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                                  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, 2002

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

The issuer's revenues for its most recent fiscal year were $14,579,000.

The aggregate market value of the voting stock held by non-affiliates of the
Company (1,210,777 shares) based on the $14.50 per share last trade price quoted
by the OTC Bulletin Board on March 15, 2003 was $17,556,267. At March 15, 2003
1,828,737 shares of the registrant's common stock were issued and outstanding.

                      Documents incorporated by reference:

The issuer's Proxy Statement dated March 18, 2003 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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                          VALLEY FINANCIAL CORPORATION
                                   FORM 10-KSB
                                December 31, 2002

                                      INDEX

PART I.
     Item  1.  Description of Business.                                3
     Item  2.  Description of Property.                               14
     Item  3.  Legal Proceedings.                                     15
     Item  4.  Submission of Matters to a Vote of Security Holders.   15

PART II.
     Item  5.  Market for Common Equity and Related                   16
               Stockholder Matters.
     Item  6.  Management's Discussion and Analysis or Plan           18
               of Operation.
     Item  7.  Financial Statements.                                  45
     Item  8.  Changes in and Disagreements With Accountants on       72
               Accounting and Financial Disclosure.

PART III.
     Item  9.  Directors, Executive Officers, Promoters and Control   72
               Persons; Compliance with Section 16(a) of the
               Exchange Act.
     Item 10.  Executive Compensation.                                72
     Item 11.  Security Ownership of Certain Beneficial Owners and    72
               Management.
     Item 12.  Certain Relationships and Related Transactions.        72
     Item 13.  Exhibits and Reports on Form 8-K.                      73
     Item 14.  Controls and Procedures                                76

SIGNATURES                                                            77

EXHIBIT INDEX                                                         81

                                       2

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                                     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 (the "Bank"). Effective October 16, 2002,
Valley Bank established VB Investments, LLC as a wholly-owned subsidiary of the
Bank to be a limited partner in Grandin Theatre, LP. The establishment of the
subsidiary gives the Bank the right to utilize certain federal and state tax
credits. 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, its third office on January 15, 1997 in the City of Roanoke, its fourth
office in the City of Salem on April 5, 1999, its fifth office in the City of
Roanoke on May 7, 2001, and its sixth office in County of Roanoke on May 20,
2002. The Bank is scheduled to open its seventh office in the City of Roanoke in
the summer of 2003.

        The Bank operates under a state charter issued by the Commonwealth of
Virginia, 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, and its branch
offices at 4467 Starkey Road, SW in the County of Roanoke, 2203 Crystal Spring
Avenue, SW in the City of Roanoke, 8 East Main Street in the City of Salem, 1518
Hershberger Road in the City of Roanoke, and 1003 Hardy Road in the County of
Roanoke. The Bank is scheduled to open its seventh office at 3844 Keagy Road, SW
in the City of Roanoke in the summer of 2003.

        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 800
and 1,700, respectively, are located in the Roanoke MSA. Virginia Polytechnic
Institute & State University and Radford University, with student bodies of some
25,000 and 8,000, respectively, are approximately a 45-minute drive away.

        The population in the Roanoke MSA was estimated at 235,932 per the 2000
Census. The Roanoke MSA's growth typically is slower than that in the
Commonwealth overall and in other key Virginia markets in particular, and the
Virginia Employment Commission reported that from December 2001 through December
2002 the number of jobs in the Roanoke MSA decreased 1.8%, compared with a
0.003% increase for the state as a whole. The Roanoke MSA had an unemployment
rate of 3.1% in December 2002, compared with 5.7% nationally and 3.6% for
Virginia.

                                       3

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        The Roanoke MSA operated 6,887 businesses at December 31, 2001(the
latest information available). 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,
Lewis-Gale Hospital, and the Veterans Administration Hospital are among
Roanoke's largest employers. Other large employers include Norfolk Southern
Corporation, General Electric Co., First Union Corporation, The Kroger Co., 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 mortgage loans and real
estate construction and acquisition loans.

        The Bank's lending activities are subject to a variety of lending
limits imposed by state and federal laws and regulations. In general the Bank is
subject to a loan-to-one borrower limit of an amount equal to 15% of the total
of the Bank's unimpaired capital, surplus, and allowance for loan loss. 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 including overnight repurchase agreements, merchant purchase and
management programs, travelers checks, direct deposit of payroll and social
security checks and automatic drafts for various accounts. The Bank operates
five proprietary ATM's and is associated with the Honor, Cirrus and The Exchange
shared networks of automated teller machines that may be used by Bank customers
throughout Virginia and other regions. The Bank also offers VISA and MasterCard
credit card services as well as a debit-check card.

                                       4

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        The Bank has no immediate plans to exercise trust powers. The Bank may
in the future offer a full-service trust department, but cannot do so without
the prior approval of its primary regulators, the Federal Reserve Bank of
Richmond and the Virginia State Corporation Commission, before exercise of trust
powers.

        In May 2002 the Bank introduced a transactional Internet-based banking
product. This product allows customers to view account balances, see account
history, make transfers between accounts, and pay bills online, along with may
other features. Business customers also have access to a number of online cash
management and treasury functions.

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 June 30, 2002 there were fourteen commercial banks and
savings associations operating a total of 119 offices in the Roanoke MSA.
Currently, the Bank, Bank of Botetourt and Bank of Fincastle are the only
locally owned and operated commercial banks. 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 offices in the Bank's market area.

        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, 2002 the Bank had sixty-six full-time employees and two
part-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

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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.

                                       6

<PAGE>

        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 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.

        Financial Modernization Legislation/Gramm-Leach-Bliley Act. A bank
holding company generally is restricted to activities related or incidental to
banking. In the past, bank holding companies were specifically prohibited from
engaging in the issue, flotation, underwriting, public sale, or distribution of
third party securities. Limits also were placed on underwriting and selling
insurance. The activities permissible to bank holding companies and their
affiliates were substantially expanded by the Gramm-Leach-Bliley Act (the "GLB
Act"). This new act repeals the banking/securities industry anti-affiliation
rules and permits the common ownership of commercial banks, investment banks,
and insurance companies. Under this new law, a bank holding company may elect to
be treated as a financial holding company, which may engage in any activity that
the Federal Reserve determines is financial in nature. A financial holding
company also may engage in any activity that is complementary to a financial
activity and does not pose a substantial risk to the safety and soundness of the
related depository institutions or the financial system generally.

        In order for a bank holding company to qualify as a financial holding
company, all of its depository subsidiaries (i.e., banks and thrifts) must be
well capitalized and well managed, and must meet their Community Reinvestment
Act obligations, as explained below. The bank holding company also must declare
its intention to become a financial holding company to the Federal Reserve and
certify that it meets the requirements. Banks and thrifts acquired by a
financial holding company within 12 months prior to the date on which the
election is filed may be excluded from this test if they have less than a
satisfactory CRA rating, but they must submit a plan to the applicable federal
banking agency describing how the CRA rating will be brought into conformance.

        Financial holding company powers that are either specified in the
statue or have been determined by the Federal Reserve to be financial in nature
include the following:

     .    underwriting insurance or annuities;
     .    providing financial or investment advice;
     .    underwriting, dealing in, or making markets in securities;
     .    merchant banking, subject to limitations on size and capital
          restrictions;
     .    insurance portfolio investing, subject to limitations; and
     .    any other activities previously found to be closely related to banking
          by the Federal Reserve.

                                       7

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        The GLB Act also establishes a system of functional regulation for
financial holding companies and banks providing regulation of securities by the
Securities and Exchange Commission and state securities regulators, regulation
of futures by the Commodity Futures Trading Commission, and regulation of
insurance activities by the state insurance regulators. Banks may sell title
insurance only when specifically permitted under the applicable state law.

        The Company may elect to become a financial holding company under the
terms of this new law. The Company is unable to predict the impact of this new
law on its competition or operations at this time.

        Sarbanes-Oxley Act of 2002. On July 30, 2002, the Sarbanes-Oxley Act of
2002 (the "Sarbanes-Oxley Act") was signed into law. The Sarbanes-Oxley Act
represents a comprehensive revision of laws affecting corporate governance,
accounting obligations and corporate reporting. The Sarbanes-Oxley Act is
applicable to all companies with equity or debt securities registered under the
Securities Exchange Act of 1934, including the Company. In particular, the
Sarbanes-Oxley Act establishes: (i) new requirements for audit committees,
including independence, expertise, and responsibilities; (ii) additional
responsibilities regarding financial statements for the Chief Executive Officer
and Chief Financial Officer of the reporting company; (iii) new standards for
auditors and regulation of audits; (iv) increased disclosure and reporting
obligations for the reporting company and their directors and executive
officers; and (v) new and increased civil and criminal penalties for violation
of the securities laws. Many of the provisions became effective immediately
while other provisions become effective over a period of 30 to 270 days and are
subject to rulemaking by the Securities and Exchange Commission. Although the
Company anticipates that it will incur additional expense in complying with the
provisions of the Sarbanes-Oxley Act and the resulting regulations, the Company
does not expect that such compliance will have a material impact on the
Company's or the Bank's results of operations or financial condition.

                                       8

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The Bank

        General. The Bank is a state-chartered commercial bank organized under
the laws of the Commonwealth of Virginia, and is subject to examination by the
Federal Reserve and the Virginia State Corporation Commission. The regulators
monitor 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 prescribed minimum standards and procedures. The Bank
also is required 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. Also, the Bank is
charged a deposit-based assessment by the FDIC in connection with the so-called
FICO bonds issued by the federal government to finance the savings and loan
industry bailout. The total BIF and FICO assessment combined was approximately
$25,000 in 2002. Future deposit insurance premiums will vary with the strength
of the banking industry, the level of the BIF insurance fund and the Bank's
individual risk rating as determined by the FDIC, and there can be no assurance
that premiums will remain at their current 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.

                                       9

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        Branching. The Bank may branch without geographic restriction in
Virginia since the Virginia Act permits statewide branching for state banks in
Virginia. The federal Interstate Banking and Branching Efficiency Act of 1994
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" rating pursuant to its latest CRA
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 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.

                                       10

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         Dividends. During 2002, the Company had no significant revenue, as its
investments were downstreamed to the Bank on April 20, 2001. At a future point
in time, it will be necessary for the Bank to pay dividends to the Company. 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 state law,
regulations and policies. A Virginia bank may not pay dividends from its
capital; all dividends must be paid out of net undivided profits then on hand,
after providing for all expenses, losses, interest and taxes accrued, or due by
the Bank. Before any dividend is declared, any deficit in capital funds
originally paid in must have been restored by earnings to their initial level,
and no dividend shall be declared or paid by any bank which would impair the
paid-in capital of the bank. To ascertain the net undivided profits before any
dividend shall be declared, all debts due to the bank on which interest is past
due and unpaid for a period of twelve months, unless they are well secured and
in process of collection, are deducted from the undivided profits in addition to
all expenses, losses, interest and taxes accrued, and the balance is deemed to
be the net undivided profits. The Virginia State Corporation Commission may
limit or approve the payment of dividends by the board of directors of any bank
when the Commission determines that the limitation or approval is warranted by
the financial condition of the bank. The Company does not anticipate paying cash
dividends to shareholders in the near term. See "Capital Regulations" below,
"Item 5. Market for Common Equity and Related Stockholder Matters" and Note 15
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 Virginia State Corporation Commission and the
Federal Reserve 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.

         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 three components
- Core or Tier 1 capital, Supplementary or Tier 2 capital, and Market Risk
Allocated or Tier 3 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 allowance for loan and lease
losses. Tier 3 capital is only applicable to banks which are subject to the
market risk capital guidelines. The amount reported in this item may only be
used to satisfy the bank's market risk capital requirement and may not be used
to support credit risk.

                                       11

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         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, 2002 the Company and the Bank had the following
risk-based capital and leverage ratios relative to regulatory minimums:

                        Ratio            Company          Bank         Minimum
                        -----            -------          ----         -------
                        Tier 1            9.3%            9.2%           4%

                        Total            10.3%           10.2%           8%

                        Leverage          7.7%            7.6%           4%

         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, 2002 the Company and
the Bank qualified as "well-capitalized" institutions (see Note 15 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 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.

                                       12

<PAGE>

         The Office of the Comptroller of the Currency, Board of Governors of
the Federal Reserve System, Federal Deposit Insurance System, and the Office of
the Thrift Supervision issued their joint final rule regarding the obligation of
financial institutions to protect the financial privacy of their consumers under
the GLB Act. Compliance with the Joint Rule was mandatory July 2001. The Final
Rule applies to nonpublic personal information about individuals who obtain
financial products or services from a bank or thrift institution and their
subsidiaries. The Bank should provide consumers with a "clear and conspicuous"
notice regarding the bank's privacy policies and practices and describe the
conditions under which the Bank may disclose nonpublic personal information
about its consumers to affiliates and nonaffiliated third parties. The Bank
should provide a method for its consumers to opt out of the disclosure of
nonpublic personal information to third parties. The Bank should finally adopt
policies and procedures reasonably designed to protect customer records and
information from any anticipated threats, hazards, or unauthorized access or use
that could result in "substantial harm or inconvenience" to any customer. The
Bank must disclose their specific privacy policies to their customers annually.
Upon making such disclosure, there is no specific restriction on the Bank
disclosing customer information to affiliated parties. The Bank must comply with
state law, however, if it protects customer privacy more fully than federal law.

         The GLB act also revises the present Federal Home Loan Bank system,
imposing new capital requirements on Federal Home Loan Banks and authorizing
them to issue two classes of stock with differing dividend rates and redemption
requirements. Permissible uses of Federal Home Loan Bank advances by community
financial institutions (under $500 million in assets) have been expanded to
include funding loans to small businesses, and small farms and agribusiness. The
Bank uses Federal Home Loan Bank loans extensively to fund lending
opportunities.

         The GLB act contains a variety of other provisions. Automated teller
machine surcharges are prohibited unless the customer first has been provided
notice of the imposition and amount of the fee. Community Reinvestment Act
examinations for smaller institutions (including the Bank) will be less
frequent. Certain reporting requirements are now imposed on depository
institutions that make payments to non-governmental entities in connection with
the Community Reinvestment Act.

         International Money Laundering Abatement and Financial Anti-Terrorism
Act of 2001. On October 26, 2001 the USA Patriot Act was signed into law. This
act contains the International Money Laundering Abatement and Financial
Anti-Terrorism Act of 2001 (the "IMLAFA"). IMLAFA contains anti-money laundering
measures affecting insured depository institutions, broker-dealers and certain
other financial institutions. IMLAFA requires U.S. financial institutions to
adopt new policies and procedures to combat money laundering and grants the
Secretary of the Treasury broad authority to establish regulations and to impose
requirements and restrictions on financial institutions' operations. The Company
does not expect that compliance with IMLAFA will have a material impact on the
Company's or the Bank's results of operations or financial condition.

                                       13

<PAGE>

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,
2002 the Bank leased approximately 8,148 square feet of recently-renovated
office space on the first floor of this facility. The lease commenced April 1,
1995 and had an initial base term of five years, which expired December 31,
1999. The lease was renewed on December 23, 1999 for the period beginning
January 1, 2000 and ending December 31, 2004 with options to renew for two
additional five-year terms at the end of the December 31, 2004 extension period.
Annual base rent on the leased space is $90,607 payable in equal monthly
installments of $7,551. The Bank also is responsible for paying a pro rata share
of certain operating costs associated with the leased space.

         Under the original lease, the Bank was 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. Annual base rent on the mezzanine
level is $23,699 payable in equal monthly installments of $1,975. The same terms
and conditions exist with the mezzanine level lease as with the original lease
from which the right of first refusal was granted, including renewal periods.

         The Bank signed a lease to occupy 3,212 square feet of the second floor
of the Church Avenue location on August 10, 2000. The lease commenced September
1, 2000 and runs through December 31, 2004. Annual base rent on the second floor
is $38,544 payable in equal monthly installments of $3,212. The Bank also is
responsible for paying a pro rata share of certain operating costs associated
with the leased space.

         The cost of the leasehold improvements to the Church Avenue leased
premises, net of accumulated amortization, was $89,762 at December 31, 2002.

         The Bank's Starkey Road office is a 2,700 square foot building
constructed in 1995 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 the total land cost after all necessary grading and
closing costs is $292,376. The total cost of the building, net of accumulated
depreciation, was $360,564 at December 31, 2002.

                                       14

<PAGE>

         The Bank's South Roanoke office is a 914 square foot facility that the
Bank leased at a 2002 annual rate of $12,300, payable in equal monthly
installments of $1,025. For 2003, the annual rental has increased to $12,720
payable in equal monthly installments of $1,060. 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 $5,816
at December 31, 2002.

         The Bank's Salem office is a newly-constructed Colonial Williamsburg
style building with two floors containing 6,000 square feet, of which the Bank
occupies the first story and leases the second story. The structure is located
on an approximately one-half acre site at 8 East Main Street in the City of
Salem. The Company acquired the land for a contract price of $325,000 and the
total land cost after all necessary grading, structure removal, and closing
costs is $361,839. The total cost of the facility construction, net of
accumulated depreciation, was $687,073 at December 31, 2002. Total monthly
rental income from leasing the second story is $2,356, which directly reduces
occupancy expense.

         The Bank's Hershberger Road office is a 2,400 square foot building on a
one-acre site at 1518 Hershberger Road in the City of Roanoke (Crossroads Mall
area). The land with the existing branch was purchased from First Union National
Bank in September 2000. The Bank acquired the property for a contract price of
$485,000. The branch was renovated and opened on May 7, 2001. Of the original
contract price, the cost allocated to the land is $299,151. The total cost
allocated to the building, including all renovation costs, net of accumulated
depreciation, was $416,604 at December 31, 2002.

