deposits                                              1,106        653
Time deposits greater than $100,000 (note 14)                 8,048      6,481
Other time deposits (note 14)                                37,922     32,103
                                                           --------     ------
           Total deposits (note 13)                          90,026     65,588

Accrued interest payable                                        679        510
Other liabilities                                               324        300
Federal Home Loan Bank advances (notes 1(e), 3 and 4)         5,000         --
                                                           --------     ------
           Total liabilities                                 96,029     66,398
                                                           --------     ------
Shareholders' equity (notes 3, 7 and 9):
   Preferred stock, no par value.  Authorized
     10,000,000 shares; none issued                              --         --
   Common stock, no par value.  Authorized
     10,000,000 shares; issued and outstanding
     964,590 shares and 964,040 shares in 1998 and
     1997, respectively                                       9,095      9,089
   Accumulated deficit                                         (108)      (866)
   Accumulated other comprehensive income                       170         56
                                                           --------     ------
           Total shareholders' equity                         9,157      8,279
Commitments and other matters (notes 3, 5, 8, 9, 12
  and 16)                                                  --------     ------

           Total liabilities and shareholders' equity      $105,186     74,677
                                                           ========     ======

</TABLE>
See accompanying notes to consolidated financial statements.

                                       28
<PAGE>


<TABLE>
<CAPTION>

                          VALLEY FINANCIAL CORPORATION

           Consolidated Statements of Income and Comprehensive Income

                     Years Ended December 31, 1998 and 1997

                (In thousands, except share and per share data)

                                                              1998       1997
                                                            --------   -------
<S>                                                        <C>         <C>
Interest income:
   Interest and fees on loans                              $  5,059      3,558
   Interest on securities - taxable                           1,365      1,180
   Interest on securities - nontaxable                          195         --
   Interest on money market investments                         151         68
                                                           --------     ------
           Total interest income                              6,770      4,806
                                                           --------     ------
Interest expense:
   Interest on certificates of deposit of $100,000 or more      397        309
   Interest on other deposits                                 2,860      2,193
   Interest on Federal Home Loan Bank advances                  208         --
   Interest on other borrowed funds                              47          9
                                                           --------     ------
           Total interest expense                             3,512      2,511
                                                           --------     ------
           Net interest income                                3,258      2,295
   Provision for loan losses (note 4)                           249        131
                                                           --------     ------
           Net interest income after provision for loan
             losses                                           3,009      2,164
                                                           --------     ------
Noninterest income:
   Service charges on deposit accounts                          165        117
   Gain on sale of securities                                    10          2
   Other income                                                  89         59
                                                           --------     ------
           Total noninterest income                             264        178
                                                           --------     ------
Noninterest expense:
   Personnel (note 14)                                        1,177        917
   Occupancy                                                    168        166
   Data processing and equipment expenses                       260        212
   Advertising and promotion                                     90        112
   Supplies                                                      57         51
   Amortization of organizational expenses                       57         59
   Other expense                                                443        339
                                                           --------     ------
           Total noninterest expense                          2,252      1,856
                                                           --------     ------
Income before income taxes                                    1,021        486

Income tax expense (benefit)(note 6)                            263       (397)
                                                           --------     ------
           Net income                                           758        883

Other comprehensive income, net of deferred tax expense:
   Net unrealized gains on securities available-for-sale
     (note 16)                                                  114         43
                                                           --------     ------
           Comprehensive income                            $    872        926
                                                           ========     ======
Net income per share:
   Basic net income per share                              $    .79        .92
                                                           ========     ======
   Diluted net income per share                            $    .77        .92
                                                           ========     ======

</TABLE>
See accompanying notes to consolidated financial statements.

                                       29
<PAGE>


<TABLE>
<CAPTION>

                          VALLEY FINANCIAL CORPORATION

           Consolidated Statements of Changes in Shareholders' Equity

                     Years Ended December 31, 1998 and 1997

                       (In thousands, except share data)

                                                     Accumulated
                                                        Other         Total
                         Common  Common Accumulated Comprehensive Shareholders'
                         Shares   Stock   Deficit      Income        Equity
                         -------  ------ ----------- ------------ -------------
<S>                      <C>      <C>    <C>         <C>          <C>
Balances at December
  31, 1996               964,040  $9,089     (1,749)           13         7,353

Net income                    --      --        883            --           883
Unrealized gains on
  securities available-
  for-sale, net of
  deferred tax expense
  of $22                      --      --         --            43            43
                         -------  ------ ---------- ------------- -------------
Balances at December
  31, 1997               964,040  $9,089       (866)           56         8,279

Net income                    --      --        758            --           758
Stock options
  exercised                  550       6         --            --             6
Unrealized gains on
  securities available-
  for-sale, net of
  deferred tax expense
  of $59                      --      --         --           114           114
                         -------  ------ ---------- ------------- -------------
Balances at December
  31, 1998               964,590  $9,095       (108)          170         9,157
                         =======  ====== ========== ============= =============

</TABLE>
See accompanying notes to consolidated financial statements.

                                       30
<PAGE>


<TABLE>
<CAPTION>

                          VALLEY FINANCIAL CORPORATION

                     Consolidated Statements of Cash Flows

                     Years Ended December 31, 1998 and 1997

                                 (In thousands)

                                                              1998       1997
                                                            --------   -------
<S>                                                        <C>         <C>
Cash flows from operating activities:
   Net income                                              $    758        883
   Adjustments to reconcile net income to net cash
     provided by operating activities:
       Provision for loan losses                                249        131
       Depreciation and amortization of premises and
         equipment                                              153        147
       Deferred income tax                                      189       (397)
       Amortization of organizational expenses                   57         59
       Gain on sale of securities                               (10)        (2)
       Amortization (accretion) of premiums/discounts, net        1        (11)
       Increase in unearned fees                                  1          5
       Increase in accrued interest receivable                 (168)      (262)
       (Increase) decrease in other assets                      (24)         8
       Increase in accrued interest payable                     169         78
       Increase (decrease) in other liabilities                  24        (41)
                                                           --------    -------
           Net cash provided by operating activities          1,399        598
                                                           --------    -------
Cash flows from investing activities:
   Net (increase) decrease in money market investments         (270)     1,318
   Purchases of premises and equipment                         (668)       (65)
   Purchases of securities available-for-sale               (34,587)   (18,011)
   Proceeds from sales, calls and maturities of
     securities available-for-sale                           29,795      8,529
   Increase in loans, net                                   (24,975)   (13,165)
                                                           --------    -------
           Net cash used in investing activities            (30,705)   (21,394)
                                                           --------    -------
Cash flows from financing activities:
   Increase in time deposits greater than $100,000            1,567      2,039
   Increase in other time deposits                            5,819      5,804
   Net increase in other deposits                            17,052     14,128
   Federal Home Loan Bank advances                            5,000         --
   Proceeds from exercise of stock options                        6         --
                                                           --------    -------
           Net cash provided by financing activities         29,444     21,971
                                                           --------    -------
           Net increase in cash and due from banks              138      1,175

Cash and due from banks at beginning of year                  3,324      2,149
                                                           --------    -------
Cash and due from banks at end of year                     $  3,462      3,324
                                                           ========    =======
Supplemental disclosure of cash flows information:
   Cash paid during the year for interest                  $  3,343      2,433
                                                           ========    =======

</TABLE>
See accompanying notes to consolidated financial statements.

                                       31
<PAGE>


                          VALLEY FINANCIAL CORPORATION

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997

                 (In thousands except share and per share data)


(1)  Summary of Significant Accounting Policies

     (a)  General

          The accounting and reporting policies of Valley Financial Corporation
          ("the Company") and Valley Bank N.A. ("the Bank") conform to generally
          accepted accounting principles and to general banking industry
          practices.  The Bank provides traditional commercial banking services
          concentrated primarily in the Roanoke Valley.  The Bank does not
          currently offer trust services; however, the Bank does refer customers
          to a provider of trust services in exchange for a fee.

