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

                                   FORM 10-QSB

                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999

                        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)

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 registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X  No
         ---   ---

At October 31, 1999, 964,990 shares of the issuer's common stock, no par value,
were outstanding.

Transitional small business disclosure format:  Yes      No  x  .
                                                   ---      ---

<PAGE>

                          VALLEY FINANCIAL CORPORATION
                                   FORM 10-QSB
                               SEPTEMBER 30, 1999

                                      INDEX


Part I.  FINANCIAL INFORMATION

         Item 1.  Financial Statements

                           Consolidated Balance Sheets                    3
                           Consolidated Statements of Income              4
                           Consolidated Statements of Cash Flows          6
                           Notes to Consolidated Financial Statements     7

         Item 2.  Management's Discussion and Analysis                   10


Part II.  OTHER INFORMATION

         Item 4.  Submission of Matters to a Vote of Security Holders    20

         Item 5.  Other Information                                      20

         Item 6.  Exhibits and Reports on Form 8-K                       20


SIGNATURES                                                               21

<PAGE>

         PART 1 - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS.

                          VALLEY FINANCIAL CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                                   (UNAUDITED)
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>


                                                                SEPTEMBER 30       DECEMBER 31
                                                                    1999              1998
                                                                ------------       ------------
<S>                                                                <C>                 <C>
ASSETS
         Cash and due from banks                                $    2,901          $   3,462
         Money market investments:
                  Federal funds sold                                 3,703              1,699
                  Interest-bearing deposits in other banks             108                 44
                                                                ----------          ---------
                           Total money market investments            3,811              1,743

         Securities available for sale                              32,785             26,118
         Loans:
                  Commercial loans                                  22,049             17,794
                  Commercial real estate loans                      31,505             22,040
                  Residential real estate loans                     19,124             19,140
                  Loans to individuals                              12,921             12,648
                                                               -----------         ----------
                           Total loans                              85,599             71,622
         Less unearned income                                          (33)               (39)
         Less allowance for loan losses                               (856)              (708)
                                                               -----------         ----------
                           Total net loans                          84,710             70,875
         Premises and equipment                                      2,566              1,830
         Accrued interest receivable                                   919                804
         Other assets                                                  764                354
                                                               -----------         ----------
                           Total assets                           $128,456          $ 105,186
                                                               ===========         ==========

LIABILITIES AND SHAREHOLDERS' EQUITY
         Deposits:
                  Non-interest bearing demand deposits           $  14,869         $   10,437
                  Interest bearing demand deposits                   7,235              7,687
                  Money market deposits                             22,820             24,826
                  Other savings deposits                             1,498              1,106
                  Certificates of deposits >100,000                 11,865              8,048
                  Other time deposits                               49,872             37,922
                                                              ------------         ----------
                           Total deposits                          108,159             90,026
                                                              ------------         ----------

Short-term borrowings                                                    -                  -
Accrued interest payable                                               755                679
Other liabilities                                                      393                324
Federal Home Loan Bank advances                                     10,000              5,000
                                                              ------------         ----------
                           Total liabilities                       119,307             96,029
                                                              ------------         ----------

Commitments and other contingencies

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 964,990 at
         September 30, 1999 and 964,590 at December
         31,1998                                                     9,099             9,095
Accumulated retained earnings (deficit)                                626              (108)
Accumulated other comprehensive income                                (576)              170
                                                               -----------         ---------
                           Total shareholders' equity                9,149             9,157
                                                               -----------         ---------

                           Total liabilities and shareholders'
                              equity                              $128,456        $  105,186
                                                               ===========        ==========
</TABLE>

See accompanying notes to consolidated financial statements.

                                       3

<PAGE>

                          VALLEY FINANCIAL CORPORATION
                        CONSOLIDATED STATEMENTS OF INCOME
                                   (UNAUDITED)
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>

                                                               FOR THE PERIOD           FOR THE PERIOD
                                                              JANUARY 1, 1999           JANUARY 1, 1998
                                                                 THROUGH                    THROUGH
                                                             SEPTEMBER 30, 1999        SEPTEMBER 30, 1998
                                                             ------------------        ------------------
<S>                                                                <C>                       <C>
INTEREST INCOME:
         Interest and fees on loans                              $   4,965                 $  3,580
         Interest on money market investments                           78                      116
         Interest on securities - taxable                            1,051                    1,090
         Interest on securities - nontaxable                           238                      112
                                                                 ---------                ---------
                  Total interest income                              6,332                    4,898
                                                                 ---------                ---------