         The Bank's Vinton office is a 2,950 square foot building on an .8-acre
site at 1003 Hardy Road (Vinton) in the County of Roanoke. The land was
purchased on August 1, 2001 for a contract price of $280,000. The branch was
constructed and opened on May 20, 2002. The total land cost after all necessary
grading, structure removal, and closing costs is $292,196. The total cost of the
facility construction, net of accumulated depreciation, was $655,726 at December
31, 2002.

         The Bank purchased a parcel of land on Keagy Road (Lewis-Gale area) in
the City of Roanoke on December 28, 2001 for the purpose of opening a branch.
The land was acquired for a contract price of $375,000. The branch is
anticipated to open in the summer of 2003.

         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.

                                       15

<PAGE>

                                    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
1,828,737 shares were issued and outstanding at March 15, 2003.

         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 (adjusted for the 3-for-2 stock split declared April 24, 2002) for the
Common Stock during the last two fiscal years was as follows:

                  2002      Quarter Ended      High Close      Low Close

                              03/31/02           $12.00         $10.33
                              06/30/02           $13.50         $10.73
                              09/30/02           $13.25         $11.60
                              12/31/02           $15.10         $11.68

                  2001      Quarter Ended      High Close      Low Close

                              03/31/01           $11.00         $10.13
                              06/30/01           $11.67         $10.00
                              09/30/01           $10.83         $ 8.17
                              12/31/01           $11.50         $ 8.67

         Holders. At March 15, 2003 there were approximately 463 holders of
record of the Company's outstanding Common Stock.

         Dividends. The Company has not declared any cash dividends to date and
does not anticipate paying any cash dividends to shareholders in the immediate
term. See "Supervision and Regulation" and Note 15 to the Consolidated Financial
Statements for restrictions on the payment of dividends.

         Voting rights. In all elections of directors, a shareholder of the
Company has the right to cast one vote for each share of stock held for as many
persons as there are directors to be elected. There are no cumulative voting
rights. On any other question to be determined by a vote of shares at any
meeting of shareholders, each shareholder is entitled to one vote for each share
of stock held and entitled to vote.

         Preemptive Rights. Shareholders do not have preemptive rights with
respect to issues of common stock. Accordingly, share ownership may be diluted
if additional stock is issued in the future.

                                       16

<PAGE>

         Liquidation Rights. Upon liquidation, after payment of all creditors,
the remaining assets of the Company would be distributed to shareholders on a
pro-rata basis.

         Calls and Assessments. All common stock outstanding is fully paid and
non-assessable.

         Indemnification of Officers and Directors. The Articles of
Incorporation provide for the indemnification of our officers and directors for
their actions unless a court finds them liable for willful misconduct of a
knowing violation of the criminal law. In any proceedings brought by
shareholders against an officer or director, no damages may be assessed against
that officer or director unless they are liable for willful misconduct or a
knowing violation of criminal or securities laws. The Securities and Exchange
Commission has the opinion that indemnification of officers, directors, and
controlling persons for liabilities is against public policy and is, therefore,
unenforceable.

         Securities authorized for issuance under equity compensation plans.

                                    Equity Compensation Plan Information

<TABLE>
<CAPTION>
Plan category                              Number of securities    Weighted-average           Number of securities
                                           to be issued upon       exercise price of          remaining available for
                                           exercise of             outstanding options,       future issuance under equity
                                           outstanding options,    warrants, and rights       compensation plans
                                           warrants and rights                                (excluding securities
                                                                                              reflected in column (a))
  ======================================   ======================   =======================   =============================
<S>                                        <C>                      <C>                       <C>
Valley Financial Corporation Incentive                    130,544                     $9.40                          25,381
Stock Plan (approved by security holders)

Individual Stock Option Agreements                         81,998                     $6.35                               0
(approved by security holders)

Equity Compensation plans not approved                          0                     $0.00                               0
by security holders
                                           ----------------------                             -----------------------------
Total                                                     212,542                                                    25,381
                                           ======================                             =============================
</TABLE>

         As of December 31, 2002 there were no compensation plans, including
individual compensation arrangements, under which equity securities of the
Company are authorized for issuance that have not been approved by a vote of
security holders.

                                       17

<PAGE>

Item 6. Management's Discussion and Analysis of Financial Condition and Results
  of Operations

         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, 2002 and 2001. The discussion should be read in conjunction with
the Company's Consolidated Financial Statements and Notes thereto.

Critical Accounting Policies

      The Company's financial statements are prepared in accordance with
accounting principles generally accepted in the United States (GAAP). The notes
to the audited consolidated financial statements included in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 2002 contain a
summary of its significant accounting policies. Management believes the
Company's policy, with respect to the methodology for the determination of the
allowance for loan losses, involves a higher degree of complexity and requires
management to make difficult and subjective judgments that often require
assumptions or estimates about highly uncertain matters. Accordingly, the
Company considers the policy related to this area as critical.

      The allowance for loan losses is an estimate of the losses that may be
sustained in the Company's loan portfolio. The allowance is based on two basic
principles of accounting: (i) Statement of Financial Accounting Standards
("SFAS") 5, Accounting for Contingencies, which requires that losses be accrued
when they are probable of occurring and estimable, and (ii) SFAS 114, Accounting
by Creditors for Impairment of a Loan, which requires that losses be accrued
based on the differences between the value of collateral, present value of
future cash flows or values that are observable in the secondary market, and the
loan balance.

      The Company's allowance for loan losses has two basic components: (i) the
formula allowance, and (ii) the specific allowance. Each of these components is
determined based upon estimates that can and do change when the actual events
occur. The formula allowance uses an historical loss view as an indicator of
future losses and, as a result, could differ from the loss incurred in the
future. However, since this history is updated with the most recent loss
information, the errors that might otherwise occur are mitigated. The specific
allowance used various techniques to arrive at an estimate of loss. Historical
loss information, expected cash flows and fair market value of collateral are
used to estimate these losses. The use of these values is inherently subjective
and our actual losses could be greater or less than the estimates. Prevailing
economic conditions are also considered in the provision calculation. The
allowance for loan losses is evaluated on a regular basis by management.

Forward-Looking Statements

      This report contains forward-looking statements that are subject to risks
and uncertainties that could cause actual results to differ materially from
those reflected in such forward-looking statements, which are representative
only on the date hereof. Readers of this report should not rely solely on the
forward-looking statements and should consider all uncertainties and risks
discussed throughout this report. The Corporation takes no obligation to update
any forward-looking

                                       18

<PAGE>

statements contained herein. Factors that may cause actual results to differ
materially from those contemplated by such forward-looking statements include,
among others, the following possibilities: (1) competitive pressures among
depository and other financial institutions may increase significantly; (2)
changes in the interest rate environment may reduce margins; (3) general
economic conditions, either nationally or regionally, may be less favorable than
expected that could result in a deterioration of credit quality or a reduced
demand for credit; (4) legislative or regulatory changes including changes in
accounting standards, may adversely affect the business.

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 (1,518,363 shares after the
effects of the 1.05 for 1 stock split declared January 20, 2000 and the 3 for 2
stock split declared April 24, 2002) of its common stock, no par value, at a
price of $10.00 per share ($6.35 per share after the effects of the 1.05 for 1
stock split declared January 20, 2000 and the 3 for 2 stock split declared April
24, 2002). The Offering resulted in gross proceeds to the Company of $9.6
million, reduced by $551,000 of direct stock issuance costs associated with the
offering, for net proceeds of $9.1 million. The Company completed its second
stock offering effective November 17, 2000. The secondary offering resulted in
gross proceeds to the Company of $3.3 million, reduced by $122,000 direct stock
issuance costs associated with the offering, for net proceeds of $3.2 million.
Of the proceeds of the secondary offering, $2.3 million was used to re-pay a
subordinated capital note initiated as of June 30, 2000, with the remainder used
to purchase investment securities at the Company level. The Company's investment
in the Bank was $18.8 million as of December 31, 2002.

         Total assets at December 31, 2002 were $248.8 million, up $54.9 million
or 28.3% from $193.9 million at December 31, 2001. The principal components of
the Company's assets at the end of the period were $22.2 million in securities
available-for-sale, including restricted equity securities, $20.2 million in
securities held to maturity, and $185.7 million in gross loans.

         Total liabilities at December 31, 2002 were $229.8 million, up from
$177.6 million at December 31, 2001, an increase of $52.2 million or 29.4%.
Deposits increased $43.3 million or 31.2% to $182.2 million over the $138.9
million level at December 31, 2001. The remainder of the increase was primarily
due to an increase in the overnight repurchase agreement program with
appropriate commercial customers in the amount of $2.6 million, an increase in
Federal Home Loan Bank advances in the amount of $10.0 million, offset by a
decrease in federal funds purchased in the amount of $3.8 million.

         Total shareholders' equity at December 31, 2002 was $19.0 million,
consisting of $9.1 million in net proceeds from the Company's initial public
offering, $3.2 million in net proceeds from the Company's secondary offering,
$68,000 in proceeds from the exercise of stock options, increased by retained
earnings of $6.4 million and including $302,000 of unrealized gains on
securities available-for-sale, net of related deferred tax expense. Exclusive of
the unrealized losses on securities available-for-sale, shareholders' equity was
$18.7 million at December 31, 2002. At December 31, 2001 total shareholders'
equity was $16.3 million. Exclusive of unrealized losses on securities
available-for-sale, shareholders' equity was $16.4 million at December 31, 2001.

                                       19

<PAGE>

         The Company had net income of $2.3 million for the year ended December
31, 2002 compared with $1.7 million for the year ended December 31, 2001, an
increase of 35.3%. An improved net interest margin combined with increased
noninterest income, offset by increases in noninterest expense in all major
categories, contributed to the 35.3% increase for calendar year 2002.

         Profitability as measured by the Company's return on average assets
("ROA") was 1.0% in 2002 and return on average equity ("ROE") was 12.9% in 2002.
The ROA and ROE ratios were 1.0% and 11.1% in 2001, respectively. The
calculation of ROE excludes the effect of any unrealized gains or losses on
investment securities available-for-sale.

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
and the Bank. 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 $8.3 million for 2002 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 $2.1 million or 33.9%
over the $6.2 million level in 2001. Total interest income was $13.7 million for
2002 as compared to $13.0 million in 2001, an increase of $700,000 or 5.4%. This
increase is attributable to the Bank's reinvestment of funding growth into loans
and securities. Total interest expense was $5.5 million for 2002 as compared to
$6.7 million in 2001, a decrease of $1.2 million or 17.9%. The net interest
margin on a fully taxable equivalent basis was 4.1% for the year ended 2002 as
compared to 3.9% for the year ended 2001. The Bank produced the .2% margin
increase by working diligently throughout 2002 and 2001 to reprice deposits
significantly downward and by restructuring the investment portfolio to shorten
maturities and to obtain a more attractive yield. The yield on average loans
actually decreased by 1.5% to 7.0% from its level of 8.5% in 2001, as
approximately one-third of the loan portfolio is variable rate. The Bank's
overall yield on earning assets was 6.7% for the year ended 2002, as compared to
8.0% for the prior year ended 2001.

         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. Where appropriate, income categories and yields
have been adjusted in the table to their fully taxable equivalent basis.

                                       20

<PAGE>

                  NET INTEREST INCOME AND AVERAGE BALANCES (1)
                                 (000's omitted)

<TABLE>
<CAPTION>
                                                                    Years Ended December 31
                                                                    -----------------------
                                                            2002                                2001
                                                            ----                                ----
                                             Average      Interest    Rate       Average      Interest     Rate
Assets                                       Balance       Income    Earned      Balance       Income     Earned
                                             -------      --------  --------    ---------     --------     ------
<S>                                        <C>              <C>       <C>      <C>              <C>         <C>
Interest-earning assets:
  Loans (2)(5)                              $ 166,097        11,685    7.04%    $ 128,098        10,852    8.47%
  Investment securities
    Taxable                                    31,516         1,659    5.26%       27,242         1,740    6.39%
    Nontaxable(3)                               7,993           550    6.88%        6,922           503    7.27%
  Money market investments                      2,273            35    1.54%        1,420            45    3.17%
                                           ----------     ---------             ---------     ---------
Total interest-earning assets                 207,879        13,929    6.70%      163,682        13,140    8.03%

Other Assets:

Reserve for loan losses                        (1,768)                             (1,290)
Cash and due from banks                         6,350                               4,279
Premises and equipment, net                     4,652                               3,456
Other assets, net                               4,781                               1,570
                                            ---------                           ---------
Total assets                                $ 221,894                           $ 171,697
                                            =========                           =========
</TABLE>


<TABLE>
<CAPTION>
                                                                     Years Ended December 31
                                                                     -----------------------
                                                             2002                               2001
                                                             ----                               ----
Liabilities and Shareholders'               Average        Interest   Rate       Average      Interest     Rate
Equity                                      Balance        Expense    Paid       Balance      Expense      Paid
                                           ---------       --------  ------      -------      ---------    ----
<S>                                        <C>             <C>       <C>         <C>          <C>         <C>
Interest-bearing liabilities:
  Savings, NOW and MMA                      $  32,658           378    1.16%     $ 30,369           703    2.31%
  Time Deposits                               106,162         3,645    3.43%       84,531         4,966    5.87%
  Repurchase agreements                         5,573            73    1.31%        4,880           155    3.18%
  FHLB advances                                33,397         1,354    4.05%       15,712           870    5.54%
  Other borrowings                                880            18    2.05%        1,288            54    4.19%
                                            ---------     ---------              --------     ---------
Total interest-bearing liabilities            178,670         5,468    3.06%      136,780         6,748    4.93%

Noninterest-bearing liabilities:
  Demand deposits                              24,110                              17,499
  Other liabilities                             1,593                               1,926
                                            ---------                            --------
Total liabilities                             204,373                             156,205

Shareholders' equity, exclusive of
unrealized gains/losses on securities          17,521                              15,492
                                            ---------                            --------

Total liabilities and shareholders' equity  $ 221,894                            $171,697
                                            =========                            ========

Net interest income                                       $   8,461                              $6,392
                                                          =========                              ======
Net interest margin (4)                                                4.07%                               3.91%
                                                                      =====                                ====
</TABLE>

Legends for the table are as follows:

                                       21

<PAGE>

(1) Averages are daily averages.
(2) Loan interest income includes loan fees of $1.3 million and $1.1 million for
    the years ended 2002 and 2001, 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.
(5) Non-accrual loans are included in the above yield calculation.

     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.

                              RATE/VOLUME ANALYSIS
                                 (000's omitted)

<TABLE>
<CAPTION>
                                                                Year Ended December 31,
                                                                2002 compared to 2001
                                                                ---------------------
                                                         Volume          Rate         Net
                                                         ------          ----         ---
<S>                                                      <C>         <C>          <C>
Interest earned on interest-earning assets:
Loans                                                    $1,957      $(1,124)     $   833
Investment securities:
       Taxable                                              653         (734)         (81)
       Nontaxable                                            71          (24)          47
Money market investments                                    (69)          59          (10)
                                                         ------      -------      -------
Total interest earned on interest-earning assets          2,612       (1,823)         789
                                                         ------      -------      -------

Interest paid on interest-bearing liabilities:
Savings, NOW, and money markets                              58         (383)        (325)
Time Deposits                                             2,115       (3,436)      (1,321)
FHLB Borrowings                                             633         (149)         484
Securities sold under agreements to repurchase               26         (108)         (82)
Other Borrowings                                            (14)         (22)         (36)
                                                         ------      -------      -------
Total interest paid on interest-bearing liabilities       2,818       (4,098)      (1,280)
                                                         ------      -------      -------
Change in net interest income                            $ (206)     $ 2,275      $ 2,069
                                                         ======      =======      =======
</TABLE>

                                       22



<PAGE>

<TABLE>
<CAPTION>
                                                                      Year Ended December 31,
                                                                      2001 compared to 2000
                                                                      ---------------------
                                                                 Volume         Rate         Net
                                                                 ------         ----         ---
<S>                                                              <C>           <C>          <C>
Interest earned on interest-earning assets:
Loans                                                            $1,960        $ (564)      $1,396
Investment securities:
       Taxable                                                      (96)          (24)        (120)
       Nontaxable                                                   (91)            -          (91)
Money market investments                                             16           (51)         (35)
                                                                 ------        ------       ------
Total interest earned on interest-earning assets                  1,789          (639)       1,150
                                                                 ------        ------       ------

Interest paid on interest-bearing liabilities:
Savings, NOW, and money markets                                      (6)         (292)        (298)
Time Deposits                                                       674           (35)         639
FHLB Borrowings                                                     321           (21)         300
Securities sold under agreements to repurchase                       10            (6)           4
Subordinated capital note                                           (73)            -          (73)
Other Borrowings                                                   (129)            -         (129)
                                                                 ------        ------       ------
Total interest paid on interest-bearing liabilities                 797          (354)         443
                                                                 ------        ------       ------
Change in net interest income                                    $  992        $ (285)      $  707
                                                                 ======        ======       ======
</TABLE>

Noninterest Income

         Noninterest income of $837,000 in 2002 consisted of service charges and
fees on accounts, securities gains and losses in the amount of $34,000, income
earned on bank owned life insurance, and other miscellaneous income, and
represented an increase of $225,000 or 36.8% over the 2001 level of $612,000.
Securities gains and losses were $98,000 in 2001. Exclusive of securities gains
and losses, noninterest income increased $289,000 or 56.2% in 2002 over its 2001
level. Future levels of noninterest income are expected to increase as a direct
result of business growth and expansion.

Noninterest Expense

         Noninterest expense for 2002 was $5.4 million, an increase of $1.3
million or 31.7% over the $4.1 million level in 2001. Noninterest expense in
2002 includeds costs associated with the opening of the Bank's Vinton office on
May 20, 2002. Noninterest expense in 2001 includes costs associated with the
opening of the Bank's Hershberger Road office on May 7, 2001. All major
categories experienced increases due to growth and expansion. Noninterest
expenses are expected to continue to increase in future years as a direct result
of business growth and expansion.