          The following is a summary of the more significant accounting
          policies:

     (b)  Consolidation

          The consolidated financial statements include the accounts of the
          Company and its wholly-owned subsidiary, the Bank, collectively
          referred to hereinafter as the Corporation.  All significant
          intercompany balances and transactions have been eliminated.

     (c)  Cash and Cash Equivalents

          For purposes of reporting cash flows, cash and cash equivalents
          include cash and due from banks.

     (d)  Securities

          Investments are classified in three categories and accounted for as
          follows:  (1) debt securities that the Corporation has the positive
          intent and ability to hold to maturity are classified as securities
          held-to-maturity" and reported at amortized cost; (2) debt and equity
          securities that are bought and held principally for the purpose of
          selling them in the near term are classified as "trading securities"
          and reported at fair value, with unrealized gains and losses included
          in net income; and (3) debt and equity securities not classified as
          either held-to-maturity securities or trading securities are
          classified as "securities available-for-sale" and reported at fair
          value, with unrealized gains and losses excluded from net income and
          reported in a separate component of shareholders' equity.

          The Corporation does not currently maintain a trading securities
          portfolio and there were no securities classified as held-to-maturity
          at December 31, 1998 or 1997.  Gains or losses on disposition, if any,
          are based on the net proceeds and adjusted carrying values of the
          securities called or sold, using the specific identification method. 
          A decline in value of any available-for-sale or held-to-maturity
          security below cost deemed other than temporary is charged directly to
          net income, resulting in the establishment of a new cost basis for the
          security.

                                       32
<PAGE>


     (e)  Required Investments

          As members of the Federal Reserve and the Federal Home Loan Bank
          (FHLB) of Atlanta, the Bank is required to maintain certain minimum
          investments in the common stock of those entities.  Required levels of
          investment are based upon the Bank's capital and a percentage of
          qualifying assets.  In addition, the Bank is eligible to borrow from
          the FHLB with borrowings collateralized by qualifying assets,
          primarily residential mortgage loans, and the Bank's capital stock
          investment in the FHLB (see notes 3 and 4).  At December 31, 1998, the
          Bank's available borrowing limit was approximately $6,000.  The Bank
          had $5,000 in borrowings outstanding at December 31, 1998.  No amounts
          were outstanding at December 31, 1997.  The note payable is due in
          2008 and bears interest at a fixed rate of 4.96 percent convertible at
          the option of the FHLB to the prevailing three-month LIBOR rate.

     (f)  Loans, Allowance for Loan Losses, Loan Fees and Costs

          Loans are stated at the amount of unpaid principal, reduced by
          unearned fees on loans, and an allowance for loan losses.  Income is
          recognized over the terms of the loans using methods which approximate
          the level yield method.  The allowance for loan losses is a valuation
          allowance consisting of the cumulative effect of the provision for
          loan losses, plus any amounts recovered on loans previously charged
          off, minus loans charged off.  The provision for loan losses charged
          to operating expenses is the amount necessary in management's judgment
          to maintain the allowance for loan losses at a level it believes
          sufficient to cover losses in the collection of its loans.  Management
          determines the adequacy of the allowance based upon reviews of
          individual credits, recent loss experience, delinquencies, current
          economic conditions, the risk characteristics of the various
          categories of loans and other pertinent factors.  Loans are charged
          against the allowance for loan losses when management believes the
          collectibility of the principal is unlikely.  While management uses
          available information to recognize losses on loans, future additions
          to the allowance for loan losses may be necessary based on changes in
          economic conditions.  In addition, various regulatory agencies, as an
          integral part of their examination process, periodically review the
          Bank's allowance for loan losses.  Such agencies may require the Bank
          to recognize additions to the allowance for loan losses based on their
          judgments about information available to them at the time of their
          examinations.

          Interest related to nonaccrual loans is recognized on the cash basis.
          Loans are generally placed in nonaccrual status when the collection
          of principal and interest is 90 days or more past due, unless the
          obligation is both well-secured and in the process of collection.

          Impaired loans are presented in the financial statements at the
          present value of the expected future cash flows or at the fair value
          of the loan's collateral.  Homogeneous loans such as real estate
          mortgage loans, individual consumer loans, home equity loans and
          bankcard loans are evaluated collectively for impairment.  Management,

                                       33
<PAGE>


          considering current information and events regarding the borrowers
          ability to repay their obligations, considers a loan to be impaired
          when it is probable that the Bank will be unable to collect all
          amounts due according to the contractual terms of the loan agreement.
          Impairment losses are included in the allowance for loan losses
          through a charge to the provision for loan losses.  Cash receipts on
          impaired loans receivable are applied first to reduce interest on such
          loans to the extent of interest contractually due and any remaining
          amounts are applied to principal.

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

     (g)  Premises and Equipment

          Premises and equipment are stated at cost, net of accumulated
          depreciation and amortization.  Depreciation on buildings, equipment,
          furniture and fixtures, and amortization of leasehold improvements is
          computed by straight-line or accelerated methods over the shorter of
          the estimated useful lives of the assets or the related lease term. 
          Estimated useful lives for assets include land improvements and
          leasehold improvements, 3 to 15 years, buildings, 31.5 years, and
          furniture, fixtures and equipment, 3 to 10 years.  The cost of assets
          retired and sold and the related accumulated depreciation and
          amortization are eliminated from the accounts and the resulting gains
          or losses are included in determining net income.  Expenditures for
          maintenance and repairs are charged to expense as incurred, and
          improvements and betterments are capitalized.

     (h)  Organizational Costs

          Organizational costs incurred during the development stage of the
          Corporation have been capitalized and are being amortized using the
          straight-line method over five years.

     (i)  Income Taxes

          Income taxes are accounted for under the asset and liability method,
          whereby deferred tax assets and liabilities are recognized for the
          future tax consequences attributable to differences between the
          financial statement carrying amounts of existing assets and
          liabilities and their respective tax bases and operating loss and tax
          credit carryforwards.  Deferred tax assets and liabilities are
          measured using enacted tax rates expected to apply to taxable income
          in the years in which those temporary differences are expected to be
          recovered or settled.  The effect on deferred tax assets and
          liabilities of a change in tax rates is recognized in net income in
          the period that includes the enactment date.

                                       34
<PAGE>


     (j)  Stock Options

          The Corporation accounts for its stock option plan in accordance with
          the provisions of Statement of Financial Accounting Standards (SFAS)
          No. 123, Accounting for Stock-Based Compensation, which permits
          entities to recognize as expense over the vesting period the fair
          value of all stock-based awards on the date of grant.  Alternatively,
          SFAS No. 123 also allows entities to continue to apply the provisions
          of APB Opinion 25, which requires compensation expense to be recorded
          on the date of grant only if the current market price of the
          underlying stock exceeds the exercise price, and provide pro forma net
          income and pro forma earnings per share disclosures for employee stock
          option grants made in 1995 and future years as if the fair-value-based
          method defined in SFAS No. 123 had been applied.  The Corporation has
          elected to continue to apply the provisions of APB Opinion No. 25 and
          provide the pro forma disclosure provisions of SFAS No. 123.

     (k)  Net Income Per Share

          In February 1997, the Financial Accounting Standards Board issued
          Statement of Financial Accounting Standards No. 128, Earnings per
          Share.  Statement 128 establishes new standards for computing and
          presenting earnings per share (EPS) and applies to entities with
          publicly held common stock or potential common stock.  It replaces the
          presentation of primary EPS with a presentation of basic EPS.  It also
          requires dual presentation of basic and diluted EPS on the face of the
          income statement for all entities with complex capital structures and
          requires a reconciliation of the numerator and denominator of the
          basic EPS computation to the numerator and denominator of the diluted
          EPS computation.