INTEREST EXPENSE:
         Interest on certificates of deposit > 100,000                 389                      302
         Interest on other deposits                                  2,504                    2,072
         Interest on Federal Home Loan Bank advances                   284                      145
         Interest on borrowed funds                                     22                       40
                                                                 ---------               ----------
                  Total interest expense                             3,199                    2,559
                                                                 ---------               ----------

                  Net interest income                                3,133                    2,339

PROVISION FOR LOAN LOSSES                                              161                      194
                                                                 ---------               ----------

         Net interest income after provision for loan losses         2,972                    2,145
                                                                 ---------               ----------
NONINTEREST INCOME:
         Service charges on deposit accounts                           159                      118
         Other fee income                                               88                       58
         Securities gains (losses)                                       -                       10
                                                                 ---------               ----------
                  Total noninterest income                             247                      186
                                                                 ---------               ----------

NONINTEREST  EXPENSE:
         Compensation expense                                        1,191                      877
         Occupancy and equipment expense, net                          287                      224
         Data processing expense                                       127                       83
         Marketing and advertising expense                              98                       60
         Office supplies expense                                        63                       43
         Other expense                                                 449                      369
                                                                ----------              -----------
                  Total noninterest expense                          2,215                    1,656
                                                                ----------              -----------

NET INCOME BEFORE TAXES                                              1,004                      675

Provision for income taxes                                             270                      195
                                                                ----------              -----------

NET INCOME                                                      $      734               $      480
                                                                ==========              ===========
BASIC EARNINGS PER SHARE                                        $      .76               $      .50
                                                                ==========              ===========
DILUTED EARNINGS PER SHARE                                      $      .74               $      .49
                                                                ==========              ===========
</TABLE>

See accompanying notes to consolidated financial statements.

                                       4
<PAGE>
                          VALLEY FINANCIAL CORPORATION
                        CONSOLIDATED STATEMENTS OF INCOME
                                   (UNAUDITED)
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>

                                                              FOR THE PERIOD             FOR THE PERIOD
                                                               JULY 1, 1999              JULY 1, 1998
                                                                 THROUGH                   THROUGH
                                                            SEPTEMBER 30, 1999          SEPTEMBER 30, 1998
                                                            ------------------          ------------------
<S>                                                               <C>                           <C>
INTEREST INCOME:
         Interest and fees on loans                            $   1,773                    $   1,341
         Interest on money market investments                         44                           76
         Interest on securities - taxable                            408                          382
         Interest on securities - nontaxable                          85                           57
                                                               ---------                    ---------
                     Total interest income                         2,310                        1,856
                                                               ---------                    ---------
INTEREST EXPENSE:
         Interest on certificates of deposit > 100,000               146                          112
         Interest on other deposits                                  899                          799
         Interest on Federal Home Loan Bank advances                 127                           64
         Interest on borrowed funds                                    5                           12
                                                              ----------                    ---------
                  Total interest expense                           1,177                          987
                                                              ----------                    ---------
                  Net interest income                              1,133                          869

PROVISION FOR LOAN LOSSES                                             34                           66
                                                              ----------                    ---------
         Net interest income after provision for
             loan losses                                           1,099                          803
                                                              ----------                    ---------
NONINTEREST INCOME:
         Service charges on deposit accounts                          58                           45
         Other fee income                                             43                           19
         Securities gains (losses)                                     -                            -
                                                              ----------                   ----------
                   Total noninterest income                          101                           64
                                                              ----------                   ----------
NONINTEREST EXPENSE:
         Compensation expense                                        410                          298
         Occupancy and equipment expense, net                        108                           77
         Data processing expense                                      46                           28
         Marketing and advertising expense                            25                           23
         Office supplies expense                                      11                           13
         Other expense                                               157                          121
                                                             -----------                  -----------
                    Total noninterest expense                        757                          560
                                                             -----------                  -----------

NET INCOME BEFORE TAXES                                              443                          307

Provision for income taxes                                           123                           87
                                                             -----------                  -----------
NET INCOME                                                    $      320                    $     220
                                                             ===========                  ===========
BASIC EARNINGS PER SHARE                                      $      .33                    $     .23
                                                             ===========                  ===========
DILUTED EARNINGS PER SHARE                                    $      .32                    $     .22
                                                             ===========                  ===========
</TABLE>

See accompanying notes to consolidated financial statements.