                                       23

<PAGE>

Income Taxes

         During 2002 and 2001 the Company recorded federal income tax provision
in the amounts of $871,000 and $738,000, respectively. The anticipated federal
income tax liability equates to an effective tax rate of 27.8% and 30.1%,
respectively. The effective tax rate differs from the statutory rate of 34
percent primarily due to tax-exempt interest income on municipal securities, net
of disallowance and tax-exempt income earned on bank owned life insurance.

Earning Assets

         Average earning assets were $207.9 million at December 31, 2002 as
compared to $163.7 million as of December 31, 2001, an increase of $44.2
million, or 27.0%. Total average earning assets were 93.7% of total average
assets at December 31, 2002 as compared to 95.3% at December 31, 2001. Average
loans represented the largest component of average earning assets and increased
29.7% to $166.1 million at December 31, 2002, up from $128.1 million as of
December 31, 2001. Average loans were 79.9% and 74.9% of average earning assets
and average total assets as of December 31, 2002 as compared to 78.3% and 74.6%,
respectively one year earlier. Average investment securities, both taxable and
nontaxable, increased 15.5% to $39.5 million, up from $34.2 million as of
December 31, 2001. Average investment securities were 19.0% and 17.8% of average
earning assets and average total assets as of December 31, 2002, as compared to
20.9% and 19.9%, respectively one year earlier.

         A summary of average assets as of December 31, 2002 and 2001 is shown
in the following table.

                                AVERAGE ASSET MIX
                                 (000's omitted)

<TABLE>
<CAPTION>
                                      December 31, 2002          December 31, 2001
                                      -----------------          -----------------
                                      Average                    Average
                                      Balance   Percent          Balance     Percent
                                      -------   -------          -------     -------
<S>                                  <C>        <C>             <C>          <C>
Earning assets:
Loans, total                         $166,097      74.9%        $ 128,098       74.6%
Investment securities:
  Taxable                              31,516      14.2            27,242       15.9
  Nontaxable                            7,993       3.6             6,922        4.0
Money market investments                2,273       1.0             1,420         .8
                                     --------   -------         ---------    -------
    Total earning assets              207,879      93.7           163,682       95.3
                                     --------   -------         ---------    -------

Non-earning assets:
Cash and due from banks                 6,350       2.9             4,279        2.5
Premises and equipment                  4,652       2.1             3,456        2.0
Reserve for loan losses                (1,768)      (.8)           (1,290)       (.7)
Other assets                            4,781       2.1             1,570         .9
                                     --------   -------         ---------    -------
    Total non-earning assets           14,015       6.3             8,015        4.7
                                     --------   -------         ---------    -------
           Total assets              $221,894     100.0%        $ 171,697      100.0%
                                     ========   =======         =========    =======
</TABLE>

                                       24

<PAGE>

Investment Securities

     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 restricted
equity securities. Obligations of the U.S. Government and its agencies include
treasury notes and callable or noncallable agency bonds. Mortgage-backed
securities and collateralized mortgage obligations 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, and Community Bankers Bank. The Company does
not invest in derivatives or other types of high-risk securities. Unrealized
gains and losses on securities available-for-sale are recognized as direct
increases or decreases in shareholders' equity.

     Investment securities (available for sale and held to maturity), including
restricted equity securities, at December 31, 2002 were $42.4 million, an
increase of $9.1 million or 27.3% from their level of $33.3 million on December
31, 2001. The increase of $9.1 million is primarily due to purchases in the
amount of $32.4 million, offset by principal repayments, called proceeds, and
sales in the amount of $23.8 million. An increase in unrealized gains on
securities on the available for sale portfolio, which is carried at approximate
fair market value, in the amount of $615,000 contributed to the remainder of the
increase.

     The following table presents the composition of securities available for
sale, which are carried at approximate market value at December 31, 2002 and
December 31, 2001.

                     AVAILABLE FOR SALE INVESTMENT PORTFOLIO
                              CATEGORY DISTRIBUTION
                                 (000's omitted)

<TABLE>
<CAPTION>
                                             December 31, 2002           December 31, 2001
                                             -----------------           -----------------
                                         Amortized    Approximate     Amortized  Approximate
                                           Cost       Fair Values        Cost    Fair Values
                                           ----       -----------        ----    -----------
<S>                                       <C>             <C>             <C>          <C>
Securities available for sale:

U.S. Treasury                           $   199         $   205         $   198      $   205


U.S. Government agencies                  2,399           2,416           3,174        3,123

Mortgage-backed securities                4,736           4,914           5,817        5,851
Collateralized mortgage obligations       2,874           2,886          16,711       16,628

States and political subdivisions         9,094           9,339           4,796        4,734

Corporate debt securities                     -               -             800          797
                                        -------         -------         -------      -------
Total securities available for sale     $19,302         $19,760         $31,496      $31,338
                                        =======         =======         =======      =======
</TABLE>

                                       25

<PAGE>

     The following table sets forth the composition of securities held to
maturity, which are carried at amortized cost at December 31, 2002 and December
31, 2001.

                      HELD TO MATURITY INVESTMENT PORTFOLIO
                              CATEGORY DISTRIBUTION
                                 (000's omitted)

<TABLE>
<CAPTION>
                                               December 31, 2002                December 31, 2001
                                               -----------------                -----------------
                                           Amortized      Approximate       Amortized       Approximate
                                              Cost        Fair Values          Cost         Fair Values
                                              ----        -----------          ----         -----------
<S>                                           <C>               <C>         <C>             <C>
Mortgage-backed securities                    10,851            10,844               -              -
Collateralized mortgage obligations            3,779             3,826               -              -

States and political subdivisions              5,588             5,450               -              -
                                             -------           -------        --------        -------
Total securities held to maturity            $20,218           $20,120        $      -        $     -
                                             =======           =======        ========        =======
</TABLE>

     The following table presents the maturity ranges of securities available
for sale as of December 31, 2002 and the weighted average yields of such
securities. Maturities may differ from scheduled maturities on mortgage-backed
securities and collateralized mortgage obligations because the mortgages
underlying the securities may be repaid prior to the scheduled maturity date.
Maturities on all other securities are based on the contractual maturity. The
weighted average yields are calculated on the basis of the cost and effective
yields weighted for the scheduled maturity of each security. Weighted average
yields on tax-exempt obligations have been computed on a taxable equivalent
basis using a tax rate of 34%.


                  INVESTMENT PORTFOLIO - MATURITY DISTRIBUTION
                                 (000's omitted)

<TABLE>
<CAPTION>
                                                                        December 31, 2002
                                                                        -----------------
Available-for-sale                                             Amortized Costs    Fair Value  Yield
------------------                                             ---------------    ----------  -----
<S>                                                                    <C>         <C>         <C>
U.S. Treasury securities and obligations of U.S.
     Government corporations:
            Within one year                                            $   199     $   205     4.7%
            After five but within ten years                              1,936       1,954     5.8%
            After ten years                                                463         462     1.2%

Obligations of states and subdivisions:
            Within one year                                                100         101     7.4%
            After one but within five years                                622         640     5.8%
            After five but within ten years                              2,654       2,736     6.8%
            After ten years                                              5,718       5,862     7.0%

Mortgage-backed securities                                               4,736       4,914     5.6%
Collateralized mortgage obligations                                      2,874       2,886     5.5%
                                                                       -------     -------
Total available-for-sale                                               $19,302     $19,760     6.1%
                                                                       =======     =======
</TABLE>




<PAGE>

<TABLE>
<CAPTION>
                                                         Amortized Costs      Fair Value     Yield
                                                         ---------------      ----------     -----
Total Securities by Maturity Period*
-----------------------------------
<S>                                                      <C>                  <C>            <C>
Within one year                                                  $   299         $   306       5.6%
After one but within five years                                      622             640       5.8%
After five but within ten years                                    4,590           4,690       6.4%
After ten years                                                    6,181           6,324       6.6%
Mortgage-backed securities                                         4,736           4,914       5.6%
Collateralized mortgage obligations                                2,874           2,886       5.5%
                                                                 -------         -------
Total by Maturity Period                                         $19,302         $19,760       6.1%
                                                                 =======         =======
</TABLE>

     *Maturities on mortgage-backed securities and collateralized mortgage
obligations are not presented in this table because maturities may differ
substantially from contractual terms due to early repayments of principal.

     The following table presents the maturity ranges of securities held to
maturity as of December 31, 2002 and the weighted average yields of such
securities. Maturities may differ from scheduled maturities on mortgage-backed
securities and collateralized mortgage obligations because the mortgages
underlying the securities may be repaid prior to the scheduled maturity date.
Maturities on all other securities are based on the contractual maturity. The
weighted average yields are calculated on the basis of the cost and effective
yields weighted for the scheduled maturity of each security. Weighted average
yields on tax-exempt obligations have been computed on a taxable equivalent
basis using a tax rate of 34%.

                  INVESTMENT PORTFOLIO - MATURITY DISTRIBUTION
                                 (000's omitted)

<TABLE>
<CAPTION>
                                                                            December 31, 2002
                                                                            -----------------
Held to maturity*                                            Amortized Costs         Fair Value     Yield
-----------------                                            ---------------         ----------     -----
<S>                                                          <C>                     <C>            <C>
Obligations of states and subdivisions:
               After ten years                                         5,588              5,450       6.1%

Mortgage-backed securities                                            10,851             10,844       4.2%
Collateralized mortgage obligations                                    3,779              3,826       4.8%
                                                                     -------            -------
Total held to maturity                                               $20,218            $20,120       4.8%
                                                                     =======            =======
</TABLE>

     *Maturities on mortgage-backed securities and collateralized mortgage
obligations are not presented in this table because maturities may differ
substantially from contractual terms due to early repayments of principal.

                                       27

<PAGE>

Loan Portfolio

     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.

     The Company's total gross loans were $185.7 million at December 31, 2002,
an increase of $38.1 million or 25.8% from the $147.6 million reported one year
earlier. The Company's ratio of total loans to total funding sources (customer
deposits, securities sold under agreements to repurchase, federal funds
purchased and Federal Home Loan Bank advances) stood at 81.4% at December 31,
2002 and 83.9% at December 31, 2001. Management seeks to maintain the ratio of
loans to funding sources at a maximum of 85%.

     The following table summarizes the loan portfolio by category as of the
years ended December 31, 2002 and 2001.

                             LOAN PORTFOLIO SUMMARY
                                 (000's omitted)

                                                       2002            2001
                                                       ----            ----
          Commercial and industrial                  $ 44,668        $ 35,366
          Commercial real estate                       75,378          60,290
          Real estate construction                     15,727           9,005
          Residential real estate                      23,966          21,482
          Loans to individuals                         25,922          21,430
                                                     --------        --------
          Total loans                                $185,661        $147,573
                                                     ========        ========

     The following table presents maturity information on the loan portfolio
based upon scheduled repayments at December 31, 2002.

                                  LOAN MATURITY
                                 (000's omitted)

<TABLE>
<CAPTION>
                                                Due Within        Due One to       Due After
                                                 One Year         Five Years       Five Years         Total
                                                 --------         ----------       ----------         -----
<S>                                             <C>               <C>              <C>               <C>
Commercial and industrial                         $29,491           $12,334          $ 2,843        $ 44,668
Commercial real estate                              2,638            59,625           13,115          75,378
Real estate construction                            5,211             4,317            6,199          15,727
Residential real estate                               278            11,718           11,970          23,966
Loans to individuals                                2,300             6,659           16,963          25,922
                                                  -------           -------          -------        --------
Total loans                                       $39,918           $94,653          $51,090        $185,661
                                                  =======           =======          =======        ========
</TABLE>

                                       28

<PAGE>

     The following table presents fixed and variable rate loans from the
portfolio by category, which are due after one year.

                          FIXED AND VARIABLE RATE LOANS
                                 (000's omitted)

<TABLE>
<CAPTION>
                                                    December 31, 2002
                                                    -----------------
                                            Fixed                        Variable
                                            -----                        --------
                                   Due One to     Due After     Due One to       Due After
                                   Five Years    Five Years     Five Years      Five Years
                                   ----------    ----------     ----------      ----------
<S>                                 <C>            <C>            <C>               <C>
Commercial and industrial           $10,272       $ 1,938        $ 2,062         $   905
Commercial real estate               50,009        12,223          9,616             892
Real estate construction              3,866         3,118            451           3,081
Residential real estate              11,285        11,970            433               -
Loans to individuals                  3,489         1,703          3,170          15,260
                                    -------       -------        -------         -------
  Total                             $78,921       $30,952        $15,732         $20,138
                                    =======       =======        =======         =======
</TABLE>

Loan Category Analysis

     Commercial Loans. Commercial and industrial loans accounted for 24.1% of
the loan portfolio as of December 31, 2002 and stood at $44.7 million versus
$35.4 million (24.0% of total loans) at December 31, 2001. 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 mortgages represent
financing of commercial properties that are secured by real estate, and were
40.6% and 40.8% of total loans at December 31, 2002 and December 31, 2001,
respectively. Outstanding loans in this category equaled $75.4 million and $60.3
million at December 31, 2002 and December 31, 2001, respectively. The Company
prefers to make commercial real estate loans secured by owner-occupied
properties, and as of December 31, 2002 approximately 55% of these loans are
secured in that manner. 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.

     Real Estate Construction Loans. Real estate construction loans represent
interim financing on residential and commercial properties under construction,
and are secured by real estate. Once construction is completed and the loan
becomes permanent, the loans are reclassified as commercial real estate loans
which are secured by commercial property or residential real estate loans which
are secured by first deeds of trust. Outstanding loans in this category totaled
$15.7 million (8.5% of total loans) at December 31, 2002 as compared to $9.0
million (6.1% of total loans) at December 31, 2001.

                                       29

<PAGE>

     Residential Real Estate Loans. Residential real estate loans are secured by
first deeds of trust on 1-4 family residential properties. This category had
$24.0 million in loans (12.9% of total loans) at December 31, 2002 and $21.5
million in loans (14.6% of total loans) at December 31, 2001. 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 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 $25.9 million (13.9% of total loans) at December 31, 2002
and $21.4 million (14.5% of total loans) at December 31, 2001.

Summary of Allowance for Loan Losses

     Certain credit risks are inherent in making loans. The Company attempts to
assess these risks prudently and to manage them effectively. The Company also
attempts to reduce repayment risks by adhering to our internal credit policies
and procedures. These policies and procedures include officer and customer
limits, periodic loan documentation review, and follow-up on exceptions to
credit policies.

     The allowance for loan losses is maintained at a level considered adequate
to absorb probable losses. Some of the factors which management of the Company
considers in determining the appropriate level of the allowance for loans losses
are an evaluation of the current loan portfolio, identified loan problems, loan
volume outstanding, past loss experience, present and expected industry and
economic conditions, and in particular, how such conditions relate to the
Company's market area. Bank regulators also periodically review the portfolio
and other assets to assess their quality. The provision for loan losses is
charged to income in an amount necessary to maintain an allowance for loan
losses adequate to provide for expected losses in the loan portfolio. Loans
deemed uncollectible are charged to the allowance for loan losses and recoveries
on loans previously charged off are added to the allowance for loan losses.
Management believes the allowance is adequate to provide for any inherent losses
in the portfolio.

     A provision for loan losses of $610,000 was provided during 2002, an
increase of $309,000 or 102.7% over the $301,000 provided during 2001, 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 allowance for loan losses was $2.0 million and $1.5 million as of
December 31, 2002 and 2001, respectively, and represented approximately 1.1% and
1.0%, respectively, of net loans outstanding (see Note 4 to the Consolidated
Financial Statements). A total of $0 in specific reserves is included in the
balance of the allowance for loan losses as of December 31, 2002. A total of
$30,000 in specific reserves, on one commercial loan customer placed on
nonaccrual status in April 1999, is

                                       30

<PAGE>

included in the balance of the allowance for loan losses as of December 31,
2001. Of the $30,000 specific reserve at December 31, 2001, $20,000 was accrued
during the second quarter of 2000 and $10,000 was accrued during the first
quarter of 1999. During the first quarter of 2001, $25,000 of specific reserves
accrued during 2000 on a second commercial loan were reversed when the loan was
repaid. Additional factors contributing factors to the increase in provision
expense are strong year-over-year loan growth in average loans outstanding and
management's concern about perceived continuing economic weakness.

     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.

     The following table summarizes the loan loss experience for the years ended
December 31, 2002 and 2001.

                            ALLOWANCE FOR LOAN LOSSES
                                 (000's omitted)

                                     December 31  December 31
                                        2002         2001
                                        ----         ----
        Balance at January 1          $1,468       $1,190
        Provision for loan losses        610          301
        Recoveries                         0            0
        Charged off loans:
             Commercial Loans            (58)          (7)
             Credit cards                 (3)         (16)
             Loans to individuals         (3)           0
                                      ------       ------
        Balance at December 31        $2,014       $1,468
                                      ======       ======

     The following table summarizes the allocation of the allowance for loan
losses for the years ended December 31, 2002 and 2001.