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

          The following is a reconciliation of the numerators and denominators
          of the basic and diluted EPS computations for the periods indicated:

<TABLE>
<CAPTION>

                                         Net Income       Shares      Per Share
     Year Ended December 31, 1998        (Numerator)   (Denominator)    Amount
                                         -----------   -------------  ---------
     <S>                                 <C>           <C>            <C>
     Basic net income per share          $       758         964,118  $     .79
                                                                      =========
     Effect of dilutive stock options             --          19,844
                                         -----------   -------------
          Diluted net income per share   $       758         983,962  $     .77
                                         ===========   =============  =========

                                       35
<PAGE>


                                         Net Income       Shares      Per Share
     Year Ended December 31, 1997        (Numerator)   (Denominator)    Amount
                                         -----------   -------------  ---------

     Basic net income per share          $       883         964,040  $     .92
                                                                      =========
     Effect of dilutive stock options             --             987
                                         -----------   -------------
          Diluted net income per share   $       883         965,027  $     .92
                                         ===========   =============  =========

</TABLE>


     (l)  Off-Balance-Sheet Financial Instruments

          In the ordinary course of business, the Bank has entered into off-
          balance-sheet financial instruments consisting of commitments to
          extend credit and standby letters of credit.  Such financial
          instruments are recorded in the financial statements when they become
          payable.

     (m)  Transfers and Servicing of Financial Assets and Extinguishments of
          Liabilities

          The Corporation adopted the provisions of Statement No. 125,
          Accounting for Transfers and Servicing of Financial Assets and
          Extinguishments of Liabilities, on January 1, 1997.  This Statement
          provides accounting and reporting standards for transfers and
          servicing of financial assets and extinguishments of liabilities based
          on consistent application of a financial-components approach that
          focuses on control.  Under that approach, after a transfer of
          financial assets, an entity recognizes the financial and servicing
          assets it controls and the liabilities it has incurred, derecognizes
          financial assets when control has been surrendered, and derecognizes
          liabilities when extinguished.  This Statement provides consistent
          standards for distinguishing transfers of financial assets that are
          sales from transfers that are secured borrowings.  This Statement also
          provides implementation guidance for assessing isolation of
          transferred assets and for accounting for transfers of partial
          interests, servicing of financial assets, securitizations, transfers
          of sales-type and direct financing lease receivables, securities
          lending transactions, repurchase agreements including "dollar rolls,"
          "wash sales," loan syndications and participations, risk
          participations in banker's acceptances, factoring arrangements,
          transfers of receivables with recourse, and extinguishments of
          liabilities.  Statement No. 127, Deferral of the Effective Date of
          Certain Provisions of Statement 125, issued in December 1996, deferred
          until January 1, 1998 the effective date (a) of paragraph 15 of
          Statement 125 and (b) for repurchase agreement, dollar-roll,
          securities lending, and similar transactions, of paragraphs 9 - 12 and
          237(b) of Statement 125.  Statement 125 was required to be adopted on
          a prospective basis and its adoption did not have a material impact on
          the Corporation's financial position, results of operations or
          liquidity.

                                       36

<PAGE>


     (n)  Comprehensive Income

          On January 1, 1998, the Corporation adopted Statement of Financial
          Accounting Standards No. 130, Reporting Comprehensive Income.  This
          Statement establishes standards for reporting and presentation of
          comprehensive income and its components in a full set of general
          purpose financial statements.  This Statement was issued to address
          concerns over the practice of reporting elements of comprehensive
          income directly in equity.

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

          In accordance with the provisions of the Statement, the Corporation
          has included Consolidated Statements of Income and Comprehensive
          Income in the accompanying consolidated financial statements. 
          Comprehensive income consists of net income and net unrealized gains
          on securities available for sale.  Also, accumulated other
          comprehensive income is included as a separate disclosure within the
          Consolidated Statements of Changes in Stockholders' Equity in the
          accompanying consolidated financial statements.  Comprehensive income
          for the year ended December 31, 1997 is presented for comparative
          purposes.  The adoption of Statement 130 did not have any effect on
          the Corporation's consolidated financial position, results of
          operation or liquidity.

     (o)  Use of Estimates

          In preparing the consolidated financial statements, management is
          required to make estimates and assumptions that affect the reported
          amounts of assets and liabilities and the disclosure of contingent
          assets and liabilities as of the dates of the consolidated balance
          sheets and the reported amounts of revenues and expenses for the years
          presented.  Actual results could differ significantly from those
          estimates.

          A material estimate that is particularly susceptible to significant
          change in the near term relates to the determination of the allowance
          for loan losses.  In connection with the determination of the
          allowance for loan losses, management obtains independent appraisals
          for significant properties.

          Management believes the allowance for loan losses is adequate.  While
          management uses available information to recognize losses on loans,
          future additions to the allowance for loan losses may be necessary
          based on changes in economic conditions.  In addition, various

                                       37
<PAGE>


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

     (p)  Reclassifications

          Certain reclassifications have been made to prior years' consolidated
          financial statements to place them on a basis comparable with the 1998
          consolidated financial statements.

     (q)  Recent Accounting Developments

          In June 1998, the Financial Accounting Standards Board (FASB) issued
          Statement of Financial Accounting Standards No. 133, Accounting for
          Derivative Instruments and Hedging Activities.  Statement 133
          establishes standards for accounting and reporting for derivative
          instruments, including certain instruments embedded in other contracts
          and for hedging activities.  It requires that an entity recognize all
          derivatives as either assets or liabilities in the statement of
          financial position and measure those instruments at fair value. 
          Statement 133 was issued to establish guidelines over the accounting
          and reporting of derivative instruments and hedging activities.

          Statement 133 shall be effective for all fiscal quarters of all fiscal
          years beginning after June 15, 1999.  Initial application of this
          Statement shall be as of the beginning of an entity's fiscal quarter.
          Earlier application of all of the provisions of this Statement is
          encouraged but is permitted only as of the beginning of any fiscal
          quarter that begins after issuance of this Statement. Earlier
          application of selected provisions of this Statement is not permitted.
          This Statement shall not be applied retroactively to financial
          statements of prior periods.  Adoption of Statement 133 on January 1,
          1999 will not have any effect on the Bank's consolidated financial
          position, results of operation or liquidity.

(2)  Restrictions on Cash

     To comply with Federal Reserve regulations, the Bank will be required to
     maintain certain average reserve balances.  There were no daily reserve
     requirements for the weeks including December 31, 1998 and 1997 as the Bank
     had not met minimum average deposit levels under the current provisions of
     the regulations.

                                       38
<PAGE>


(3)  Securities

     The amortized costs, gross unrealized gains and losses, and approximate
     fair values of securities available-for-sale as of December 31, 1998 and
     1997 were as follows:

<TABLE>
<CAPTION>

                                                     1998
                                -----------------------------------------------
                                              Gross        Gross    Approximate
                                Amortized  Unrealized   Unrealized      Fair
                                  Costs       Gains       Losses       Values
                                ---------  ----------   ----------  -----------
<S>                             <C>        <C>          <C>         <C>
U.S. Treasury                   $     199           3           --          202
U.S. Government agencies and
 corporations                      14,680          47           (2)      14,725
Mortgage-backed securities          3,841          10           --        3,851
States and political subdivisions   6,105         193           --        6,298
Corporate obligations                 100           2           --          102
Federal Home Loan Bank stock          450          --           --          450
Other securities                      485           5                       490
                                ---------  ----------   ----------  -----------
   Total securities
    available-for-sale          $  25,860         260           (2)      26,118
                                =========  ==========   ==========  ===========


                                                     1997
                                -----------------------------------------------
                                              Gross        Gross    Approximate
                                Amortized  Unrealized   Unrealized      Fair
                                  Costs       Gains       Losses       Values
                                ---------  ----------   ----------  -----------
U.S. Treasury                   $     200          --           --          200
U.S. Government agencies and
 corporations                      14,951          58          (12)      14,997
Mortgage-backed securities          3,536          26           (4)       3,558
States and political subdivisions   1,612          10           --        1,622
Corporate obligations                  99           2           --          101
Federal Home Loan Bank stock          187          --           --          187
Other securities                      474           5           --          479
                                ---------  ----------   ----------  -----------
   Total securities
    available-for-sale          $  21,059         101          (16)      21,144
                                =========  ==========   ==========  ===========

</TABLE>

                                       39
<PAGE>


   The amortized costs and approximate fair values of available-for-sale
   securities as of December 31, 1998, by contractual maturity, are shown
   below.  Expected maturities may differ from contractual maturities because
   borrowers may have the right to call or prepay obligations with or without
   call or prepayment penalties.