                                       5
<PAGE>





                          VALLEY FINANCIAL CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>

                                                               FOR THE PERIOD             FOR THE PERIOD
                                                               JANUARY 1, 1999            JANUARY 1, 1998
                                                                  THROUGH                     THROUGH
                                                              SEPTEMBER 30, 1999         SEPTEMBER 30, 1998
                                                              ------------------         ------------------
<S>                                                                 <C>                        <C>
Cash Flows From Operating Activities:
         Net income                                               $     734                  $      480
         Adjustments to reconcile net income to net
         cash provided by operating activities:
                  Provision for loan losses                              161                        194
                  Depreciation and amortization of bank
                    premises and equipment                               150                         78
                  Amortization of organizational expenses                 14                         44
                  Deferred income taxes                                  (24)                         -
                  Gain on sale of securities                               -                        (10)
                  Amortization (accretion) of premiums and
                    discounts                                             31                         (9)
                  Increase (decrease) in unearned fees                    (6)                         3
                  Increase in accrued interest receivable               (115)                       (48)
                  (Increase) decrease in other assets                    (15)                       143
                  Increase in accrued interest payable                    76                         98
                  Increase (decrease) in other liabilities                69                        (40)
                                                                  ----------                 ----------
Net cash provided by operating activities                              1,075                        933
                                                                  ----------                 ----------

Cash Flows From Investing Activities:
         (Increase) decrease in money market investments              (2,068)                     1,452
         Purchases of premises and equipment                            (886)                      (398)
         Purchases of securities available-for-sale                  (15,359)                   (29,603)
         Proceeds from sales, calls, and maturities of
           securities available-for-sale                               7,530                     23,099
         Increase in loans                                           (13,990)                   (19,821)
                                                                  ----------                -----------
Net cash used in investing activities                                (24,773)                   (25,271)
                                                                  ----------                -----------
Cash Flows From Financing Activities:
         Increase in time deposits greater than $100,000               3,817                      1,418
         Increase in other time deposits                              11,950                      6,646
         Increase in other deposits                                    2,366                      8,297
         Increase in short-term borrowings                                 -                      2,891
         Proceeds from Federal Home Loan Bank advances                 5,000                      5,000
         Proceeds from the issuance of common stock                        4                          2
                                                                  ----------               ------------
Net cash provided by financing activities                             23,137                     24,254
                                                                  ----------               ------------

Net Decrease in Cash and Due From Banks                               (561)                        (84)

Cash and Due From Banks at Beginning of Period                         3,462                      3,324
                                                                  ----------               ------------

Cash and Due From Banks at End of Period                         $     2,901               $      3,240
                                                                  ==========               ============

Supplemental disclosure of cash flow information:
         Cash paid during the period for interest                $     3,123               $      2,461
                                                                  ==========               ============
         Cash paid during the period for taxes                   $       213               $          2
                                                                  ==========               ============
</TABLE>

See accompanying notes to consolidated financial statements.

                                       6

<PAGE>

                          VALLEY FINANCIAL CORPORATION

                   Notes to Consolidated Financial Statements
                               September 30, 1999
                                   (Unaudited)

(In thousands, except share and per share data)

         (1)      Organization and Summary of Significant Accounting Policies

                  Valley Financial Corporation (the "Company") was incorporated
                  under the laws of the Commonwealth of Virginia on March 15,
                  1994, primarily to serve as a holding company for Valley Bank,
                  N.A. (the "Bank"), which opened for business on May 15, 1995.
                  The Company's fiscal year end is December 31.

                  The consolidated financial statements of the Company conform
                  to generally accepted accounting principles and to general
                  banking industry practices. The interim period consolidated
                  financial statements are unaudited; however, in the opinion of
                  management, all adjustments of a normal recurring nature which
                  are necessary for a fair presentation of the consolidated
                  financial statements herein have been included. The
                  consolidated financial statements herein should be read in
                  conjunction with the Company's 1998 Annual Report on Form
                  10-KSB.

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

         (2)      Cash and Cash Equivalents

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

                                       7

<PAGE>


(3)      Securities

         The carrying values, unrealized gains, unrealized losses and
         approximate fair values of investment securities at September
         30, 1999 are shown in the table below. The entire investment
         portfolio is classified as available-for-sale in order to
         provide maximum liquidity for funding needs. As of September
         30, 1999, investments with amortized costs and fair values of
         $4,783 and $4,637, respectively, were pledged as collateral
         for public deposits, a line of credit available from the
         Federal Home Loan Bank, customer sweep accounts, and for other
         purposes as required or permitted by law.