                   ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
                                 (000's omitted)

<TABLE>
<CAPTION>
                                             December 31, 2002        December 31, 2001
                                             -----------------        -----------------
                                            Amount      Percent      Amount      Percent
                                            ------      -------      ------      -------
<S>                                         <C>          <C>         <C>           <C>
Balance at end of period applicable
to:
Commercial and industrial                   $  485       24.1%       $  352        24.0%
Commercial real estate                         818       40.6           599        40.8
Real estate construction                       171        8.5            90         6.1
Residential real estate                        260       12.9           214        14.6
Loans to individuals                           280       13.9           213        14.5
                                            ------     ------        ------      ------
    Total allowance                         $2,014      100.0%       $1,468       100.0%
                                            ======     ======        ======      ======
</TABLE>

                                       31

<PAGE>

     During 2002 and 2001, the Company charged off loans in the amounts of
$64,000 and $23,000, respectively. From the inception of operations in 1995
through 1998, the Company had no history of charge-offs. The $64,000 in loans
charged off in 2002 was comprised of $58,000 in commercial loans, $3,000 in
credit card loans, and $3,000 in loans to individuals. The $23,000 in loans
charged off in 2001 was comprised of $16,000 in credit cards loans and $7,000 in
commercial loans.

     Nonperforming Assets. Nonperforming assets include nonaccrual loans, loans
past due 90 days or more, restructured loans, and foreclosed/repossessed
property. A loan will be placed on nonaccrual status when collection of all
principal or interest is deemed unlikely. A loan will automatically be placed on
nonaccrual status when principal or interest is past due 90 days or more, unless
the loan is both well secured and in the process of being collected. In this
case, the loan will continue to accrue interest despite its past due status.

     A restructured loan is a loan in which the original contract terms have
been modified due to a borrower's financial condition or there has been a
transfer of assets in full or partial satisfaction of the loan. A modification
of original contractual terms is generally a concession to a borrower that a
lending institution would not normally consider.

     An impaired loan as defined in SFAS 114 is a loan when, based on current
information and events, it is likely that a lending institution will be unable
to collect all amounts, including both principal and interest, due according to
the contractual terms of the loan agreement.

     Once a quarter the Board of Directors reviews all loans on the Bank's watch
list to determine proper action and reporting of any loans identified as
substandard by the credit quality review.

     Nonperforming assets at December 31, 2002 and December 31, 2001 are
detailed as follows:

                              NONPERFORMING ASSETS
                                 (000's omitted)

                                                   December 31     December 31
                                                      2002            2001
                                                      ----            ----
Nonaccrual loans                                      $  -            $514

Loans past due 90 days or more                         390              25

Restructured loans                                       -               -
                                                      ----            ----
Total nonperforming loans                              390             539
                                                      ----            ----
Foreclosed, repossessed and idled properties           196               -
                                                      ----            ----

    Total nonperforming assets                        $586            $539
                                                      ====            ====

                                       32

<PAGE>

     If the nonaccrual loans disclosed above had performed in accordance with
their original terms, additional interest income in the amount of $15,000 and
$23,000, would have been recorded for the years ended December 31, 2002 and
2001, respectively.

     There were no restructured loans as of December 31, 2002 or December 31,
2001.

     The total recorded investment in impaired loans was $586,000 and $539,000
for the years ended December 31, 2002 and 2001, respectively. The related loan
loss allowance allocated to impaired loans was $0 and $30,000, respectively for
the above-referenced time periods. Management believes that the above allocated
reserves are adequate for the impaired loans in the Company's portfolio based
upon a detailed review of the quality and pledged collateral of each individual
loan considered impaired at each of the above-referenced periods.

Other Assets

     The Company's other assets were $4.2 million at December 31, 2002, an
increase of $1.1 million over the $3.1 reported one year earlier. An additional
purchase of bank owned life insurance on key employees contributed $671,000 of
the total increase during 2002. Bank owned life insurance on key employees in
the amount of $2.3 million was purchased in the fourth quarter of 2001. Bank
owned life insurance comprises a total of $3.2 million of the $4.2 million other
assets balance as of December 31, 2002.

Deposits

     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 Bank. 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. The ratio of certificates of
deposit to total deposits increased from 56.1% at December 31, 2001 to 63.5% at
December 31, 2002. The cost of funds ratio was 2.7% in 2002, a decrease of 1.7%
over the 2001 ratio of 4.4% as the Bank worked diligently during 2002 and 2001
to reprice deposits downward in response to Federal Reserve prime rate cuts.
Average rates paid on time deposits primarily contributed to the decrease in
cost of funds during 2002, as the average rate paid decreased by 2.5% to 3.4%
from a level of 5.9% during 2001.

     As of December 31, 2002 total deposits were $182.2 million, an increase of
$43.3 million or 31.2% from their level of $138.9 million one-year earlier. The
major categories of increases were non-interest bearing demand deposits,
interest bearing demand deposits and time deposits in the amounts of $6.4
million, $1.2 million and $37.8 million, respectively. The major category of
decrease was money market deposits in the amount of $3.1 million.

                                       33

<PAGE>

         At December 31, 2002 noninterest-bearing demand deposits were $30.7
million or 16.9% of total deposits. On December 31, 2001 noninterest-bearing
demand deposits were $24.3 million or 17.5% of total deposits. Nonmaturity
deposits (noninterest bearing demand deposits, interest bearing demand deposits,
money market accounts, and savings accounts) were $66.5 million or 36.6% of
total deposits, compared with $61.0 million or 43.9% of total deposits at
December 31, 2001. Total interest bearing deposits were $151.5 million at
December 31, 2002, an increase of $36.9 million or 32.2% over their level of
$114.6 million at December 31, 2001. Total time deposits were $115.7 million or
63.4% of total deposits, compared with $77.9 million or 56.1% of total deposits
at December 31, 2001.

         The following table summarizes deposits for the years ended December
31, 2002 and December 31, 2001.

                                   DEPOSIT MIX
                                 (000's omitted)

<TABLE>
<CAPTION>
                                          December 31, 2002         December 31, 2001
                                          -----------------         -----------------

                                         Balance     Percent       Balance      Percent
                                         -------     -------       -------      -------
<S>                                      <C>         <C>          <C>           <C>
Interest bearing deposits:
NOW accounts                              12,007       6.6         10,820        7.8
Money market accounts                     20,521      11.3         23,590       17.0
Savings                                    3,275       1.8          2,220        1.6
Time deposits over $100,000               33,982      18.6         25,591       18.4
Time deposits under $100,000              81,734      44.8         52,348       37.7
                                        --------     -----       --------      -----
Total interest bearing deposits          151,519      83.1        114,569       82.5
                                        --------     -----       --------      -----

Noninterest bearing deposits:
Demand deposits                           30,724      16.9         24,297       17.5
                                        --------     -----       --------      -----

Total deposits                          $182,243     100.0%      $138,866      100.0%
                                        ========     =====       ========      =====
</TABLE>

         For the year ended December 31, 2002 average noninterest bearing demand
deposits were $24.1 million or 14.8% of average total deposits. For the prior
year, average noninterest bearing demand deposits were $17.5 million or 13.2% of
average total deposits. Nonmaturity deposits (noninterest bearing demand
deposits, interest bearing demand deposits, money market accounts and savings
accounts) averaged $56.7 million or 34.9% of average total deposits in 2002, up
from $47.9 million or 36.1% of average total deposits in 2001. Total interest
bearing deposits averaged $138.8 million for the year ended December 31, 2002,
an increase of $23.9 million or 20.8% over their level of $114.9 million for the
year ended December 31, 2001. Total time deposits averaged $106.2 million in
2002 or 65.1% of average total deposits, up from $84.5 million or 63.9% of
average total deposits in 2001.

                                       34

<PAGE>

         The following table summarizes average deposits for the years ended
December 31, 2002 and December 31, 2001.

                               AVERAGE DEPOSIT MIX
                                 (000's omitted)

<TABLE>
<CAPTION>
                                          December 31, 2002        December 31, 2001
                                          -----------------        -----------------
                                        Average                  Average
                                        Balance      Percent     Balance      Percent
                                        -------      -------     -------      -------
<S>                                    <C>           <C>        <C>           <C>
Interest bearing deposits:
NOW accounts                             10,325        6.3          8,768         6.6
Money market accounts                    19,636       12.1         19,750        14.9
Savings                                   2,697        1.7          1,851         1.4
Time deposits over $100,000              32,638       20.0         24,399        18.5
Time deposits under $100,000             73,524       45.1         60,132        45.4
                                       --------      -----       --------       -----
Total interest bearing deposits         138,820       85.2        114,900        86.8
                                       --------      -----       --------       -----

Noninterest bearing deposits:
Demand deposits                          24,110       14.8         17,499        13.2
                                       --------      -----       --------       -----

Total average deposits                 $162,930      100.0%      $132,399       100.0%
                                       ========      =====       ========       =====
</TABLE>

         The following table presents the maturity schedule of certificates of
deposit of $100,000 or more as of December 31, 2002 and December 31, 2001.

                        MATURITY SCHEDULE OF CERTIFICATES
                            OF DEPOSIT OVER $100,000
                                 (000's omitted)

                                        December 31, 2002     December 31, 2001
                                        -----------------     -----------------
Three months or less                         $12,183              $   7,930
Over three through 6 months                    4,094                  5,132
Over six through 12 months                     7,886                 10,520
Over 12 months                                 9,819                  2,009
                                             -------              ---------
Total                                        $33,982              $  25,591
                                             =======              =========

                                       35

<PAGE>

Short-Term Borrowings

     The Bank placed in service a commercial sweep account program in the third
quarter of 1999. The balances in the program grew by $2.6 million from their
level of $3.3 million at December 31, 2001 to a total of $5.9 million as of
December 31, 2002. The program consists of establishing a demand deposit account
in which the Bank invests available balances daily in securities on an overnight
basis subject to repurchase. On the following business day, the Bank will
repurchase from the customer the securities for an amount equal to the amount of
available balances invested in the securities. Interest is calculated daily at
the rate applicable for each overnight period; however, it is posted to the
customer accounts only once per month. The contractual agreement states that the
repurchase agreement is not a deposit and therefore is not insured by the
Federal Deposit Insurance Corporation. Therefore, these repurchase balances are
not reported as deposits but as short-term borrowings.

     As of December 31, 2002 the Company had a federal funds purchased balance
of $0 as compared to $3.8 million at December 31, 2001.

     The following table presents information on each category of the Company's
short-term debt, which generally mature within one to seven days from the
transaction date.

                              SHORT-TERM BORROWINGS
                                (000's omitted)                 Year Ended
                                                                December 31,
                                                             2002        2001
                                                             ----        ----

Actual amount outstanding at period end:
  Short-term borrowings                                    $      -    $  3,824
  Securities sold under agreements to repurchase              5,864       3,347

Weighted average actual interest rate at period end:
  Short-term borrowings                                           -%       1.86%
  Securities sold under agreements to repurchase                .94        1.29

Maximum amount outstanding at any month-end in period:
  Short-term borrowings                                    $  5,381    $  6,251
  Securities sold under agreements to repurchase              6,575       5,387

Average amount outstanding during period end:
  Short-term borrowings                                    $    880    $  1,288
  Securities sold under agreements to repurchase              5,572       4,880

Weighted average interest rate during the period:
  Short-term borrowings                                        2.05%       4.19%
  Securities sold under agreements to repurchase               1.31        3.18

                                       36



<PAGE>

     Other Debt

          The Company has outstanding debt with the Federal Home Bank of Atlanta
     in the amount of $40.0 million as of December 31, 2002, an increase of
     $10.0 million or 33.3% over the $30.0 million balance as of December 31,
     2001. There are four convertible advances in the amount of $5.0 million
     each and one convertible advance in the amount of $10.0 million currently
     drawn, which comprise $30.0 million of the outstanding balance. There is
     also one adjustable rate advance in the amount of $10.0 million currently
     drawn. The Federal Home Bank of Atlanta has the option to convert the five
     fixed rate advances on the conversion dates below and any interest payment
     date thereafter with at least two business days notice. The advance will be
     converted into a 3-month LIBOR-based adjustable rate credit (ARC) at 3M
     LIBOR flat. The $10.0 million convertible advance will only be converted if
     the reference rate (3M USD LIBOR, BBA Telerate 3750) is greater than or
     equal to a trigger rate of 7%. The variable rate advance with maturity date
     of December 16, 2003 is an ARC with a current rate of 1.44%, subject to
     change on each quarterly interest payment date. The following table
     provides more information on the outstanding advances as of December 31,
     2002.

                         FEDERAL HOME LOAN BANK ADVANCES
                                 (000's omitted)

<TABLE>
<CAPTION>
                                                                                Interest
  Advance             Advance                Maturity                            Payment           Conversion
  Balance              Date                    Date                 Rate          Dates               Date
  -------              ----                    ----                 ----          -----               ----
<S>              <C>                      <C>                    <C>           <C>              <C>
$  5,000,000      December 2, 1999        December 2, 2009          5.46%       Quarterly        December 4, 2000
$  5,000,000          May 24, 2000            May 24, 2010          6.49%       Quarterly            May 24, 2001
$  5,000,000      February 9, 2001        February 9, 2011          4.97%       Quarterly        February 9, 2004
$  5,000,000      November 7, 2001        November 7, 2011          3.91%       Quarterly        November 7, 2006
$ 10,000,000     September 4, 2002       September 4, 2007          3.09%       Quarterly       September 4, 2003
$ 10,000,000     December 16, 2002       December 16, 2003        Variable      Quarterly             N/A
</TABLE>

Interest Rate Risk

          Interest rate risk is the risk to earnings or capital generated by the
     effects of changes in interest rates on the Company's on- and off-balance
     sheet positions, and can take one or more of several forms. Repricing risk
     comes from timing mismatches in the ability to alter contractual rates
     earned on financial assets held or paid on interest-bearing liabilities.
     Basis risk refers to changes in the underlying relationships between market
     rates or indices, which result in a narrowing of the spread earned on a
     loan or investment relative to its cost of funds. Option risk arises from
     "embedded options" in many financial instruments such as interest rate
     options, loan prepayment options, deposit early withdrawal options,
     callable Federal Home Loan Bank advances and potential prepayment of the
     underlying collateral of asset-backed securities. Embedded options are
     complex risk positions that are difficult to predict and offset, and are a
     large component of the overall interest rate risk to the Company.

                                       37

<PAGE>

     The Company has established risk measures, limits, policy guidelines and
internal control mechanisms for managing the overall asset/liability management
("ALM") position. The responsibility for interest rate risk control resides with
Management, with oversight by the Board of Directors and its Investment
Committee. The Company seeks to balance the return potential of the ALM position
against the desire to limit volatility in earnings.

     At least quarterly, the Company measures the ALM position using earnings
simulation modeling to estimate what assets and liabilities would reprice, and
to what extent, within a one-year period in response to an immediate 200 basis
point change in the Prime Rate, as well as in response to more gradual interest
rate changes. The model also incorporates Management's forecasts for balance
sheet growth, noninterest income and noninterest expense. The interest rate
scenarios are used for analytical purposes and do not necessarily represent
Management's view of future market movements. Rather, these are intended to
provide a measure of the degree of volatility interest rate movements may apply
to the earnings of the Company. Modeling the sensitivity of earnings to interest
rate risk is highly dependent on numerous assumptions embedded in the simulation
model. While the earnings sensitivity analysis incorporates Management's best
estimate of interest rate and balance sheet dynamics under various market rate
movements, the actual behavior and resulting earnings impact likely will differ
from that projected.

     The Company's objective is to keep the change in net interest income over
twelve months at or below 5% under an immediate 200 basis point interest rate
shock scenario. At December 31, 2002 it was estimated that an immediate 200
basis point increase in Prime would change net interest income by +3.54% while
an immediate 200 basis point decrease in Prime would change net interest income
by -8.41%. At December 31, 2001 it was estimated that an immediate 200 basis
point increase in Prime would change net interest income by +3.79% while an
immediate 200 basis point decrease in Prime would change net interest income by
-4.25%.

     The following table shows the sensitivity of the Company's balance sheet at
the dates indicated, but is not necessarily indicative of the position on other
dates.

                                       38

<PAGE>

                            INTEREST RATE SENSITIVITY
                      Maturities/Repricing (000'S omitted)
                                December 31, 2002
                                -----------------

<TABLE>
<CAPTION>
                                                1-3             4-12           13-60          Over 60
Earning Assets:                                Months          Months          Months          Months         Total
                                              --------        --------        --------        --------       --------
<S>                                           <C>             <C>             <C>             <C>            <C>
Loans, excluding nonaccruals                  $ 60,749        $  7,369        $ 84,732        $ 32,811       $185,661
Investment securities                            1,053           4,426           2,595          31,904         39,978
Restricted equity securities                         -               -               -           2,427          2,427
Money market investments                         4,439               -               -               -          4,439
                                              -----------------------------------------------------------------------
   Total earning assets                         66,241          11,795          87,327          67,142        232,505
                                              -----------------------------------------------------------------------

Interest Bearing Liabilities:
NOW accounts                                    12,007               -               -               -         12,007
Money market accounts                           20,521               -               -               -         20,521
Savings                                          3,275               -               -               -          3,275
Certificates of Deposit                         38,070          39,358          38,288               -        115,716
                                              -----------------------------------------------------------------------
   Total Deposits                               73,873          39,358          38,288               -        151,519
                                              -----------------------------------------------------------------------
Repurchase agreements                            5,864               -               -               -          5,864
FHLB advances                                   20,000          10,000          10,000               -         40,000
Federal funds purchased                              -               -               -               -              -
                                              -----------------------------------------------------------------------
Total interest bearing liabilities              99,737          49,358          48,288               -        197,383
                                              -----------------------------------------------------------------------
Interest Rate Gap                             $(33,496)       $(37,563)       $ 39,039        $ 67,142       $ 35,122
                                              =======================================================================

Cumulative interest sensitivity gap           $(33,496)       $(71,059)       $(32,020)       $ 35,122              -

Ratio of sensitivity gap to total               (14.41%)        (16.16%)         16.79%          28.88%         15.10%
earning assets

Cumulative ratio of sensitivity gap             (14.41%)        (30.57%)        (13.78%)         15.10%             -
to total earning assets
</TABLE>

Capital Adequacy

     The Company's financial position at December 31, 2002 and December 31, 2001
reflects liquidity and capital levels currently adequate to fund anticipated
short-term business expansion. Capital ratios are 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.