<TABLE>
<CAPTION>

                                                                   Approximate
                                                      Amortized        Fair
                                                        Costs         Values
                                                      ---------    -----------
     <S>                                              <C>          <C>
     Due in one year or less                          $     250            250
     Due after one year through five years                8,198          8,237
     Due after five years through ten years               7,487          7,507
     Due after ten years                                  6,084          6,273
     Mortgage-backed securities                           3,841          3,851
                                                      ---------    -----------
               Total                                  $  25,860         26,118
                                                      =========    ===========

</TABLE>

     Securities with amortized costs of $1,220 and $200 as of December 31, 1998
     and 1997, respectively, were pledged as collateral for public deposits and
     for other purposes as required or permitted by law.

     The Federal Home Loan Bank stock is carried at cost and collateralizes
     lines of credit available from Federal Home Loan Bank.

(4)  Loans and Allowance for Loan Losses

     In the normal course of business, the Bank has made loans to officers,
     directors and/or related interests.  At December 31, 1998 and 1997, $3,482
     and $3,091, respectively, represented direct loans to officers and
     directors and $1,109 and $1,778, respectively, represented loans made to
     related interests of officers or directors and/or endorsed by officers or
     directors.

     The following table will summarize activity and amounts receivable from
     officers, directors and/or related interests:

<TABLE>
<CAPTION>

                                                          1998        1997
                                                        ---------   ---------
     <S>                                                <C>         <C>
     Balances at beginning of year                      $   4,869       5,037
     Additions                                              2,052       1,387
     Repayments                                            (2,330)     (1,555)
                                                        ---------   ---------
                                                        $   4,591       4,869
                                                        =========   =========

</TABLE>

                                       40
<PAGE>


     Activity in the allowance for loan losses is summarized as follows:

<TABLE>
<CAPTION>

                                                          1998        1997
                                                        ---------   ---------
     <S>                                                <C>         <C>
     Balances at beginning of year                      $     459         328
     Provision for loan losses                                249         131
                                                        ---------   ---------
     Balances at end of year                              $   708         459
                                                        =========   =========

</TABLE>


     As of December 31, 1998, the Bank had one accruing loan past due 90 days or
     more.  The approximate carrying value of this loan was $200.  As of
     December 31, 1997, the Bank had no significant past due loans greater than
     90 days.  No loans are considered to be impaired as of December 31, 1998
     and 1997, and there were no loan amounts charged off during 1998 and 1997.

     Loans approximating $12,896 and consisting primarily of residential
     mortgage loans collateralize the line of credit available from the Federal
     Home Loan Bank.

(5)  Premises and Equipment

     Components of premises and equipment and total accumulated depreciation and
     amortization as of December 31, 1998 and 1997 are as follows:

<TABLE>
<CAPTION>

                                                          1998        1997
                                                        ---------   ---------
     <S>                                                <C>         <C>
     Land and improvements                              $     293         293
     Building                                                 477         477
     Furniture, fixtures and equipment                        635         585
     Leasehold improvements                                   310         310
     Construction in progress                                 618          --
                                                        ---------   ---------
                                                            2,333       1,665

       Less accumulated depreciation and amortization         503         350
                                                        ---------   ---------
                                                        $   1,830       1,315
                                                        =========   =========

</TABLE>


     The Bank currently leases its main office location under a noncancellable
     operating lease.  The lease for the main office has an original term of
     five years with the option of two additional renewal terms of five years

                                       41
<PAGE>


     each.  In addition, the Bank has entered into a lease for a branch location
     which opened in January 1997.  The property under lease is owned by a
     family member of a director, however, the terms of the agreement are
     comparable to current market rates.  The original lease term is for twelve
     years with an option to renew for one additional five-year term.  Rental
     expenses under operating leases were approximately $94 and $93 for 1998 and
     1997, respectively.  Future minimum lease payments under noncancellable
     operating leases were as follows at December 31, 1998:


               1999                             $    93
               2000                                  32
               2001                                  12
               2002                                  12
               2003                                  13
               Subsequent years                      71
                                                -------
                                                $   233
                                                =======


(6)  Income Taxes

     Total income tax expense (benefit) for the years ended December 31, 1998
     and 1997 are allocated as follows:

<TABLE>
<CAPTION>

                                                          1998        1997
                                                        ---------   ---------
     <S>                                                <C>         <C>
     Income                                             $     263        (397)
     Stockholders' equity for unrealized gains on
       available-for-sale securities recognized
       for financial statement purposes                        59          22
                                                        ---------   ---------
                                                        $     322        (375)
                                                        =========   =========
     Income tax expense (benefit) consists of:
        Current                                         $      74          --
        Deferred                                              189        (397)
                                                        ---------   ---------
                                                        $     263        (397)
                                                        =========   =========

</TABLE>

                                       42
<PAGE>


     Total income tax expense (benefit) differed from the "expected" amount
     computed by applying the U.S. Federal income tax rate of 34 percent to
     income before income taxes as a result of the following:

<TABLE>
<CAPTION>

                                                          1998        1997
                                                        ---------   ---------
     <S>                                                <C>         <C>
     Computed "expected" tax expense                    $     347         165
     Increase (decrease) in income taxes
       resulting from:
        Tax-exempt interest income                            (66)         --
        Tax exempt interest disallowance                        9          --
        Decrease in beginning-of-the-year balance
          of the valuation allowance for deferred
          tax assets                                           --        (585)
        Other                                                 (27)         23
                                                        ---------   ---------
           Reported income tax expense (benefit)        $     263        (397)
                                                        =========   =========

</TABLE>

     The tax effects of temporary differences that give rise to significant
     portions of the deferred tax assets and deferred tax liabilities at
     December 31, 1998 and 1997 are as follows:

<TABLE>
<CAPTION>

                                                          1998        1997
                                                        ---------   ---------
     <S>                                                <C>         <C>
     Deferred tax assets:
        Net operating loss carryforwards                $      --         176
        Loans, principally due to allowance for
          loan losses                                         207         145
        Preopening expenses due to capitalization
          for tax purposes                                     50          89
        Other                                                  --          36
                                                        ---------   ---------
            Total gross deferred tax assets                   257         446

        Less valuation allowance                               --          --
                                                        ---------   ---------
            Net deferred tax assets                           257         446
                                                        ---------   ---------
     Deferred tax liabilities:
        Net unrealized gains on available-for-sale
          securities                                           88          29
        Other                                                  20          20
                                                        ---------   ---------
            Total gross deferred tax liabilities              108          49
                                                        ---------   ---------
            Net deferred tax assets                     $     149         397
                                                        =========   =========

</TABLE>

                                       43
<PAGE>


     The net change in the total valuation allowance for 1997 was a decrease of
     $585.  In assessing the realizability of deferred tax assets, management
     considers whether it is more likely than not that some portion or all of
     the deferred tax assets will not be realized.  The ultimate realization of
     deferred tax assets is dependent upon the generation of future taxable
     income during the periods in which those temporary differences become
     deductible and loss carryforwards become utilized.  Management considers
     the scheduled reversal of deferred tax liabilities, projected future
     taxable income and tax planning strategies in making this assessment. 
     Based upon projections for future taxable income over the periods in which
     the deferred tax assets are deductible, management is able to conclude it
     is more likely than not the Corporation will realize the benefits of these
     deductible differences and loss carryforwards and, accordingly, a
     corresponding valuation allowance for net deferred tax assets is not
     considered necessary at December 31, 1998.