     Major capital expenditures planned for the upcoming year include the
construction of the Bank's seventh full-service branch in the Lewis-Gale
Hospital area. The branch is planned to open in the summer of 2003, which will
be funded by current operations. Also planned for 2003 are extensive leasehold
improvements to the Bank's headquarters facility.

                                       39

<PAGE>

     Total shareholders' equity was $19.0 million at December 31, 2002 compared
with $16.3 million at December 31, 2001, an increase of $2.7 million or 16.6%.
The $2.7 million increase is attributable to 2002's net income of $2.3 million,
a $406,000 increase over the level at December 31, 2001 in accumulated other
comprehensive income (loss), which is comprised exclusively of unrealized gains
(losses) on available-for-sale investment securities, and $58,000 in proceeds
from the exercise of stock options in December of 2002. Exclusive of accumulated
other comprehensive income (loss), which is comprised exclusively of the
unrealized gains (losses) on available-for-sale securities, total shareholders'
equity would have been $18.7 million and $16.4 million at December 31, 2002 and
2001, respectively, an increase of $2.3 million or 14.0%.

     For the periods indicated, the Company had the following risk-based capital
and leverage ratios relative to regulatory minimums:

                                 CAPITAL RATIOS

        Ratio              12/31/02          12/31/01           Minimum

        Tier 1               9.3%             10.2%                4%

        Total               10.3%             11.1%                8%

        Leverage             7.7%              9.1%                4%

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 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, money
market investments, investments available for sale including restricted equity
securities, and through the management of investment maturities/prepayments and
loan repayments.

     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.

                                       40

<PAGE>

     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. The
Bank has established a credit line though the discount window of the Federal
Reserve Bank of Richmond as an additional source of liquidity. 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.

     The Company's ratio of liquid assets to deposits and short-term borrowings
was 18.5% and 27.1% at December 31, 2002 and 2001, respectively. The Company
sells excess funds as overnight federal funds sold to provide an immediate
source of liquidity. The Company had federal funds sold of $4.1 million and $0
at December 31, 2002 and 2001, respectively. During 2002, deposit growth and an
increase in securities sold under agreements to repurchase in the amounts of
$43.3 million and $2.6 million, respectively, a total of $45.9 million,
surpassed loan growth in the amount of $38.1 million. The excess $7.8 million
coupled with Federal Home Loan Bank advances in the amount of $10.0 million, was
used to fund investment purchases in excess of sales, calls, and principal
paydowns in the amount of $8.6 million and repay $3.8 million in federal funds
purchased.

     As of December 31, 2002 the Company had pledged approximately $11.0 million
of its investment portfolio as collateral for a line of credit from the Federal
Home Loan Bank. As of that date, the Company had approximately $22.2 million in
remaining credit availability from the Federal Home Loan Bank.

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 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.

                                       41

<PAGE>

Financial Ratios

     The following table presents certain financial ratios for the years ended
December 31, 2002 and 2001.

                              KEY FINANCIAL RATIOS

                                                             Years Ended
                                                             December 31,
                                                             ------------
                                                      2002               2001
------------------------------------------------------------------------------
Return on average assets                              1.02%              1.00%
Return on average equity                              12.9%              11.1%
Average equity to average assets                       7.9%               9.0%

Recent and Future Accounting Considerations

     In December 2002 the Financial Accounting Standards Board (FASB) issued
Statement No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure-an amendment of FASB Statement No. 123", which amends FASB Statement
No. 123, "Accounting for Stock-Based Compensation" to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of Statement 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The provisions of this Statement are effective for
interim periods beginning after December 15, 2002 and for fiscal years ending
after December 15, 2002.

     In October 2000 the Financial Accounting Standards Board (FASB) issued
Statement No. 147, "Acquisitions of Certain Financial Institutions-an amendment
of FASB Statements No. 72 and 144 and FASB Interpretation No. 9," which removes
acquisitions of financial institutions from the scope of both Statement 72 and
Interpretation 9. The Statement requires that acquisitions of financial
institutions be accounted for under the purchase method of accounting in
accordance with Statement 141, "Business Combinations" and Statement 142,
"Goodwill and Other Intangible Assets." Thus, the requirement in paragraph 5 of
Statement 72 to recognize (and subsequently amortize) any excess of the fair
market value of liabilities assumed over the fair value of tangible and
identifiable intangible assets acquired as an unidentifiable intangible asset no
longer applies to acquisitions within the scope of this Statement. The
provisions of this Statement relating to the application of the purchase method
of accounting are effective for acquisitions initiated on or after October 1,
2002. The provisions of this Statement relating to accounting for intangible
assets are effective on October 1, 2002.

                                       42

<PAGE>

     In June 2002 the Financial Accounting Standards Board (FASB) issued
Statement No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," which nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The
Statement requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred, not at the date
of an entity's commitment to an exit plan. This Statement also establishes that
fair value is the objective for initial measurement of the liability. The
provisions of this Statement are effective for exit or disposal activities that
are initiated after December 31, 2002.

     In October 2001 the Financial Accounting Standards Board (FASB) issued
Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," which supercedes Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." Statement 144
also supercedes the accounting and reporting provisions of APB Opinion No. 30,
"Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for the disposal of a segment of a business. However,
it retains the requirement in Opinion No. 30 to report separately discontinued
operations and extends that reporting to a component of an entity that either
has been disposed of either by sale, abandonment, or distribution to owners or
is classified as held for sale. Statement 144 carries over many of the
fundamental provisions of Statement No. 121. Statement No. 144 is effective for
fiscal years beginning after December 15, 2001. The Company will adopt the
provisions of this Statement effective January 1, 2002, as required. The
adoption of the Statement is not expected to have any effect on the Company's
financial position, results of operations, or liquidity.

     In June 2001 the Financial Accounting Standards Board (FASB) issued
Statement No. 142, "Goodwill and Other Intangible Assets," which supercedes APB
Opinion No. 17, "Intangible Assets". Statement No. 142 addresses how intangible
assets that are acquired individually or with a group of other assets, excluding
those acquired in a business combination, should be accounted for in financial
statements upon their acquisition as well as after they have been initially
recognized in the financial statements. The Statement eliminates the requirement
to amortize goodwill and other intangible assets that have indefinite useful
lives, instead requiring the assets be tested at least annually for impairment
based on the specific guidance in the Statement. The Company will adopt the
provisions of the Statement effective January 1, 2002 as required. The Statement
requires a transition impairment test of goodwill and other intangible assets in
connection with the initial application of the Statement, with any resultant
impairment losses being recognized as a cumulative effect of a change in
accounting principle. The adoption of the Statement is not expected to have any
effect on the Company's financial position, results of operations, or liquidity.

                                       43

<PAGE>

     In June 2001 the Financial Accounting Standards Board (FASB) issued
Statement No. 141, "Business Combinations," which supersedes Accounting
Principles Board (APB) Opinion No. 16, "Business Combinations," and FASB
Statement No. 38, "Accounting for Preacquisition Contingencies of Purchased
Enterprises." Statement 141 requires that all business combinations be accounted
for by the purchase method of accounting. The purchase method of accounting
requires the accounts of an acquired institution to be included with the
acquirer's accounts as of the date of acquisition, recognizing any excess of
purchase price over the fair value of the net assets acquired as goodwill. The
Statement also requires that the assets of an acquired institution be recognized
as assets apart from goodwill if they meet specific criteria presented in the
Statement. The provisions of the Statement apply to all business combinations
initiated after June 30, 2001.

     In September 2000 the Financial Accounting Standards Board (FASB) issued
Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities," as a replacement for FASB Statement No.
125, which has the same title. Statement No. 140 revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral, but it carries over most of the provisions of Statement No. 125
without change. The statement provides accounting and reporting standards for
such transactions based upon consistent application of a financial components
approach that focuses on control. Under this approach, after a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, de-recognizes financial assets
when control has been surrendered, and de-recognizes liabilities when
extinguished.

     Statement No. 140 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after March 31, 2001. The
Statement is effective for recognition and reclassification of collateral for
fiscal years ending after December 15, 2000. The adoption of Statement No. 140
on January 1, 2001 did not have any effect on the Company's consolidated
financial position, results of operation or liquidity.

     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 established 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. The
Statement requires that changes in a derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting.

     Statement 133 was effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. 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, 2000 did not have any
effect on the Bank's consolidated financial position, results of operation or
liquidity.

                                       44

<PAGE>

Item 7.  Financial Statements

<TABLE>
<S>                                                                                     <C>
Index to Financial Statements

Independent Auditors' Report                                                             46

Consolidated Balance Sheets as of December 31, 2002 and 2001                             47

Consolidated Statements of Income for the Years Ended December 31,
2002 and 2001                                                                            48

Consolidated Statements Shareholders' Equity for the Years Ended
December 31, 2002 and 2001                                                               49

Consolidated Statements of Cash Flows for the Years Ended December 31,                   50
2002 and 2001

Notes to Consolidated Financial Statements                                               51
</TABLE>

                                       45

<PAGE>

                          Independent Auditors' Report



The Board of Directors
Valley Financial Corporation:



We have audited the consolidated balance sheets of Valley Financial Corporation
and subsidiary (Valley Bank) as of December 31, 2002 and 2001 and the related
consolidated statements of income, shareholders' equity and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Corporation'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 auditing standards generally accepted
in the United States of America. 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, 2002 and 2001 and the results of
their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.



Galax, Virginia
January 17, 2003

                                       46

<PAGE>

Valley Financial Corporation
Consolidated Balance Sheets
December 31, 2002 and 2001
(In thousands, except share data)

<TABLE>
<CAPTION>
                                                                                      2002           2001
                                                                                    ---------      ---------
<S>                                                                                 <C>            <C>
Assets
  Cash and due from banks                                                           $   8,163      $   6,235
  Money market investments
    Federal funds sold                                                                  4,088              -
    Interest-bearing deposits in other banks                                              351            143
  Securities held to maturity (approximate market values of $20,120
    and $0 in 2002 and 2001, respectively)                                             20,218              -
  Securities available-for-sale                                                        19,760         31,338
  Restricted equity securities                                                          2,427          1,927
  Loans, net of allowance for loan losses of
    $2,014 in 2002 and $1,468 in 2001                                                 183,633        146,083
  Premises and equipment, net                                                           4,876          4,084
  Accrued interest receivable                                                           1,112            930
  Other assets                                                                          4,218          3,128
                                                                                    ---------      ---------
        Total assets                                                                $ 248,846      $ 193,868
                                                                                    =========      =========

Liabilities and Shareholders' Equity
Liabilities:
  Noninterest-bearing deposits                                                      $  30,724      $  24,297
  Interest-bearing deposits                                                           151,519        114,569
                                                                                    ---------      ---------
        Total deposits                                                                182,243        138,866

  Federal funds purchased and securities sold under
    agreements to repurchase                                                            5,864          7,171
  Federal Home Loan Bank advances                                                      40,000         30,000
  Accrued interest payable                                                              1,044          1,104
  Other liabilities                                                                       671            423
                                                                                    ---------      ---------
        Total liabilities                                                             229,822        177,564
                                                                                    ---------      ---------

Commitments and other matters

Shareholders' equity:
  Preferred stock, no par value; 10,000,000
    shares authorized; none issued and outstanding                                          -              -
  Common stock, no par value;
    10,000,000 authorized; 1,828,737 and
    1,819,637 shares issued and outstanding in
    2002 and 2001, respectively                                                        12,353         12,295
  Retained earnings                                                                     6,369          4,113
  Accumulated other comprehensive income (loss)                                           302           (104)
                                                                                    ---------      ---------
    Total shareholders' equity                                                         19,024         16,304
                                                                                    ---------      ---------
    Total liabilities and shareholders' equity                                      $ 248,846      $ 193,868
                                                                                    =========      =========
</TABLE>

See accompanying notes to consolidated financial statements.

                                       47

<PAGE>

Valley Financial Corporation
Consolidated Statements of Income
Years Ended December 31, 2002 and 2001
(In thousands, except per share data)

<TABLE>
                                                                                       2002              2001
                                                                                  ---------------  ----------------
<S>                                                                               <C>              <C>
Interest income
   Interest and fees on loans                                                     $        11,685  $         10,852
   Interest on securities - taxable                                                         1,659             1,740
   Interest on securities - nontaxable                                                        363               332
   Interest on money market investments                                                        35                45
                                                                                  ---------------  ----------------
         Total interest income                                                             13,742            12,969
                                                                                  ---------------  ----------------

Interest expense
   Interest on deposits                                                                     4,023             5,669
   Interest on Federal Home Loan Bank advances                                              1,354               870
   Interest on other borrowed funds                                                            91               209
                                                                                  ---------------  ----------------
         Total interest expense                                                             5,468             6,748
                                                                                  ---------------  ----------------
         Net interest income                                                                8,274             6,221

Provision for loan losses                                                                     610               301
                                                                                  ---------------  ----------------
         Net interest income after provision for loan losses                                7,664             5,920
                                                                                  ---------------  ----------------

Noninterest income
   Service charges on deposit accounts                                                        521               397
   Realized gains on sale of securities available-for-sale                                     34                98
   Income earned on bank owned life insurance                                                 173                 -
   Other income                                                                               109               117
                                                                                  ---------------  ----------------
         Total noninterest income                                                             837               612
                                                                                  ---------------  ----------------

Noninterest expense
   Personnel                                                                                2,899             2,158
   Occupancy                                                                                  353               305
   Data processing and equipment                                                              606               469
   Franchise tax expense                                                                      157               140
   Loan expenses                                                                              347               233
   Other expense                                                                            1,009               777
                                                                                  ---------------  ----------------
         Total noninterest expense                                                          5,371             4,082
                                                                                  ---------------  ----------------
         Income before income taxes                                                         3,130             2,450

Income tax expense                                                                            871               738
                                                                                  ---------------  ----------------
         Net income                                                               $         2,259  $          1,712
                                                                                  ===============  ================

Net income per share

   Basic net income per share                                                     $          1.24  $           0.94
                                                                                  ===============  ================
   Diluted net income per share                                                   $          1.19  $           0.92
                                                                                  ===============  ================
</TABLE>

See accompanying notes to consolidated financial statements.

                                       48

<PAGE>

Valley Financial Corporation
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 2002 and 2001
(In thousands, except share data)

<TABLE>
<CAPTION>
                                                                                   Accumulated
                                                                                      Other               Total
                                                                                  Comprehensive           Share-
                                           Common      Common       Retained         Income              holders'
                                           Shares       Stock       Earnings         (Loss)               Equity
                                           ------      -------      --------      -------------        ------------
<S>                                       <C>        <C>          <C>             <C>                  <C>
Balances at December 31, 2000             1,819,637  $    12,299  $     2,401     $         (45)       $     14,655

Comprehensive income:
   Net income                                     -            -        1,712                 -               1,712
   Unrealized gains on securities
   available-for-sale, net of deferred
   tax expense of $2                              -            -            -                 6                   6
   Reclassification adjustment, net of
   deferred tax benefit of $33                    -            -            -               (65)                (65)
                                                                                                       -------------

         Total comprehensive income                                                                           1,653

   Stock issuance costs                           -           (4)           -                 -                  (4)
                                          ---------  -----------  -----------   ---------------        ------------
Balances at December 31, 2001             1,819,637       12,295        4,113              (104)             16,304

Comprehensive income:
   Net income                                     -            -        2,259                 -               2,259
   Unrealized gains on securities
   available-for-sale, net of deferred
   tax expense of $222                            -            -            -               428                 428
   Reclassification adjustment, net of
   deferred tax benefit of $12                    -            -            -               (22)                (22)
                                                                                                       -------------

         Total comprehensive income                                                                           2,665

   Cash in lieu of fractional shares              -            -           (3)                -                  (3)
   Exercise of stock options                  9,100           58            -                 -                  58
                                          ---------  -----------  -----------     -------------        ------------
Balances at December 31, 2002             1,828,737  $    12,353  $     6,369     $         302        $     19,024
                                          =========  ===========  ===========     =============        ============
</TABLE>

See accompanying notes to consolidated financial statements.

                                       49

<PAGE>

Valley Financial Corporation
Consolidated Statements of Cash Flows
Years Ended December 31, 2002 and 2001
(In thousands)

<TABLE>
                                                                                       2002              2001
                                                                                  ---------------  ----------------
<S>                                                                               <C>              <C>
Cash flows from operating activities
   Net income                                                                     $         2,259  $          1,712
   Adjustments to reconcile net income to net cash
     provided by operating activities:
       Provision for loan losses                                                              610               301
       Depreciation and amortization                                                          403               312
       Deferred income tax                                                                   (232)              (94)
       Gain on sale of securities available-for-sale                                          (34)              (98)
       Amortization (accretion) of bond premiums/discounts, net                                88                18
       Decrease in unearned fees                                                               (8)              (29)
       (Increase) decrease in accrued interest receivable                                    (182)              336
       Increase in other assets                                                              (271)             (118)
       Increase in value of life insurance contracts                                         (178)                -
       Decrease in accrued interest payable                                                   (60)             (419)
       Increase in other liabilities                                                          248                56
                                                                                  ---------------  ----------------
         Net cash provided by operating activities                                          2,643             1,977
                                                                                  ---------------  ----------------

Cash flows from investing activities
   Increase in money market investments                                                    (4,296)              (30)
   Purchases of premises and equipment                                                     (1,142)           (1,285)
   Purchases of securities available-for-sale                                             (10,284)          (28,343)
   Purchases of securities held to maturity                                               (21,641)                -
   Purchases of restricted equity securities                                                 (500)             (917)
   Proceeds from sales, calls, paydowns, and maturities
     of securities available-for-sale                                                      22,472            33,868
   Proceeds from paydowns on securities held to maturity                                    1,374                 -
   Investment in life insurance contracts                                                    (671)           (2,329)
   Increase in loans, net                                                                 (38,152)          (33,108)
                                                                                  ---------------- ----------------
         Net cash used in investing activities                                            (52,840)          (32,144)
                                                                                  ---------------- ----------------

Cash flows from financing activities
   Increase in noninterest-bearing deposits                                                 6,427             7,043
   Increase in interest-bearing deposits                                                   36,950             1,949
   Federal Home Loan Bank advances                                                         10,000            20,000
   Increase (decrease) in federal funds purchased and securities
     sold under agreements to repurchase                                                   (1,307)            3,426
   Cash in lieu of fractional shares                                                           (3)                -
   Net proceeds from issuance of common stock                                                  58                (4)
                                                                                  ---------------  ----------------
         Net cash provided by financing activities                                         52,125            32,414
                                                                                  ---------------  ----------------
         Net increase in cash and due from banks                                            1,928             2,247

Cash and due from banks at beginning of year                                                6,235             3,988
                                                                                  ---------------  ----------------
Cash and due from banks at end of year                                            $         8,163  $          6,235
                                                                                  ===============  ================

Supplemental disclosure of cash flows information
   Cash paid during the year for interest                                         $         5,528  $          7,167
                                                                                  ===============  ================
   Cash paid during the year for income taxes                                     $         1,200  $            762
                                                                                  ===============  ================
</TABLE>

See accompanying notes to consolidated financial statements.

                                       50

<PAGE>

Valley Financial Corporation
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(In thousands, except share and per share data)

Note 1.  Summary of Significant Accounting Policies

General

The Bank provides traditional commercial banking services concentrated primarily
in the Roanoke Valley. The Bank does not currently offer trust services. As a
state chartered, Federal Reserve member bank, the Bank is subject to regulation
by the Virginia Bureau of Financial Institutions and the Federal Reserve.

Critical Accounting Policies

The accounting and reporting policies of Valley Financial Corporation ("the
Company") and Valley Bank ("the Bank") conform to generally accepted accounting
principles (GAAP) and to general banking industry practices. The notes to our
audited consolidated financial statements included in our annual report contain
a summary of significant accounting policies. Our policies with respect to the
methodology for determination of the allowance for loan losses involve a high
degree of complexity. Management must make difficult and subjective judgments
that often require assumptions or estimates about highly uncertain matters.
Changes in these judgments, assumptions, or estimates would cause reported
results to differ materially. These critical policies and their application are
reviewed periodically with our Audit Committee and Board of Directors. The
following is a summary of the more significant accounting policies:

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and
the Bank, thereafter referred to collectively as the Company. All significant,
intercompany transactions and balances have been eliminated in consolidation.

Business Segments

The Company reports its activities in one business segment. In determining the
appropriateness of segment definition, the Company considers the materiality of
potential business segments and components of the business about which financial
information is available and regularly evaluated relative to resource allocation
and performance assessment.

Use of Estimates

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

Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the valuation
of real estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowances for loan and
foreclosed real estate losses, management obtains independent appraisals for
significant properties.

Substantially all of the Bank's loan portfolio consists of loans in the Roanoke
Valley. Accordingly, the ultimate collectibility of a substantial portion of the
Bank's loan portfolio and the recovery of a substantial portion of the carrying
amount of foreclosed real estate are susceptible to changes in local market
conditions. The regional economy is reasonably diverse.

                                       51

<PAGE>

Valley Financial Corporation
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(In thousands, except share and per share data)

Note 1.  Summary of Significant Accounting Policies, continued

Use of Estimates, continued

While management uses available information to recognize loan and foreclosed
real estate losses, future additions to the allowances may be necessary based on
changes in local economic conditions. In addition, regulatory agencies, as a
part of their routine examination process, periodically review the Bank's
allowances for loan and foreclosed real estate losses. Such agencies may require
the Bank to recognize additions to the allowances based on their judgments about
information available to them at the time of their examinations. Because of
these factors, it is reasonably possible that the allowances for loan and
foreclosed real estate losses may change materially in the near term.

Cash and Cash Equivalents

For the purpose of presentation in the consolidated statements of cash flows,
cash and cash equivalents are defined as those amounts included in the balance
sheet caption "cash and due from banks."

Trading Securities

The Company does not hold securities for short-term resale and therefore does
not maintain a trading securities portfolio.

Securities Held to Maturity

Bonds, notes, and debentures for which the Bank has the positive intent and
ability to hold to maturity are reported at cost, adjusted for premiums and
discounts that are recognized in interest income using the interest method over
the period to maturity or to call dates.

Securities Available for Sale

Available-for-sale securities are reported at fair value and consist of bonds,
notes, debentures, and certain equity securities not classified as trading
securities or as held-to-maturity securities.

Unrealized holding gains and losses, net of tax, on available-for-sale
securities are reported as a net amount in a separate component of shareholders'
equity. Realized gains and losses on the sale of available-for-sale securities
are determined using the specific-identification method. Premiums and discounts
are recognized in interest income using the interest method over the period to
maturity or to call dates.

Declines in the fair value of individual held-to-maturity and available-for-sale
securities below cost that are other than temporary are reflected as write-downs
of the individual securities to fair value. Related write-downs are included in
earnings as realized losses.

Loans Held for Sale

Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized through a valuation allowance by charges to
income.

Loans Receivable

Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their
outstanding principal amount adjusted for the allowance for loan losses, and any
deferred fees or costs on originated loans and unamortized premiums or discounts
on purchased loans.

                                       52

<PAGE>

Valley Financial Corporation
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(In thousands, except share and per share data)

Note 1.  Summary of Significant Accounting Policies, continued

Loans Receivable, continued

Loan origination fees and costs are not capitalized and recognized as an
adjustment to the yield on the related loan as such deferrals are not material
to the Company's financial position or results of operations. Discounts and
premiums on any purchased residential real estate loans are amortized to income
using the interest method over the remaining period to contractual maturity,
adjusted for anticipated prepayments. Discounts and premiums on any purchased
consumer loans are recognized over the expected lives of the loans using methods
that approximate the interest method.

Interest is accrued and credited to income based on the principal amount
outstanding. The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they become
due. When interest accrual is discontinued, all unpaid accrued interest is
reversed. Interest income is subsequently recognized only to the extent cash
payments are received. When facts and circumstances indicate the borrower has
regained the ability to meet required payments, the loan is returned to accrual
status. Past due status of loans is determined based on contractual terms.

Allowance for Loan Losses

The allowance for loan losses is an estimate of the losses that may be sustained
in the loan portfolio. The allowance is based on two basic principles of
accounting: (i) Statement of Financial Accounting Standards ("SFAS") 5,
Accounting for Contingencies, which requires that losses be accrued when they
are probable of occurring and estimable, and (ii) SFAS 114, Accounting by
Creditors for Impairment of a Loan, which requires that losses be accrued based
on the differences between the value of collateral, present value of future cash
flows or values that are observable in the secondary market, and the loan
balance.

The allowance for loan losses has two basic components: (i) the formula
allowance, and (ii) the specific allowance. Each of these components is
determined based upon estimates that can and do change when the actual events
occur. The formula allowance uses an historical loss view as an indicator of
future losses and, as a result, could differ form the loss incurred in the
future. However, since this history is updated with the most recent loss
information, the errors that might otherwise occur are mitigated. The specific
allowance uses various techniques to arrive at an estimate of loss. Historical
loss information, expected cash flows and fair market value of collateral are
used to estimate these losses. The use of these values is inherently subjective
and our actual losses could differ substantially than the estimates. Prevailing
economic conditions are also considered into the provision calculation. The
allowance for loan losses is evaluated on a regular basis by management.

The allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to earnings. Loan losses
are charged against the allowance when management believes the uncollectibility
of a loan balance is confirmed. Subsequent recoveries, if any, are credited to
the allowance.

A loan is considered impaired when, based on current information and events, it
is probable that the Bank will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrower's prior payment record, and the amount of
the shortfall in relation to the principal and interest owed. Impairment is
measured on a loan by loan basis for commercial and construction loans by either
the present value of expected future cash flows discounted at the loan's
effective interest rate, the loan's obtainable market price, or the fair value
of the collateral if the loan is collateral dependent.

                                       53

<PAGE>

Valley Financial Corporation
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(In thousands, except share and per share data)

Note 1. Summary of Significant Accounting Policies, continued

Allowance for Loan Losses, continued

Large groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Bank does not separately identify individual
consumer and residential loans for impairment disclosures.

Loan Servicing

The Bank has previously acquired mortgage servicing rights through origination
of mortgage loans and subsequent sale of those loans with servicing rights
retained. Management has determined that it is not practicable to estimate the
relative fair values of the mortgage servicing rights. Accordingly, the entire
cost of originating the mortgage loans has been allocated to the loans and
mortgage servicing rights are not reflected as assets in the consolidated
balance sheets.

Property and Equipment

Land is carried at cost. Bank premises, furniture and equipment, and leasehold
improvements are carried at cost, less accumulated depreciation and amortization
computed principally by the straight-line method over the following estimated
useful lives:

                                                                Years

                Buildings and improvements                        30
                Furniture and equipment                         3-10
                Land and lease hold improvements                3-15

Foreclosed Properties

Real estate properties acquired through, or in lieu of, loan foreclosure are to
be sold and are initially recorded at fair value less anticipated cost to sell
at the date of foreclosure establishing a new cost basis. After foreclosure,
valuations are periodically performed by management and the real estate is
carried at the lower of carrying amount or fair value less cost to sell. Revenue
and expenses from operations and changes in the valuation allowance are included
in loss on foreclosed real estate.

Stock-based Compensation

The Company accounts for its stock-based compensation plans using the accounting
prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees. The Company is not required to adopt the fair value based
recognition provisions prescribed under SFAS No. 123, Accounting for Stock-Based
Compensation (issued in October 1995), but complies with the disclosure
requirements set forth in the Statement, which include disclosing pro forma net
income as if the fair value based method of accounting had been applied.

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales, when control over the
assets has been surrendered. Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Bank, (2) the
transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets, and (3)
the Bank does not maintain effective control over the transferred assets through
an agreement to repurchase them before their maturity.

                                       54

<PAGE>

Valley Financial Corporation
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(In thousands, except share and per share data)

Note 1.  Summary of Significant Accounting Policies, continued

Income Taxes

Provision for income taxes is based on amounts reported in the statements of
income (after exclusion of non-taxable income such as interest on state and
municipal securities and income earned on bank-owned life insurance) and
consists of taxes currently due plus deferred taxes on temporary differences in
the recognition of income and expense for tax and financial statement purposes.
Deferred tax assets and liabilities are included in the financial statements at
currently enacted income tax rates applicable to the period in which the
deferred tax assets or liabilities are expected to be realized or settled. As
changes in tax laws or rates are enacted, deferred taxes assets and liabilities
are adjusted through the provision for income taxes.

Deferred income tax liability relating to unrealized appreciation (or the
deferred tax asset in the case of unrealized depreciation) on investment
securities available for sale is recorded in other liabilities (assets). Such
unrealized appreciation or depreciation is recorded as an adjustment to equity
in the financial statements and not included in income determination until
realized. Accordingly, the resulting deferred income tax liability or asset is
also recorded as an adjustment to equity.

Basic Earnings per Share

Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding during
the period, after giving retroactive effect to stock splits and dividends.

Diluted Earnings per Share

The computation of diluted earnings per share is similar to the computation of
basic earnings per share except that the denominator is increased to include the
number of additional common shares that would have been outstanding if dilutive
potential common shares had been issued. The numerator is adjusted for any
changes in income or loss that would result from the assumed conversion of those
potential common shares.

Comprehensive Income

Annual comprehensive income reflects the change in the Company's equity during
the year arising from transactions and events other than investments by and
distributions to shareholders. It consists of net income plus certain other
changes in assets and liabilities that are reported as separate components of
shareholders' equity rather than as income or expense.

Financial Instruments

Derivatives that are used as part of the asset/liability management process are
linked to specific assets or liabilities and have high correlation between the
contract and the underlying item being hedged, both at inception and throughout
the hedge period. In addition, forwards and option contracts must reduce an
exposure's risk, and for hedges of anticipatory transactions, the significant
terms and characteristics of the transaction must be identified and the
transactions must be probable of occurring. All derivative financial instruments
held or issued by the Company are held or issued for purposes other than
trading.

In the ordinary course of business the Bank has entered into off-balance-sheet
financial instruments consisting of commitments to extend credit and commercial
and standby letters of credit. Such financial instruments are recorded in the
financial statements when they are funded or related fees are incurred or
received.

                                       55

<PAGE>

Valley Financial Corporation
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(In thousands, except share and per share data)

Note 1.  Summary of Significant Accounting Policies, continued

Fair Value of Financial Instruments

Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet. In
cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instruments.
Statement No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Company.

The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:

Cash and cash equivalents: The carrying amounts reported in the balance sheet
for cash and cash equivalents approximate their fair values.

Interest-bearing deposits with banks: Fair values for time deposits are
estimated using a discounted cash flow analysis that applies interest rates
currently being offered on certificates to a schedule of aggregated contractual
maturities on such time deposits.

Available-for-sale and held-to-maturity securities: Fair values for securities,
excluding restricted equity securities, are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based on
quoted market prices of comparable instruments. The carrying values of
restricted equity securities approximate fair values.

Loans receivable: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying amounts.
The fair values for other loans are estimated using discounted cash flow
analysis, based on interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. Loan fair value estimates include
judgments regarding future expected loss experience and risk characteristics.
Fair values for impaired loans are estimated using discounted cash flow analysis
or underlying collateral values, where applicable. The carrying amount of
accrued interest receivable approximates its fair value.

Deposit liabilities: The fair values disclosed for demand and savings deposits
are, by definition, equal to the amount payable on demand at the reporting date.
The fair values for certificates of deposit are estimated using a discounted
cash flow calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated contractual maturities on such time
deposits. The carrying amount of accrued interest payable approximates fair
value.

Short-term debt: The carrying amounts of short-term debt approximate their fair
values.

Other debt: The fair values of other debt is estimated using a discounted cash
flow calculation that applies contracted interest rates being paid on the debt
to the current market interest rate of similar debt.

Other liabilities: For fixed-rate loan commitments, fair value considers the
difference between current levels of interest rates and the committed rates. The
carrying amounts of other liabilities approximates fair value as the estimated
value of loan commitments approximates the fees charged.

                                       56

<PAGE>

Valley Financial Corporation
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(In thousands, except share and per share data)

Note 1.  Summary of Significant Accounting Policies, continued

Reclassification

Certain reclassifications have been made to the financial statements of the
prior year to place them on a comparable basis with the current year. Net income
and shareholders' equity previously reported were not affected by these
reclassifications.

Note 2.  Restrictions on Cash

To comply with Federal Reserve regulations, the Bank will be required to
maintain certain average reserve balances. The daily cash reserve requirement
for the week including December 31, 2002 was $2,300.

Note 3.  Securities

The amortized costs, gross unrealized gains and losses, and approximate fair
values of securities available-for-sale as of December 31, 2002 and 2001 were as
follows:

<TABLE>
<CAPTION>
                                                  Amortized        Unrealized       Unrealized           Fair
                                                    Costs             Gains           Losses            Values
                                               ---------------  ---------------   ---------------  ----------------
<S>                                            <C>              <C>               <C>              <C>
2002
----
   U.S. Treasury                               $           199  $              6  $             -  $            205
   U.S. Government agencies
     and corporations                                    2,399                17                -             2,416
   Mortgage-backed securities                            7,610               190                -             7,800
   States and political subdivisions                     9,094               260               15             9,339
                                               ---------------  ----------------  ---------------  ----------------
                                               $        19,302  $            473  $            15  $         19,760
                                               ===============  ================  ===============  ================

<CAPTION>
                                                  Amortized        Unrealized       Unrealized           Fair
                                                    Costs             Gains           Losses            Values
                                               ---------------  ---------------   ---------------  ----------------
<S>                                            <C>              <C>               <C>              <C>
2001
----
   U.S. Treasury                               $           198  $              7  $             -  $            205
   U.S. Government agencies
     and corporations                                    3,174                 3               54             3,123
   Mortgage-backed securities                           22,528               109              158            22,479
   States and political subdivisions                     4,796                26               88             4,734
   Corporate obligations                                   800                 -                3               797
                                               ---------------  ----------------  ---------------  ----------------
                                               $        31,496  $            145  $           303  $         31,338
                                               ===============  ================  ===============  ================
</TABLE>

The amortized costs, gross unrealized gains and losses, and approximate fair
values of securities held to maturity as of December 31, 2002 were as follows:

<TABLE>
<CAPTION>
                                                  Amortized        Unrealized       Unrealized           Fair
                                                    Costs             Gains           Losses            Values
                                               ---------------  ---------------   ---------------  ----------------
<S>                                            <C>              <C>               <C>              <C>
2002
----
   Mortgage-backed securities                           14,630                93               53            14,670
   States and political subdivisions                     5,588                 -              138             5,450
                                               ---------------  ----------------  ---------------  ----------------
                                               $        20,218  $             93  $           191  $         20,120
                                               ===============  ================  ===============  ================
</TABLE>

There were no securities held to maturity at December 31, 2001.