(7)  Employee Benefit Plan

     The Corporation has a defined contribution plan (the Plan) qualifying under
     IRS Code Section 401(k).  Eligible participants in the Plan can contribute
     up to 15 percent of their total annual compensation to the Plan.  Beginning
     in 1998, employee contributions are matched by the Corporation based on a
     percentage of 25 percent of the employee's contribution up to 6 percent. 
     For the year ended December 31, 1998, the Corporation contributed $10 to
     the Plan.  No employer contributions had been made to the Plan prior to
     1998.

(8)  Stock Options

     The Company has an Incentive Stock Plan (the Plan) pursuant to which the
     Company's Board of Directors may grant stock options to officers and key
     employees.  The Plan authorizes grants of options to purchase up to 99,000
     shares of the Company's authorized, but unissued common stock. 
     Accordingly, 99,000 shares of authorized, but unissued common stock are
     reserved for use in the Plan.  All stock options have been granted with an
     exercise price equal to the stock's fair market value at the date of grant.
     Stock options generally have 10-year terms, vest at the rate of 20 percent
     per year, and become fully exercisable five years from the date of grant. 
     In addition, certain options for 19,280 and 28,920 shares based on meeting
     certain performance criteria were granted to executive officers during 1998
     and 1997, respectively.

                                       44
<PAGE>


     The per share weighted average fair value of stock options granted during
     1998 and 1997 was $8.55 and $5.20, respectively, on the date of grant
     utilizing the Black-Scholes option-pricing model with the following
     weighted average assumptions:

<TABLE>
<CAPTION>

                                                          1998        1997
                                                        ---------   ---------
     <S>                                               <C>          <C>
     Expected dividend yield                                   0%          0%
     Risk-free interest rate                                6.25%        6.5%
     Expected life of options                          7.5 years    7.5 years
     Expected volatility of stock price                      30%          30%

</TABLE>

     As previously mentioned, the Company applies APB Opinion No. 25 in
     accounting for its Plan and, accordingly, no compensation cost has been
     recognized for its stock options in the consolidated financial statements.
     Had the Company determined compensation cost based on the fair value of its
     stock options at the grant date under SFAS No. 123, the Company's net
     income and net income per share would have decreased to the pro forma
     amounts indicated below:

<TABLE>
<CAPTION>

                                                          1998        1997
                                                        ---------   ---------
     <S>                                                <C>         <C>
     Net income:
        As reported                                     $     758         883
        Pro forma                                             716         829

     Basic net income per share:
        As reported                                     $     .79         .92
        Pro forma                                             .74         .86

     Diluted net income per share:
        As reported                                     $     .77         .92
        Pro forma                                             .72         .86

</TABLE>

     Stock option activity during the years ended December 31, 1998 and 1997 is
     as follows:

<TABLE>
<CAPTION>

                                                     Shares     Exercise Price
                                                     ------     --------------
     <S>                                             <C>        <C>
     Balance at December 31, 1996                    14,750              $9.24

        Granted                                      41,920              10.06
        Expired/forfeited                            (4,000)             10.25
                                                     ------
     Balance at December 31, 1997                    52,670               9.83

        Granted                                      24,280              10.70
        Exercised                                      (550)             10.25
        Expired/forfeited                              (600)             10.25
                                                     ------
     Balance at December 31, 1998                    75,800              10.21
                                                     ======

</TABLE>

                                       45
<PAGE>


     At December 31, 1998, the range of exercise prices and weighted average
     remaining contractual life of outstanding options was $8.75 - $13.38 and
     8.1 years, respectively.

     At December 31, 1998 and 1997, the number of options exercisable was 56,420
     and 32,620, respectively, and the weighted average exercise price of those
     options was $9.97 and $9.95, respectively.

(9)  Restrictions on Payments of Dividends and Capital Requirements

     The Company's principal source of funds for dividend payments is dividends
     received from the Bank.  Under applicable federal laws, the Comptroller of
     the Currency, without prior approval, restricts the total dividend payments
     of the Bank in any calendar year to the net profits of that year, as
     defined, combined with the retained net profits for the two preceding
     years.  As of December 31, 1998, the Bank is in a deficit position, and,
     accordingly, no amounts are available for dividends without prior approval
     of the Comptroller of the Currency.

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

     Quantitative measures established by regulation to ensure capital adequacy
     require the Company and the Bank to maintain minimum amounts and ratios
     (set forth in the table below) of total and Tier I capital (as defined in
     the regulations) to risk-weighted assets (as defined), and of Tier I
     capital (as defined) to average assets (as defined).  Management believes,
     as of December 31, 1998, that the Company and the Bank meets all capital
     adequacy requirements to which it is subject.

     As of December 31, 1998, the most recent notification from Office of the
     Comptroller of the Currency categorized the Company and the Bank as well
     capitalized under the regulatory framework for prompt corrective action. 
     To be categorized as well capitalized, the Company and the Bank must
     maintain minimum total risk-based, Tier I risk-based and Tier I leverage
     ratios as set forth in the table below.  There are no conditions or events
     since that notification that management believes have changed the Company's
     or the Bank's category.

                                       46

<PAGE>


     The Company's and the Bank's actual capital amounts and ratios are also
     presented in the table below.

<TABLE>
<CAPTION>

                                                                  To Be Well
                                                              Capitalized Under
                                              For Capital     Prompt Corrective
                               Actual      Adequacy Purposes  Action Provisions
                           --------------  -----------------  -----------------
                           Amount   Ratio   Amount    Ratio    Amount    Ratio
                           ------   -----   ------    -----    ------    -----
<S>                        <C>     <C>      <C>       <C>      <C>       <C>
As of December 31, 1998:
  Total Capital
   (to Risk Weighted
   Assets):
     Consolidated          $9,618  12.24%    6,288      8.0%      N/A      N/A
     Valley Bank, N.A.      8,320  10.68%    6,234      8.0%    7,793     10.0%
  Tier I Capital
   (to Risk Weighted
   Assets):
     Consolidated           8,910  11.34%    3,144      4.0%      N/A      N/A
     Valley Bank, N.A.      7,612   9.77%    3,117      4.0%    4,676      6.0%
  Tier I Capital (Leverage)
   (to Average Assets):
     Consolidated           8,910   8.65%    4,122      4.0%      N/A      N/A
     Valley Bank, N.A.      7,612   7.47%    4,071      4.0%    5,094      5.0%


                                                                  To Be Well
                                                              Capitalized Under
                                              For Capital     Prompt Corrective
                               Actual      Adequacy Purposes  Action Provisions
                           --------------  -----------------  -----------------
                           Amount   Ratio   Amount    Ratio    Amount    Ratio
                           ------   -----   ------    -----    ------    -----

As of December 31, 1997:
  Total Capital
   (to Risk Weighted
   Assets):
     Consolidated          $8,548  16.54%    4,134      8.0%      N/A      N/A
     Valley Bank, N.A.      7,285  14.25%    4,090      8.0%    5,114     10.0%
  Tier I Capital
   (to Risk Weighted
   Assets):
     Consolidated           8,089  15.65%    2,067      4.0%      N/A      N/A
     Valley Bank, N.A.      6,826  13.35%    2,045      4.0%    3,068      6.0%
  Tier I Capital (Leverage)
   (to Average Assets):
     Consolidated           8,089  11.50%    2,813      4.0%      N/A      N/A
     Valley Bank, N.A.      6,826   9.88%    2,764      4.0%    3,454      5.0%

</TABLE>
                                       47

<PAGE>


(10) Parent Company Financial Information

     Condensed financial information of Valley Financial Corporation is
     presented below:

<TABLE>
<CAPTION>

                            Condensed Balance Sheets
                           December 31, 1998 and 1997

                                                             December 31,
                                                        --------------------
                Assets                                    1998         1997
                                                        --------      ------
     <S>                                               <C>            <C>
     Cash                                              $     65          134
     Securities available-for-sale                        1,266        1,233
     Investment in subsidiary, at equity                  7,677        6,940
     Other assets                                           597          114
                                                       --------       ------
            Total assets                               $  9,605        8,421
                                                       ========       ======

                Liabilities and Shareholders' Equity

     Other liabilities                                 $    448          142
                                                       --------       ------
            Total liabilities                               448          142
                                                       --------       ------

     Shareholders' equity (notes 3, 7 and 8):
        Preferred stock, no par value.  Authorized
         10,000,000 shares; none issued                      --           --
        Common stock of no par value.  Authorized
         10,000,000 shares; issued and outstanding
         964,590 shares and 964,040 shares in 1998
         and 1997, respectively                           9,095        9,089
        Accumulated deficit                                (108)        (866)
        Accumulated other comprehensive income              170           56
                                                       --------       ------
            Total shareholders' equity                    9,157        8,279

     Commitments and other matters (notes 3, 5, 7,
      8, 11, 13 and 15)                                --------       ------
            Total liabilities and shareholders'
             equity                                    $  9,605        8,421
                                                       ========       ======

</TABLE>
                                       48
<PAGE>


<TABLE>
<CAPTION>

            Condensed Statements of Income and Comprehensive Income
                     Year Ended December 31, 1998 and 1997

                                                          1998         1997
                                                        --------      ------
     <S>                                               <C>            <C>
     Income:
        Interest income                                $     79           81
                                                       --------      -------
     Expenses:
        Interest expense                                      6           --
        Other expenses                                       40           45
                                                       --------      -------
                                                             46           45
                                                       --------      -------
               Income before income taxes and equity
                in undistributed net income of
                subsidiary                                   33           36

     Income tax expense (benefit)                            12          (81)
                                                       --------      -------
               Income before equity in undistributed
                net income of subsidiary                     21          117

     Equity in net income of subsidiary                     737          766
                                                       --------      -------
               Net income                                   758          883

     Equity in other comprehensive income, net of
      deferred tax expense:
        Net unrealized gains on securities available-
         for-sale                                           114           43
                                                       --------      -------
               Comprehensive income                    $    872          926
                                                       ========      =======

</TABLE>

                                       49
<PAGE>


<TABLE>
<CAPTION>

                       Condensed Statements of Cash Flows
                     Years Ended December 31, 1998 and 1997

                                                          1998         1997
                                                        --------      ------
     <S>                                               <C>            <C>
     Cash flows from operating activities:
        Net income                                     $    758          883
        Adjustments to reconcile net income to net
         cash provided by (used in) operating
         activities:
            Equity in net income of subsidiary             (737)        (766)
            Amortization of other assets                      9           10
            Increase in other assets                       (542)         (72)
            Increase (decrease) in other liabilities        306         (120)
                                                       --------      -------
                Net cash used in operating activities      (206)         (65)
                                                       --------      -------

     Cash flows from investing activities:
        Purchases of securities available-for-sale       (1,219)        (630)
        Proceeds from sales, maturities and calls
         of securities available-for-sale                 1,350          650
                                                       --------      -------
                Net cash provided by investing
                 activities                                 131           20
                                                       --------      -------

     Cash flows from financing activities:
        Proceeds from exercise of stock options               6           --
                                                       --------      -------

                Net cash provided by financing
                 activities                                   6           --
                                                       --------      -------
                Net decrease in cash                        (69)         (45)

     Cash at beginning of year                              134          179
                                                       --------      -------
     Cash at end of year                               $     65          134
                                                       ========      =======

</TABLE>


(11) Financial Instruments with Off-Balance-Sheet Risk

   The Bank is a party to financial instruments with off-balance-sheet risk in
   the normal course of business to meet the financing needs of its customers.
   These financial instruments include commitments to extend credit and standby
   letters of credit.  These instruments may involve, to varying degrees,
   credit risk in excess of the amount recognized in the balance sheets.  The
   contract amounts of these instruments reflect the extent of involvement the
   Bank has in particular classes of financial instruments.

                                       50
<PAGE>


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

     The Bank requires collateral to support financial instruments when it is
     deemed necessary.  The Bank evaluates customers' creditworthiness on a
     case-by-case basis.  The amount of collateral obtained upon extension of
     credit is based on management's credit evaluation of the customer. 
     Collateral may include deposits held in financial institutions, U.S.
     Treasury securities, other marketable securities, real estate, accounts
     receivable, inventory, and property, plant and equipment.

     Financial instruments whose contract amounts represent credit risk as of
     December 31 are as follows:


<TABLE>
<CAPTION>

                                                          1998         1997
                                                        --------      ------
     <S>                                               <C>            <C>
     Commitments to extend credit                      $ 18,542        9,248
                                                       ========       ======
     Standby letters of credit                         $  1,361          795
                                                       ========       ======

</TABLE>

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

     Standby letters of credit are conditional commitments issued by the Bank to
     guarantee the performance of a customer to a third party.  These guarantees
     are primarily issued to support public and private borrowing arrangements,
     including bond financing and similar transactions.  Unless renewed,
     substantially all of the Bank's credit commitments at December 31, 1998
     will expire within one year.  Management does not anticipate any material
     losses as a result of these transactions.  The credit risk involved in
     issuing letters of credit is essentially the same as that involved in
     extending loans to customers.

                                       51
<PAGE>


(12) Concentrations of Credit Risk

     The Bank grants commercial, residential and consumer loans to customers
     primarily in the Roanoke Valley area.  The Bank has a diversified loan
     portfolio which is not dependent upon any particular economic or industry
     sector.  As a whole, the portfolio could be affected by general economic
     conditions in the Roanoke Valley region.

     A detailed composition of the Bank's loan portfolio is provided in the
     consolidated financial statements.  The Bank's commercial loan portfolio is
     diversified, with no significant concentrations of credit.  Commercial real
     estate loans are generally collateralized by the related property.  The
     residential real estate loan portfolio consists principally of loans
     collateralized by 1-4 family residential property.  The loans to
     individuals portfolio consists of consumer loans primarily for home
     improvements, automobiles, personal property and other consumer purposes. 
     These loans are generally collateralized by the related property.  Overall,
     the Bank's loan portfolio is not concentrated within a single industry or
     group of industries, the loss of any one or more of which would generate a
     materially adverse impact on the business of the Bank.

     The Bank has established operating policies relating to the credit process
     and collateral in loan originations.  Loans to purchase real and personal
     property are generally collateralized by the related property.  Credit
     approval is principally a function of collateral and the evaluation of the
     creditworthiness of the borrower based on available financial information.

(13) Fair Value of Financial Instruments

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

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

     (a)  Cash and Due from Banks and Money Market Investments

          The carrying amounts are a reasonable estimate of fair value.

     (b)  Securities

          The fair value of securities, except certain state and municipal
          securities, is estimated based on bid prices published in financial
          newspapers or bid quotations received from securities dealers.

                                       52
<PAGE>


          The fair value of certain state and municipal securities is not
          readily available through market sources other than dealer quotations,
          so fair value estimates are based on quoted market prices of similar
          instruments, adjusted for differences between the quoted instruments
          and the instruments being valued.

     (c)  Loans

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

          The fair value of loans is calculated by discounting scheduled cash
          flows through the estimated maturity using estimated market discount
          rates that reflect the credit and interest rate risk inherent in the
          loan as well as estimates for prepayments.  The estimate of maturity
          is based on the Bank's industry experience with repayments for each
          loan classification, modified, as required, by an estimate of the
          effect of current economic and lending conditions.

     (d)  Deposits

          The fair value of noninterest-bearing deposits, interest-bearing
          deposits and savings deposits is the amount payable on demand.  The
          fair value of fixed maturity time deposits and certificates of deposit
          is estimated using the rates currently offered for deposits with
          similar remaining maturities.

     (e)  Commitments to Extend Credit and Standby Letters of Credit

          The only amounts recorded for commitments to extend credit and standby
          letters of credit are the deferred fees arising from these
          unrecognized financial instruments.  These deferred fees are not
          deemed significant at December 31, 1998 and 1997, and as such, the
          related fair values have not been estimated.