                                       57

<PAGE>

Valley Financial Corporation
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(In thousands, except share and per share data)

Note 3.  Securities, continued

The amortized costs and approximate fair values of available-for-sale securities
as of December 31, 2002, 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>
                                                           Amortized           Fair
                                                             Costs            Values
                                                        ---------------  ----------------
<S>                                                     <C>              <C>
Due in one year or less                                 $           299  $            306
Due after one year through five years                               622               640
Due after five years through ten years                            4,590             4,690
Due after ten years                                               6,181             6,324
Mortgage-backed securities                                        7,610             7,800
                                                        ---------------  ----------------
                                                        $        19,302  $         19,760
                                                        ===============  ================
</TABLE>

The amortized costs and approximate fair values of held to maturity securities
as of December 31, 2002, 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>
                                                           Amortized           Fair
                                                             Costs            Values
                                                        ---------------  ----------------
<S>                                                     <C>              <C>
Due after ten years                                     $         5,588  $          5,450
Mortgage-backed securities                                       14,630            14,670
                                                        ---------------  ----------------
                                                        $        20,218  $         20,120
                                                        ===============  ================
</TABLE>

Securities with amortized costs of $28,938 and $19,230 as of December 31, 2002
and 2001, respectively, were pledged as collateral for public deposits and for
other purposes as required or permitted by law.

Restricted equity securities consist of Federal Home Loan Bank stock in the
amount of $2,000, Federal Reserve Bank stock in the amount of $367, and
Community Bankers Bank stock in the amount of $60. Restricted equity securities
are carried at cost. The Federal Home Loan Bank requires the Bank to maintain
stock in an amount equal to 5% of outstanding borrowings. The Federal Reserve
Bank of Richmond requires the Bank to maintain stock with a par value equal to
3% of its outstanding capital.

                                       58

<PAGE>

Valley Financial Corporation
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(In thousands, except share and per share data)

Note 4.  Loans Receivable

The major components of loans in the consolidated balance sheets at December 31,
2002 and 2001 are as follows (in thousands):

                                                          2002           2001
                                                      ------------    ----------

Commercial                                            $     44,668    $  35,366
Real estate:
   Construction and land development                        15,727        9,005
   Residential, 1-4 families                                23,966       21,482
   Commercial                                               75,378       60,290
Consumer                                                    25,922       21,430
                                                      ------------    ----------
                                                           185,661      147,573

Unearned loan origination costs, net of fees                   (14)         (22)
Allowance for loan losses                                   (2,014)      (1,468)
                                                      ------------    ----------
                                                      $    183,633    $ 146,083
                                                      ============    ==========

Substantially all one-four family residential and commercial real estate loans
collateralize the line of credit available from the Federal Home Loan Bank.

Note 5.  Allowance for Loan Losses

Changes in the allowance for loan losses are as follows:

                                                          2002           2001
                                                      ------------    ----------

Balance, beginning                                    $      1,468    $   1,190
Provision charged to expense                                   610          301
Recoveries of amounts charged off                                -            -
Amounts charged off                                            (64)         (23)
                                                      ------------    ----------
Balance, ending                                       $      2,014    $   1,468
                                                      ============    ==========

An allowance determined in accordance with SFAS No. 114 and No. 118 is provided
for all impaired loans. The total recorded investment in impaired loans and the
related allowance for loan losses at December 31, 2002 and 2001 is as follows:

                                                          2002          2001
                                                      ------------    ----------

Impaired loans without a valuation allowance          $        390    $     466
Impaired loans with a valuation allowance                        -           73
                                                      ------------    ----------
          Total impaired loans                        $        390    $     539
                                                      ============    ==========

Valuation allowance related to impaired loans         $          -    $      30
                                                      ============    ==========

                                       59

<PAGE>

Valley Financial Corporation
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(In thousands, except share and per share data)

Note 5.  Allowance for Loan Losses, continued

The average annual recorded investment in impaired loans and interest income
recognized on impaired loans for the years ended December 31, 2002 and 2001 (all
approximate) is summarized below:

<TABLE>
<CAPTION>
                                                                          2002         2001
                                                                      -----------  -----------
<S>                                                                   <C>          <C>
Average investment in impaired loans                                  $       798  $       779
                                                                      ===========  ===========
Interest income recognized on impaired loans                          $        17  $        43
                                                                      ===========  ===========
Interest income recognized on a cash basis on impaired loans          $        17  $        43
                                                                      ===========  ===========
</TABLE>

No additional funds are committed to be advanced in connection with impaired
loans.

Nonaccrual loans totaled $0 and $514 as of December 31, 2002 and 2001,
respectively. Loans past due more than ninety days totaled $390 and $25 as of
December 31, 2002 and 2001, respectively. There were no restructured loans as of
December 31, 2002 or 2001.

Note 6.  Premises and Equipment

Components of premises and equipment and total accumulated depreciation and
amortization as of December 31, 2002 and 2001 are as follows:

                                                          2002           2001
                                                      -----------    ----------

Land and improvements                                 $     1,245    $      953
Building                                                    2,372         1,697
Furniture, fixtures and equipment                           1,881         1,508
Leasehold improvements                                        348           348
Construction in progress                                      544           747
                                                      -----------    ----------
                                                            6,390         5,253

Less accumulated depreciation and amortization             (1,514)       (1,169)
                                                      -----------    ----------
                                                      $     4,876    $    4,084
                                                      ===========    ==========

The Company currently leases its main office location under a non-cancelable
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 each. In
addition, the Company has entered into a lease for a branch location. Rental
expenses under operating leases were approximately $165 and $165 for 2002 and
2001, respectively. Future minimum lease payments under non-cancelable operating
leases at December 31, 2002 were as follows:

                                  2003                $          166
                                  2004                           166
                                  2005                            14
                                  2006                            14
                                  2007                            15
                            Subsequent years                      15
                                                      --------------
                                                      $          390
                                                      ==============

                                       60

<PAGE>

Valley Financial Corporation
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(In thousands, except share and per share data)

Note 7.  Time Deposits

The aggregate amount of time deposits in denominations of $100,000 or more at
December 31, 2002 and 2001 was $33,982 and $25,591, respectively. At December
31, 2002 the approximate scheduled maturities of time deposits are as follows:

                  Three months or less         $         38,070
                  Four to twelve months                  39,358
                  One to three years                     23,455
                  Over three years                       14,833
                                               ----------------
                                               $        115,716
                                               ================

Note 8.  Other Borrowed Funds

Short-term debt

Short-term debt consists of securities sold under agreements to repurchase and
federal funds purchased, which generally mature within one to seven days from
the transaction date. Additional information is summarized below:

<TABLE>
                                                                     2002              2001
                                                                ---------------  ----------------

<S>                                                             <C>              <C>
Outstanding balance at December 31                              $         5,864  $          7,171
                                                                ===============  ================
Year-end weighted average rate                                               94%             1.59%
                                                                ===============  ================
Daily average outstanding during the period                     $         6,452  $          6,168
                                                                ===============  ================
Average rate for the period                                                1.42%             3.39%
                                                                ===============  ================
Maximum outstanding at any month-end during the period          $        10,217  $         10,555
                                                                ===============  ================
</TABLE>

Long-term debt

At December 31, 2002 and 2001, long-term debt was $40,000 and $30,000,
respectively and consisted of advances from the Federal Home Loan Bank. These
advances are convertible to a floating rate of three month LIBOR by the FHLB on
the dates indicated. The weighted average rate at December 31, 2002 is 3.74%.

Details related to long-term debt at December 31, 2002 is as follows:

                                                 FHLB
             Maturity        Conversion        Interest            Advance
               Date             Date             Rate               Amount
            ----------      -------------     ----------        -------------
               2003           Quarterly          1.44           $      10,000
               2007         Sept. 4, 2003        3.09                  10,000
               2009           Quarterly          5.46                   5,000
               2010           Quarterly          6.49                   5,000
               2011         Feb. 9, 2004         4.97                   5,000
               2011         Nov. 7, 2006         3.91                   5,000
                                                                -------------
                                                                $      40,000
                                                                =============

                                       61

<PAGE>

Valley Financial Corporation
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(In thousands, except share and per share data)

Note 9. Fair Value of Financial Instruments

The carrying amounts and approximate fair values of the Corporation's financial
instruments are as follows at December 31, 2002 and 2001:

<TABLE>
<CAPTION>
                                                             2002                               2001
                                               ---------------------------------  --------------------------------
                                                                   Approximate                         Approximate
                                                  Carrying            Fair           Carrying              Fair
                                                   Amounts           Values           Amounts             Values
                                               ----------------   -------------   --------------      ------------
<S>                                            <C>                <C>             <C>                 <C>
Financial assets
    Cash and due from banks                    $         8,163    $        8,163  $        6,235      $      6,235
    Money market investments                             4,439             4,439             143               143
    Securities held to maturity                         20,218            20,120               -                 -
    Securities available-for-sale                       19,760            19,760          31,338            31,338
    Restricted equity securities                         2,427             2,427           1,927             1,927
    Loans, net                                         183,633           186,201         146,083           149,373

Financial liabilities
    Deposits                                           182,243           185,495         138,866           139,873
    Federal Home Loan Bank advances                     40,000            46,055          30,000            31,286
    Other borrowings                                     5,864             5,864           7,171             7,171
</TABLE>


Note 10. Earnings per Share

The following table details the computation of basic and diluted earnings per
share for each year ended December 31.

<TABLE>
<CAPTION>
                                                                                             Per
                                                          Net                               Share
                                                        Income           Shares             Amount
                                                   ----------------  ---------------  ----------------
<S>                                                <C>               <C>             <C>
Year Ended December 31, 2002
   Basic net income per share                      $          2,259        1,819,758  $           1.24
                                                                                      ================
   Effect of dilutive stock options                               -           74,343
                                                   ----------------  ---------------
   Diluted net income per share                    $          2,259        1,894,101  $           1.19
                                                   ================  ===============  ================

Year Ended December 31, 2001
   Basic net income per share                      $          1,712        1,819,811  $            .94
                                                                                      ================
   Effect of dilutive stock options                               -           48,269
                                                   ----------------  ---------------
   Diluted net income per share                    $          1,712        1,868,080  $            .92
                                                   ================  ===============  ================
</TABLE>

                                       62

<PAGE>

Valley Financial Corporation
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(In thousands, except share and per share data)

Note 11.  Employee Benefit Plan

The Company 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. Employee contributions
are matched by the Corporation based on 75 percent of the employee's
contribution up to a total of six percent of the employee's salary. For the
years ended December 31, 2002 and 2001 the Corporation contributed $64 and $54
to the Plan, respectively.

During 2002, the Company adopted a deferred compensation plan to provide future
compensation to certain members of management. Under plan provisions, payments
projected to range from $20 to $146 are payable for 15 years certain, generally
beginning at age 65. The liability accrued for compensation deferred under the
plan is $113 at December 31, 2002. Deferred compensation expense, an actuarially
determined amount, was $113 during 2002. Assumed discount rate, rate of
compensation increase, and expected long-term rate of return on plan assets were
7.5%, 5%, and 6.6%, respectively.

The Company has purchased and is the beneficiary of life insurance policies
designed to fund the deferred compensation liability. The cash value totaled
approximately $3,178 at December 31, 2002. The increase in cash surrender value
reflected in net income was $173 during 2002.

Note 12.  Stock Options

The Company has an Incentive Stock Plan (the Plan) pursuant to which the Human
Resources Committee of 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 155,925 shares (adjusted for stock splits) of the Company's authorized,
but unissued common stock. Accordingly, 155,925 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 91,098 shares (adjusted for stock
splits) based on meeting certain performance criteria have been granted to
executive officers.

The per share weighted average fair value of stock options granted during 2002
and 2001 was $1.54 and $2.86, respectively, on the date of grant utilizing the
Black-Scholes option-pricing model using the assumptions noted below.

<TABLE>
                                                             2002              2001
                                                        ---------------  ----------------
<S>                                                     <C>               <C>
Expected dividend yield                                               -                 -
Risk-free interest rate                                            1.50%             3.25%
Expected life of options (in years)                                  10                10
Expected volatility of stock price                                  .25%              .45%
</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:

                                                      2002              2001
                                                  ------------      ------------
Net income:
   As reported                                    $      2,259      $      1,712
   Pro forma                                      $      2,164      $      1,605

Basic net income per share:
   As reported                                    $       1.24      $        .94
   Pro forma                                      $       1.19      $        .88

Diluted net income per share:
   As reported                                    $       1.19      $        .92
   Pro forma                                      $       1.14      $        .86

                                       63

<PAGE>

Valley Financial Corporation
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(In thousands, except share and per share data)

Note 12.  Stock Options, continued

Stock option activity during the years ended December 31, 2002 and 2001
(adjusted for stock split) is as follows:

<TABLE>
<CAPTION>
                                                                                   Exercise
                                                                  Shares            Prices
                                                              ---------------   ---------------
<S>                                                            <C>              <C>
Balance at December 31, 2000                                          179,692   $          7.53

Granted                                                                18,000             10.39
Exercised                                                                   -                 -
Expired/forfeited                                                           -                 -
                                                              ---------------   ---------------
Balance at December 31, 2001                                          197,692              7.79

Granted                                                                23,950             11.10
Exercised                                                              (9,100)             6.35
Expired/forfeited                                                           -                 -
                                                              ---------------   ---------------
Balance at December 31, 2002                                          212,542   $          8.22
                                                              ===============   ===============
</TABLE>

At December 31, 2002, the range of exercise prices was $5.56 - $11.88 and the
weighted average remaining contractual life of outstanding options was 5.7 years
(adjusted for stock split). The grant date fair value of options issued in 2002
is $37.

At December 31, 2001, the range of exercise prices and weighted average
remaining contractual life of outstanding options was $5.56 - $11.11 and 6.2
years, respectively (adjusted for stock split). The grant date fair value of
options issued in 2001 is $52.

At December 31, 2002 and 2001, the number of options exercisable was 153,559 and
145,357, respectively, and the weighted average exercise price of those options
was $7.29 and $6.93, respectively (adjusted for stock split). There was no
compensation cost recognized in income related to stock-based compensation in
2002 or 2001.

Note 13.  Income Taxes

Current and Deferred Income Tax Components

Total income tax expense (benefit) for the years ended December 31, 2002 and
2001 consists of the following:

                                                       2002             2001
                                                  -------------    -------------

Current                                           $       1,103    $        832
Deferred                                                   (232)            (94)
                                                  -------------    -------------
                                                  $         871    $        738
                                                  =============    =============

                                       64

<PAGE>

Valley Financial Corporation
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(In thousands, except share and per share data)

Note 13.  Income Taxes, continued

Rate Reconciliation

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:

                                                          2002          2001
                                                      -----------    -----------

Tax at statutory federal rate                         $     1,064    $     833
Tax-exempt interest income                                   (123)        (111)
Tax-exempt interest disallowance                               13           17
Cash surrender value of life insurance                        (61)           -
Other                                                         (22)          (1)
                                                      -----------    ---------
                                                      $       871    $     738
                                                      ===========    =========

Deferred Income Tax Analysis

The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 2002 and
2001 are as follows:

<TABLE>
<CAPTION>

                                                                         2002             2001
                                                                     -----------      ------------
<S>                                                                  <C>              <C>
Deferred tax assets
   Net unrealized losses on available-for-sale securities            $         -      $         54
   Allowance for loan losses                                                 651               465
   Depreciation                                                               10                 7
   Employee benefits                                                          38                 -
                                                                     -----------      ------------
         Total deferred tax assets                                           699               526
                                                                     -----------      ------------

Deferred tax liabilities
   Net unrealized gains on available-for-securities                         (156)                -
   Accretion of bond discount                                                 (2)               (7)
                                                                     -----------      ------------
         Total deferred tax liabilities                                     (158)               (7)
                                                                     -----------      ------------
         Net deferred tax assets                                     $       541      $        519
                                                                     ===========      ============
</TABLE>

                                       65

<PAGE>

Valley Financial Corporation
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(In thousands, except share and per share data)

Note 14.  Commitments and Contingencies

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.

Litigation

In the normal course of business the Bank is involved in various legal
proceedings. After consultation with legal counsel, management believes that any
liability resulting from such proceedings will not be material to the financial
statements.

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.

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.

                                       66

<PAGE>

Valley Financial Corporation
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(In thousands, except share and per share data)

Note 14.  Commitments and Contingencies, continued

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:

                                                         2002           2001
                                                    -------------  -------------

            Commitments to extend credit            $      61,134  $      42,688
            Standby letters of credit                         942          6,120
                                                    -------------  -------------
                                                    $      62,076  $      48,808
                                                    =============  =============

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, 2002 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.

Note 15.  Regulatory Restrictions

Dividends

The Company's principal source of funds for dividend payments is 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 state law, regulations and policies. A state bank may not pay
dividends from its capital; all dividends must be paid out of net undivided
profits then on hand. Before any dividend is declared, any deficit in capital
funds originally paid in shall have been restored by earnings to their initial
level, and no dividend shall be declared or paid by any bank which would impair
the paid-in-capital of the bank. As of December 31, 2002 and 2001, the amount
available for payment of dividends was $6,369 and $4,113, respectively.

Capital Requirements

The Company and the Bank are subject to various regulatory capital requirements
administered by the federal and state 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 Company'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.

                                       67

<PAGE>

Valley Financial Corporation
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(In thousands, except share and per share data)

Note 15.  Regulatory Restrictions, continued

Capital Requirements, continued

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,
2002 and 2001, that the Company and the Bank meet all capital adequacy
requirements to which they are subject.

As of December 31, 2002 and 2001, the Company and the Bank were categorized as
well capitalized as defined by applicable regulations. To be categorized as well
capitalized the Company and 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 date that management believes have changed
the Company's or the Bank's category.