     (f)  Federal Home Loan Bank Advances

          The fair value of fixed rate borrowings are estimated using discounted
          cash flows based on current incremental borrowing rates for similar
          types of borrowing arrangements.

                                       53
<PAGE>


     The carrying amounts and approximate fair values of the Corporation's
     financial instruments are as follows at December 31, 1998 and 1997:


<TABLE>
<CAPTION>

                                          1998                   1997
                                 ---------------------   ---------------------
                                 Carrying  Approximate   Carrying  Approximate
                                  Amounts  Fair Values    Amounts  Fair Values
                                 --------  -----------   --------  -----------
<S>                              <C>       <C>           <C>       <C>
Financial assets:
  Cash and due from banks        $  3,462        3,462      3,324        3,324
  Money market investments          1,743        1,743      1,473        1,473
  Securities available-for-
   sale                            26,118       26,118     21,144       21,144
  Loans, net                       70,875       71,333     46,150       46,948
                                 --------  -----------   --------  -----------
      Total financial assets     $102,198      102,656     72,091       72,889
                                 ========  ===========    =======  ===========

Financial liabilities:
  Deposits                       $ 90,026       90,576     65,588       65,977
  Federal Home Loan Bank
   advances                         5,000        5,012         --           --
                                 --------  -----------   --------  -----------
      Total financial
       liabilities               $ 95,026       95,588     65,588       65,977
                                 ========  ===========   ========  ===========

</TABLE>


     Fair value estimates are made at a specific point in time, based on
     relevant market information and information about the financial instrument.
     These estimates do not reflect any premium or discount that could result
     from offering for sale at one time the Corporation's entire holdings of a
     particular financial instrument.  Because no market exists for a
     significant portion of the Corporation's financial instruments, fair value
     estimates are based on judgments regarding future expected loss experience,
     current economic conditions, risk characteristics of various financial
     instruments and other factors.  These estimates are subjective in nature
     and involve uncertainties and matters of significant judgment and therefore
     cannot be determined with precision.  Changes in assumptions could
     significantly affect the estimates.

     Fair value estimates are based on existing on and off-balance sheet
     financial instruments without attempting to estimate the value of
     anticipated future business and the value of assets and liabilities that
     are not considered financial instruments.  Significant assets that are not
     considered financial assets include deferred tax assets and premises and
     equipment.  In addition, the tax ramifications related to the realization
     of the unrealized gains and losses can have a significant effect on fair
     value estimates and have not been considered in the estimates.

                                       54
<PAGE>


(14) Time Deposits

     At December 31, 1998, the scheduled maturities of time deposits are as
     follows:


               Years Ending December 31,

               1999                             $36,642
               2000                               3,461
               2001                               1,567
               2002                               2,972
               2003                               1,328
                                                -------
                                                $45,970
                                                =======


(15) Commitments

     At December 31, 1998, the Corporation had outstanding contractual
     commitments of approximately $400,000 related to construction of a new
     branch.

(16) Other Comprehensive Income

     Other comprehensive income net of income taxes and net of reclassification
     adjustments between net income and other comprehensive income relating to
     securities available-for-sale are reported in the Consolidated Statements
     of Income and Comprehensive Income.  The information that follows discloses
     the reclassification adjustments and the income taxes related to securities
     available-for-sale that are included in other comprehensive income, net of
     income taxes.

<TABLE>
<CAPTION>

                                                                   1998
                                                                 --------
     <S>                                                        <C>
     Net unrealized gains on securities available-for-sale:
        Net unrealized holding gains during the year            $    190
            Less reclassification adjustments for gains
             included in net income                                  (17)
        Income tax expense                                           (59)
                                                                --------
                Other comprehensive income, net of income
                 taxes                                          $    114
                                                                ========

</TABLE>

                                       55
<PAGE>


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

None.

                                   PART III.

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

The information required by Item 401 of Regulation S-B is set forth under the
caption "Information Concerning Directors and Nominees" on pages 3-6 of the
Company's Proxy Statement dated March 22, 1999 and is incorporated herein by
reference. 

The information required by Item 405 of Regulation S-B is set forth under the
caption "Section 16(a) Beneficial Ownership Reporting Compliance" on page 7 of
the Company's Proxy Statement dated March 22, 1999 and is incorporated herein by
reference. 


Item 10.  Executive Compensation.

The information required by Item 402 of Regulation S-B is set forth under the
caption "Executive Compensation" on pages 8-10 of the Company's Proxy
Statement dated March 22, 1999 and is incorporated herein by reference.


Item 11.  Security Ownership of Certain Beneficial Owners and Management.

The information required by item 403 of Regulation S-B is set forth under the
caption "Security Ownership of Certain Beneficial Owners" on page 3 of the
Company's Proxy Statement dated March 22, 1999 and under the caption
"Information Concerning Directors and Nominees" on pages 3-6 of the Company's
Proxy Statement dated March 22, 1999 and is incorporated herein by reference.


Item 12.  Certain Relationships and Related Transactions.

The information required by Item 404 of Regulation S-B is set forth under the
caption "Certain Relationships and Related Transactions" on page 6 of the
Company's Proxy Statement dated March 22, 1999 and is incorporated herein by
reference.

                                       56
<PAGE>


Item 13.  Exhibits and Reports on Form 8-K.

(a)  The following documents are filed as part of this Report:

     1.   Financial Statements:

          Independent Auditors' Report.

          Consolidated Balance Sheets as of December 31, 1998 and 1997.

          Consolidated Statements of Income and Comprehensive Income for the
          Years Ended December 31, 1998 and 1997.

          Consolidated Statements of Changes in Shareholders' Equity for the
          Years Ended December 31, 1998 and 1997.

          Consolidated Statements of Cash Flows for the Years Ended December 31,
          1998 and 1997.

          Notes to Consolidated Financial Statements.

     2.   Financial Statement Schedules:

          All schedules are omitted as the required information is inapplicable
          or the information is presented in the Financial Statements or related
          notes.

     3.   Exhibits:

          3.1  Articles of Incorporation (incorporated herein by reference to
               Exhibit No. 3.1 of Registration Statement No. 33-77568, on form
               S-1, as amended).

          3.2  Bylaws (incorporated herein by reference to Exhibit No. 3.2 of
               Registration Statement No. 33-77568, on form S-1, as amended).

        *10.2  Employment Agreement dated April 8, 1994, by and between the
               Company and A. Wayne Lewis (incorporated herein by reference to
               Exhibit No. 10.2 of Registration Statement No. 33-77568, on Form
               S-1, as amended).

        *10.3  Severance Agreement dated December 19, 1996, by and between the
               Company and Ellis L. Gutshall (incorporated herein by reference
               to Exhibit No. 10.3 of Form 10-KSB filed March 27, 1997, File No.
               33-77568).

        *10.4  Stock Option Agreement dated December 19, 1996, by and between
               the Company and Ellis L. Gutshall (incorporated herein by
               reference to Exhibit No. 10.4 of Form 10-KSB filed March 27,
               1997, File No. 33-77568).

                                       57
<PAGE>


         10.5  Office Lease dated February 28, 1994, by and between First
               Federal Building, L.C. and Valley Financial Enterprises, L.C.
               (incorporated herein by reference to Exhibit No. 10.5 of
               Registration Statement No. 33-77568, on Form S-1, as amended).

        10.10  First amendment dated August 5, 1994, to the Office Lease dated
               February 28, 1994, by and between First Federal Building, L.C.
               and Valley Financial Enterprises, L.C. (incorporated herein by
               reference to Exhibit No. 10.10 of Form 10-K filed  March 30,
               1995, File No. 33-77568).

        10.12  Second amendment dated December 14, 1994, to the Office Lease
               dated February 28, 1994, by and between First Federal Building,
               L.C. and Valley Financial Enterprises, L.C. (incorporated herein
               by reference to Exhibit No. 10.12 of Form 10-K filed March 30,
               1995, File No. 33-77568).

        10.13  Lease agreement for office space dated September 20, 1996, by and
               between Valley Bank, N.A. and Betty J. Burrows (incorporated
               herein by reference to Exhibit No. 10.13 of Form 10-KSB filed
               March 27, 1997, File No. 33-77568).

        21.    Subsidiaries of the Registrant.

        24.    Power of Attorney.

        27.    Financial Data Schedule.

--------
*Management contract or compensatory plan or agreement required to be filed as
an Exhibit to this Form 10-KSB pursuant to Item 13(a).

(b)  Reports on Form 8-K filed during the last quarter of the period covered by
     this report:

     Form 8-K dated November 9, 1998 to report third quarter earnings and the
     related press release. 

                                       58
<PAGE>


                                   SIGNATURES


     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized on March 29, 1999.


                              Valley Financial Corporation



                              By:  /s/ Ellis L. Gutshall
                                   ---------------------
                                   Ellis L. Gutshall
                                   President and Chief
                                   Executive Officer



     Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
following persons in the capacities indicated as of March 29, 1999.


       Signature                                  Title
       ---------                                  -----


/s/ Ellis L. Gutshall              President, Chief  Executive Officer
-----------------------------         and Director (Chief Executive Officer)
(Ellis L. Gutshall)


/s/ A. Wayne Lewis                 Executive Vice President, Chief
-----------------------------         Operating Officer and Director
(A. Wayne Lewis)


/s/ A. Wayne Lewis                 Chief Financial Officer
-----------------------------         (Principal Financial Officer
(A. Wayne Lewis)                      and Principal Accounting Officer)


/s/ Abney S. Boxley, III    *      Director
-----------------------------
(Abney S. Boxley, III)

                                       59
<PAGE>


/s/ W. Jackson Burrows      *      Director
-----------------------------
(W. Jackson Burrows)


/s/ William D. Elliot       *      Director
-----------------------------
(William D. Elliot)


-----------------------------      Director
(Mason Haynesworth)


-----------------------------      Director
(Eddie F. Hearp)


/s/ Anna L. Lawson          *      Director
-----------------------------
(Anna L. Lawson)


/s/ Barbara B. Lemon       *       Director
----------------------------
(Barbara B. Lemon)


/s/ George W. Logan        *       Director
-----------------------------
(George W. Logan)


/s/ John W. Starr           *      Director
-----------------------------
(Dr. John W. Starr)


/s/ Ward W. Stevens         *      Director
-----------------------------
(Dr. Ward W. Stevens)


-----------------------------      Director
(Maury L. Strauss)


-----------------------------      Director
(Michael E. Warner)


* By /s/ A. Wayne Lewis
-----------------------------
     A. Wayne Lewis
     (Attorney in Fact)

                                       60
<PAGE>


                               INDEX TO EXHIBITS


Exhibit                                                                Page
Number    Description                                                  Number
-------   -----------                                                  ------
1         Articles of Incorporation (incorporated herein by
          reference to Exhibit No. 3.1 of Registration Statement
          No. 33-77568, on Form S-1, as amended).

3.2       Bylaws (incorporated herein by reference to Exhibit
          No. 3.2 of Registration Statement No. 33-77568, on
          Form S-1, as amended).

10.2      Employment Agreement dated April 8, 1994, by and between
          the Company and A. Wayne Lewis (incorporated herein by
          reference to Exhibit No. 10.2 of Registration Statement
          No. 33-77568, on Form S-1, as amended).

10.3      Severance Agreement dated December 19, 1996, by and
          between the Company and Ellis L. Gutshall.

10.4      Stock Option Agreement dated December 19, 1996, by and
          between the Company and Ellis L. Gutshall.

10.5      Office Lease dated February 28, 1994, by and between
          First Federal Building, L.C. and Valley Financial
          Enterprises, L.C. (incorporated herein by reference to
          Exhibit No. 10.5 of Registration Statement No. 33-77568,
          on Form S-1, as amended).

10.10     First amendment dated August 5, 1994, to the Office
          Lease dated February 28, 1994, by and between First
          Federal Building, L.C. and Valley Financial Enterprises,
          L.C. (incorporated herein by reference to Exhibit No.
          10.10 of Form 10-K filed March 30, 1995, File No. 33-77568).

10.12     Second amendment dated December 14, 1994, to the Office
          Lease dated February 28, 1994, by and between First
          Federal Building, L.C. and Valley Financial Enterprises,
          L.C. (incorporated herein by reference to Exhibit No. 10.12
          of Form 10-K filed March 30, 1995, File No. 33-77568).

10.13     Lease agreement for office space dated September 20, 1996,

                                       61
<PAGE>


          by and between Valley Bank, N.A. and Betty J. Burrows.

21        Subsidiaries of the Registrant.                                63

24        Power of Attorney.                                             59

27        Financial Data Schedule.                                       64

                                       62
<PAGE>


                                   EXHIBIT 21

                         SUBSIDIARIES OF THE REGISTRANT


     Valley Bank, N.A. is a subsidiary of the registrant, Valley Financial
Corporation.  Valley Financial Corporation owns 100% of the Common Stock of the
Bank. 

                                       63
<PAGE>


                          VALLEY FINANCIAL CORPORATION
                            Financial Data Schedule

[ARTICLE]                                                 12
[LEGEND]
[CIK]                                             0000921590
[NAME]                            VALLEY FINANCIAL CORP /VA/
[MULTIPLIER]                                           1,000
[FISCAL-YEAR-END]                                DEC-31-1998
[PERIOD-START]                                   JAN-01-1998
[PERIOD-END]                                     DEC-31-1998
[PERIOD-TYPE]                                         12-MOS
[CASH]                                                 3,462
[INT-BEARING-DEPOSITS]                                    44
[FED-FUNDS-SOLD]                                       1,699
[TRADING-ASSETS]                                           0
[INVESTMENTS-HELD-FOR-SALE]                           26,118
[INVESTMENTS-CARRYING]                                     0
[INVESTMENTS-MARKET]                                       0
[LOANS]                                               71,622
[ALLOWANCE]                                              708
[TOTAL-ASSETS]                                       105,186
[DEPOSITS]                                            90,026
[SHORT-TERM]                                               0
[LIABILITIES-OTHER]                                    1,003
[LONG-TERM]                                            5,000
[COMMON]                                               9,095
[PREFERRED-MANDATORY]                                      0
[PREFERRED]                                                0
[OTHER-SE]                                                62
[TOTAL-LIABILITIES-AND-EQUITY]                       105,186
[INTEREST-LOAN]                                        5,059
[INTEREST-INVEST]                                      1,560
[INTEREST-OTHER]                                         151
[INTEREST-TOTAL]                                       6,770
[INTEREST-DEPOSIT]                                     3,257
[INTEREST-EXPENSE]                                     3,512
[INTEREST-INCOME-NET]                                  3,258
[LOAN-LOSSES]                                            249
<SECURITIES-GAIN>                                         10
[EXPENSE-OTHER]                                        2,252
[INCOME-PRETAX]                                        1,021
[INCOME-PRE-EXTRAORDINARY]                               758
[EXTRAORDINARY]                                            0

                                       64
<PAGE>


[CHANGES]                                                  0
[NET-INCOME]                                             758
[EPS-PRIMARY]                                            .79
[EPS-DILUTED]                                            .77
[YIELD-ACTUAL]                                          3.86
[LOANS-NON]                                                0
[LOANS-PAST]                                             200
[LOANS-TROUBLED]                                           0
[LOANS-PROBLEM]                                            0
[ALLOWANCE-OPEN]                                         459
[CHARGE-OFFS]                                              0
[RECOVERIES]                                               0
[ALLOWANCE-CLOSE]                                        708
[ALLOWANCE-DOMESTIC]                                     708
[ALLOWANCE-FOREIGN]                                        0
[ALLOWANCE-UNALLOCATED]                                  708

                                       65
<PAGE>