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

<TABLE>
<CAPTION>
                                                                                              Minimum To Be Well
                                                                    Minimum Required          Capitalized Under
                                                                       For Capital            Prompt Corrective
                                               Actual               Adequacy Purposes         Action Provisions
                                      -----------------------     ----------------------    ----------------------
                                         Amount        Ratio       Amount        Ratio       Amount        Ratio
                                      -----------    --------     ----------   ---------    ----------    -------
<S>                                   <C>             <C>          <C>            <C>       <C>           <C>
December 31, 2002
    Total Capital
       (to Risk Weighted Assets):
        Consolidated                  $   20,736      10.30%       $ 16,108       8.0%      $     n/a         n/a
        Valley Bank                   $   20,494      10.18%       $ 16,101       8.0%      $  20,126        10.0%
    Tier I Capital
       (to Risk Weighted Assets):
        Consolidated                  $   18,722       9.30%       $  8,054       4.0%      $     n/a         n/a
        Valley Bank                   $   18,480       9.18%       $  8,050       4.0%      $  12,076         6.0%
    Tier I Capital (Leverage)
     (to Average Assets):
        Consolidated                  $   18,722       7.72%       $  9,697       4.0%      $     n/a         n/a
        Valley Bank                   $   18,480       7.63%       $  9,691       4.0%      $  12,113         5.0%

December 31, 2001
    Total Capital
       (to Risk Weighted Assets):
        Consolidated                  $   17,876      11.07%       $ 12,923       8.0%      $     n/a         n/a
        Valley Bank                   $   17,668      10.94%       $ 12,916       8.0%      $  16,145        10.0%
    Tier I Capital
       (to Risk Weighted Assets):
        Consolidated                  $   16,408      10.16%       $  6,462       4.0%      $     n/a         n/a
        Valley Bank                   $   16,200      10.03%       $  6,458       4.0%      $   9,687         6.0%
    Tier I Capital (Leverage)
     (to Average Assets):
        Consolidated                  $   16,408       9.05%       $  7,248       4.0%      $     n/a         n/a
        Valley Bank                   $   16,200       8.95%       $  7,241       4.0%      $   9,051         5.0%
</TABLE>

                                       68

<PAGE>

Valley Financial Corporation
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(In thousands, except share and per share data)

Note 15.  Regulatory Restrictions, continued

Inter-company transactions

Legal lending limits on loans by the Bank to the Company are governed by Federal
Reserve Act 23A, and differ from legal lending limits on loans to external
customers. Generally, a bank may lend up to 10% of its capital and surplus to
its parent, if the loan is secured. If collateral is in the form of stocks,
bonds, debentures or similar obligations, it must have a market value when the
loan is made of at least 20% more than the amount of the loan, and if
obligations of a state or political subdivision or agency thereof, it must have
a market value of at least 10% more than the amount of the loan. If such loans
are secured by obligations of the United States or agencies thereof, or by
notes, drafts, bills of exchange or bankers' acceptances eligible for rediscount
or purchase by a Federal Reserve Bank, requirements for collateral in excess of
loan amount do not apply. Under this definition, the legal lending limit for the
Bank on loans to the Company was approximately $1.9 million at December 31,
2002. There were no loans from the Bank to the Company at December 31, 2002.

Note 16.  Related Party Transactions

The Company has entered into transactions with its directors, significant
shareholders and their affiliates (related parties). Such transactions were made
in the ordinary course of business on substantially the same terms and
conditions, including interest rates and collateral, as those prevailing at the
same time for comparable transactions with other customers, and did not, in the
opinion of management, involve more than normal credit risk or present other
unfavorable features.

Loans

Aggregate 2002 and 2001 loan transactions with related parties were as follows:

                                                 2002              2001
                                            ---------------  ----------------

Balances at beginning of year               $         5,115  $          4,480
Advances                                              4,186             1,742
Repayments                                           (1,843)           (1,107)
                                            ---------------  ----------------
Balances at end of year                     $         7,458  $          5,115
                                            ===============  ================

                                       69

<PAGE>

Valley Financial Corporation
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(In thousands, except share and per share data)

Note 17. Parent Company Financial Information

Condensed financial information of Valley Financial Corporation is presented
below:

                            Condensed Balance Sheets
                           December 31, 2002 and 2001

<TABLE>
<CAPTION>
                                                                                     2002               2001
                                                                                ---------------   ----------------
<S>                                                                             <C>               <C>
Assets
   Cash                                                                         $           126   $            122
   Investment in subsidiary, at equity                                                   18,781             16,096
   Other assets                                                                             118                 86
                                                                                ---------------   ----------------
         Total assets                                                           $        19,025   $         16,304
                                                                                ===============   ================

Liabilities                                                                     $             1   $              -
                                                                                ---------------   ----------------

   Commitments and other matters

Shareholders' equity
   Preferred stock, no par value. Authorized 10,000,000 shares;
     none issued and outstanding                                                              -                  -
   Common stock no par value. Authorized 10,000,000 shares;
     issued and outstanding 1,828,737 shares and 1,819,637
     shares in 2002 and 2001, respectively                                               12,353             12,295
   Retained earnings                                                                      6,369              4,113
   Accumulated other comprehensive income (loss)                                            302               (104)
                                                                                ---------------   ----------------
         Total shareholders' equity                                                      19,024             16,304
                                                                                ---------------   ----------------
         Total liabilities and shareholders' equity                             $        19,025   $         16,304
                                                                                ===============   ================
</TABLE>

<TABLE>
<CAPTION>
                         Condensed Statements of Income
                     Years Ended December 31, 2002 and 2001

                                                                                     2002               2001
                                                                                ---------------   ----------------
<S>                                                                             <C>               <C>
Income
   Interest income                                                              $             3   $             88
   Other income                                                                               -                 18
                                                                                ---------------   ----------------
                                                                                              3                106

Expenses
   Interest expense                                                                           -                 36
   Other expenses                                                                            72                 55
                                                                                ---------------   ----------------
                                                                                             72                 91
                                                                                ---------------   ----------------

   Income (loss) before income taxes and equity in
     undistributed net income of subsidiary                                                 (69)                15

Income tax (expense) benefit                                                                 49                 (4)
                                                                                ---------------   ----------------
   Income (loss) before equity in undistributed
     net income of subsidiary                                                               (20)                11
   Equity in net income of subsidiary                                                     2,279              1,701
                                                                                ---------------   ----------------
         Net income                                                             $         2,259   $          1,712
                                                                                ===============   ================
</TABLE>

                                       70

<PAGE>

Valley Financial Corporation
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(In thousands, except share and per share data)

Note 17. Parent Company Financial Information, continued

                       Condensed Statements of Cash Flows
                     Years Ended December 31, 2002 and 2001

<TABLE>
<CAPTION>
                                                                      2002          2001
                                                                   ----------    -----------
<S>                                                                <C>           <C>
Cash flows from operating activities
  Net income                                                       $    2,259    $     1,712
  Adjustments to reconcile net income to net
    cash (used in) operating activities:
      Equity in net income of subsidiary                               (2,279)        (1,701)
      Amortization of bond premiums                                         -              2
      (Increase) decrease in other assets                                 (32)           410
      Increase (decrease) in other liabilities                              1           (442)
                                                                   ----------    -----------
        Net cash used in operating activities                             (51)           (19)
                                                                   ----------    -----------

Cash flows from investing activities
   Investment in subsidiary                                                 -            (16)
                                                                   ----------    -----------
        Net cash used in investing activities                               -            (16)
                                                                   ----------    -----------

Cash flows from financing activities
   Net proceeds from issuance of common stock                              58             (4)
   Cash in lieu of fractional shares                                       (3)             -
                                                                   ----------    -----------
        Net cash provided by (used in) financing activities                55             (4)
                                                                   ----------    -----------
        Net increase (decrease) in cash                                     4            (39)

Cash at beginning of year                                                 122            161
                                                                   ----------    -----------
Cash at end of year                                                $      126    $       122
                                                                   ==========    ===========
</TABLE>

                                       71

<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 3-5 of the
Company's Proxy Statement dated March 18, 2003 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 8 of
the Company's Proxy Statement dated March 18, 2003 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 9-11 of the Company's Proxy Statement
dated March 18, 2003 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 18, 2003 and under the caption
"Information Concerning Directors and Nominees" on pages 3-5 of the Company's
Proxy Statement dated March 18, 2003 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 18, 2003 and is incorporated herein by
reference.

                                       72

<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, 2002 and 2001.

          Consolidated Statements of Income for the Years Ended December 31,
          2002 and 2001.

          Consolidated Statements of Shareholders' Equity for the Years Ended
          December 31, 2002 and 2001.

          Consolidated Statements of Cash Flows for the Years Ended December 31,
          2002 and 2001.

          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 and Reports on Form 8-K:

          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).

                                       73

<PAGE>

               *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).

               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).

               *10.6     Severance agreement dated February 9, 1998, by and
                         between the Company and J. Randall Woodson
                         (incorporated herein by reference to Exhibit No. 10.6
                         of Form 10-KSB filed March 30, 2000, File No.
                         33-77568).

               *10.7     Employment agreement dated September 21, 2000, by and
                         between the Company and Ellis L. Gutshall (incorporated
                         herein by reference to Exhibit 10.2 of Form SB-2, filed
                         September 27, 2000, and Form SB-2/A filed October 25,
                         2000).

               *10.14    Valley Bank Supplemental Retirement Plan effective
                         January 1, 2002 (incorporated herein by reference to
                         Exhibit 10.14 of Form 10-QSB filed May 15, 2002, File
                         No. 33-77568).

               *10.15    Employment agreement dated August 26, 2002, by and
                         between the Company and J. Randall Woodson
                         (incorporated herein by reference to Exhibit 10.15 of
                         Form 10-QSB filed November 14, 2002, File No.
                         33-77568).

               11.       Statement re Computation of Earnings per Share (filed
                         herewith as Note 10)

                                       74

<PAGE>


               21.       Subsidiaries of the Registrant.

               24.       Power of Attorney.

               99.1      Chief Executive Officer Certification Pursuant to 18
                         U.S.C. Section 1350, as Adopted Pursuant to Section 906
                         of the Sarbanes-Oxley Act of 2002 (filed herewith).

               99.2      Chief Financial Officer Certification Pursuant to 18
                         U.S.C. Section 1350, as Adopted Pursuant to Section 906
                         of the Sarbanes-Oxley Act of 2002 (filed herewith).

*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:

         The Company filed two reports on Form 8-K during the quarter ended
         December 31, 2002. The first report, dated October 18, 2002, reported
         the Company's consolidated financial results for the quarter ended
         September 30, 2002. The second report dated November 14, 2002, reported
         that Valley Financial Corporation furnished to the Securities and
         Exchange Commission the certification of its Chief Executive Officer
         and its Chief Financial Officer with respect to Form 10-QSB for the
         period ended September 30, 2002 as required by the Sarbanes-Oxley Act
         of 2002.

                                       75

<PAGE>

Item 14. Controls and Procedures.

Within 90 days prior to the date of this report, we carried out an evaluation of
the effectiveness of the design and operation of our disclosure controls and
procedure, including internal controls and procedures for financial reporting.
Our principal executive officer and principal financial officer supervised this
evaluation and concluded that our disclosure controls and procedures are
effective. Subsequent to this evaluation, (i) there have not been any
significant changes to our internal controls or other factors that could
significantly affect our disclosure controls or procedures and (ii) we have not
taken any corrective actions with respect to our disclosure controls and
procedures to correct any significant deficiencies or weaknesses.

The design of any system of controls is based in part upon certain assumptions
about the likelihood of future events. There can be no assurance that any design
will succeed in achieving its stated goal under every potential condition,
regardless of how remote. In addition, the operation of nay system of controls
and procedures is dependent upon the employees responsible for executing it.
While we have evaluated the operation of our disclosure controls and procedures
and found them effective, there can be no assurance that they will succeed in
every instance to achieve their objective.

                                       76

<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 31, 2003.


                                           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 31, 2003.

<TABLE>
<CAPTION>
              Signature                                            Title
     <S>                                       <C>
      /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)
</TABLE>

                                       77

<PAGE>

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

       /s/ Mason Haynesworth  *                   Director
       --------------------------
       (Mason Haynesworth)

       /s/ Eddie F. Hearp     *                   Director
       --------------------------
       (Eddie  F. Hearp)

                                                  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
       --------------------------
       (Ward W. Stevens)

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



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

                                       78

<PAGE>

                                 CERTIFICATIONS

I, Ellis L. Gutshall, certify that:

     1. I have reviewed this annual report on Form 10-KSB of Valley Financial
        Corporation;

     2. Based on my knowledge, this annual report does not contain any untrue
        statement of a material fact or omit to state a material fact
        necessary to make the statements made, in light of the circumstances
        under which such statements were made, not misleading with respect to
        the period covered by this annual report;

     3. Based on my knowledge, the financial statements, and other financial
        information included in this annual report, fairly present in all
        material respects the financial condition, results of operations and
        cash flows of the registrant as of, and for, the periods presented in
        this annual report;

     4. The registrant's other certifying officers and I are responsible for
        establishing and maintaining disclosure controls and procedures (as
        defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
        and have:

           (a) designed such disclosure controls and procedures to ensure
               that material information relating to the registrant,
               including its consolidated subsidiaries, is made known to us
               by others within those entities, particularly during the
               period in which this annual report is being prepared;

           (b) evaluated the effectiveness of the registrant's disclosure
               controls and procedures as of a date within 90 days prior to
               the filing date of this annual report (the "Evaluation
               Date"); and

           (c) presented in this annual report our conclusions about the
               effectiveness of the disclosure controls and procedures
               based on our evaluation as of the Evaluation Date;

     5. The registrant's other certifying officers and I have disclosed based
        on our most recent evaluation, to the registrant's auditors and the
        audit committee of registrant's board of directors:

           (a) all significant deficiencies in the design or operation of
               internal controls which could adversely affect the
               registrant's ability to record, process, summarize and
               report financial data and have identified for the
               registrant's auditors any material weaknesses in internal
               controls; and

           (b) any fraud, whether or not material, that involves management
               or other employees who have a significant role in the
               registrant's internal controls; and

     6. The registrant's other certifying officers and I have indicated in
        this annual report whether or not there were significant changes in
        internal controls or in other factors that could significantly affect
        internal controls subsequent to the date of our most recent
        evaluation, including any corrective actions with regard to
        significant deficiencies and material weaknesses.

     Date:  March 31, 2003                By /s/ Ellis L. Gutshall
                                             ---------------------

                                          President and Chief Executive Officer

                                       79

<PAGE>

                                 CERTIFICATIONS

I, A. Wayne Lewis, certify that:

     1. I have reviewed this annual report on Form 10-KSB of Valley Financial
        Corporation;

     2. Based on my knowledge, this annual report does not contain any untrue
        statement of a material fact or omit to state a material fact necessary
        to make the statements made, in light of the circumstances under which
        such statements were made, not misleading with respect to the period
        covered by this annual report;

     3. Based on my knowledge, the financial statements, and other financial
        information included in this annual report, fairly present in all
        material respects the financial condition, results of operations and
        cash flows of the registrant as of, and for, the periods presented in
        this annual report;

     4. The registrant's other certifying officers and I are responsible for
        establishing and maintaining disclosure controls and procedures (as
        defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
        have:

              (a) designed such disclosure controls and procedures to ensure
                  that material information relating to the registrant,
                  including its consolidated subsidiaries, is made known to us
                  by others within those entities, particularly during the
                  period in which this annual report is being prepared;

              (b) evaluated the effectiveness of the registrant's disclosure
                  controls and procedures as of a date within 90 days prior to
                  the filing date of this annual report (the "Evaluation Date");
                  and

              (c) presented in this annual report our conclusions about the
                  effectiveness of the disclosure controls and procedures based
                  on our evaluation as of the Evaluation Date;

     5. The registrant's other certifying officers and I have disclosed based
        on our most recent evaluation, to the registrant's auditors and the
        audit committee of registrant's board of directors:

              (a) all significant deficiencies in the design or operation of
                  internal controls which could adversely affect the
                  registrant's ability to record, process, summarize and report
                  financial data and have identified for the registrant's
                  auditors any material weaknesses in internal controls; and

              (b) any fraud, whether or not material, that involves management
                  or other employees who have a significant role in the
                  registrant's internal controls; and

     6. The registrant's other certifying officers and I have indicated in
        this annual report whether or not there were significant changes in
        internal controls or in other factors that could significantly affect
        internal controls subsequent to the date of our most recent
        evaluation, including any corrective actions with regard to
        significant deficiencies and material weaknesses.

     Date:  March 31, 2003             By  /s/ A. Wayne Lewis
                                           ------------------

                                       Executive Vice-President and Chief
                                         Financial Officer

                                       80

<PAGE>

                                INDEX TO EXHIBITS

Exhibit                                                                    Page
Number      Description                                                   Number
------      -----------                                                   ------

 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).

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).

                                       81


<PAGE>

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).

10.6        Severance agreement dated February 9, 1998, by and between
            the Company and J. Randall Woodson (incorporated herein by
            reference to Exhibit 10.6 of Form 10-KSB filed March 30, 2000,
            File No. 33-77568).

10.7        Employment agreement dated September 21, 2000, by and between the
            Company and Ellis L. Gutshall (incorporated herein by reference to
            Exhibit 10.2 of Form SB-2, filed September 27, 2000, and Form SB-2/A
            filed October 25, 2000).

10.14       Valley Bank Supplemental Retirment Plan effective January 1, 2002
            (incorporated herein by reference to Exhibit 10.14 of Form 10-QSB
            filed May 15, 2002, File No. 33-77568).

10.15       Employment agreement dated August 26, 2002, by and between the
            Company and J. Randall Woodson (incorporated herein by reference to
            Exhibit 10.15 of Form 10-QSB filed November 14, 2002, File No.
            33-77568).

11          Statement re Computation of Earnings per Share (filed herewith as
            Note 10).

21          Subsidiaries of the Registrant.                               83

24          Power of Attorney.                                            84

99.1        Chief Executive Officer Certification Pursuant to 18 U.S.C. Section
            1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
            of 2002 (filed herewith).                                     79

99.2        Chief Financial Officer Certification Pursuant to 18 U.S.C. Section
            1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
            of 2002 (filed herewith).                                     80

                                       82