<TABLE>
<CAPTION>
============================================================================================
                                        Carrying   Unrealized   Unrealized   Approximate
Securities available for sale:           Values      Gains        Losses     Fair Values
                                      ---------------------------------------------------
<S>                                         <C>       <C>          <C>          <C>
U.S. Treasury                               $199        $0           $0          $199

U.S. Government agencies                  22,183         0         (598)       21,585

Mortgage-backed securities                 2,888         5          (18)        2,875

States and political subdivisions          7,291         1         (256)        7,036

Corporate debt securities                    100         1            0           101

Equity securities                            997         0           (8)          989
                                             ---     -----       ------        ------

  Total securities available for sale    $33,658        $7        ($880)      $32,785
                                         =======     =====       ======        ======
============================================================================================
</TABLE>

(4)      Allowance for Loan Losses

         Changes in the allowance for loan losses are as follows:

                                                  1999             1998
                                                  ----             ----

         Balance at January 1                     $708             $459

         Provision for loan losses                 161
                                                                    194

         Recoveries                                  0                0

         Charged off loans                         (13)               0
                                                  ----             ----

         Balance at September 30                  $856             $653
                                                  ====             ====

(5)      Earnings Per Share

         Basic earnings per share is based upon the weighted average
         number of common shares outstanding during the period. The
         weighted average shares outstanding for the diluted earnings
         per share computations were adjusted to reflect the assumed

                                       8
<PAGE>
         conversion of shares  available under stock options. The following
         table summarizes the shares utilized in the computations:

                                          Weighted Average Shares Outstanding
                                          -----------------------------------

         Three months ending September 30:        Basic          Diluted
                                                  -----          -------

                      1999                      964,990        1,000,079
                                                =======        =========

                      1998                      964,139          988,644
                                                =======          =======

         Nine months ending September 30:

                      1999                      964,949          994,873
                                                =======          =======

                      1998                      964,074          982,477
                                                =======          =======

 (6)      Comprehensive Income

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

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

          The adoption of Statement 130 on January 1, 1998 did not have
          any effect on the consolidated financial position, results of
          operations or liquidity of the Company. However, Statement 130
          does have an effect on financial statement displays presented
          by the Company since the Company has net unrealized gains
          (losses) on available-for-sale securities, an item of other
          comprehensive income. For the nine months ended September 30,
          1999 and 1998, total comprehensive income was $(12) and $725,
          respectively. For the three months ended September 30, 1999
          and 1998, total comprehensive income was $288 and $507,
          respectively.

                                       9

<PAGE>

         The information that follows discloses the reclassification
         adjustments and the income taxes related to securities
         available-for-sale that are included in other comprehensive
         income, net of income taxes for the nine and three month
         periods ended September 30, 1999 and 1998.

<TABLE>
<CAPTION>

                                                          For the Nine Months Ended       For the Nine Months Ended
                                                             September 30, 1999              September 30, 1998
                                                          -------------------------       -------------------------
<S>                                                                <C>                              <C>
Net unrealized losses on securities available-for-sale:
  Net unrealized holding losses during the year                $    (1,130)                      $      388
    Less reclassification adjustments for gains included
      in net income                                                      -                              (17)
  Income tax expense                                                   384                             (126)
                                                               -----------                       ----------
        Other comprehensive income, net of income taxes        $      (746)                      $      245
                                                               ===========                       ==========
</TABLE>

<TABLE>
<CAPTION>

                                                        For the Three Months Ended         For the Three Months Ended
                                                           September 30, 1999                 September 30, 1998
                                                        --------------------------         --------------------------
                  <S>                                             <C>                               <C>
Net unrealized losses on securities available-for-sale:
  Net unrealized holding losses during the year                $       (48)                      $      435
    Less reclassification adjustments for gains included
      in net income                                                      -                                -
  Income tax expense                                                    16                             (148)
                                                               -----------                       ----------
        Other comprehensive income, net of income taxes        $       (32)                      $      287
                                                               ===========                       ==========
</TABLE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS (000'S OMITTED, EXCEPT FOR SHARE
AND PER SHARE INFORMATION).

The following is management's discussion and analysis of the financial condition
and results of operations of the Company as of and for the nine months and three
months ended September 30, 1999 and 1998. The discussion should be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto.

OVERVIEW

The Company was incorporated as a Virginia stock corporation on March 15, 1994,
primarily to own and control all of the capital stock of the Bank. The Bank
opened for business on May 15, 1995.

Total assets at September 30, 1999 were $128,456, up 22% from $105,186 at
December 31, 1998. The principal components of the Company's assets at the end
of the period were $32,785 in securities available-for-sale and $85,599 in gross
loans. Total liabilities at September 30, 1999 were $119,307, up 24% from
$96,029 at December 31, 1998 with the increase represented by a $18,133 growth
in deposits and a $5,000 Federal Home Bank of Atlanta advance during the second
quarter.

Total shareholders' equity at September 30, 1999 was $9,149 consisting of $9,099
in net proceeds from the issuance of common stock, increased by accumulated
retained earnings of $626 and

                                       10
<PAGE>

decreased by $576 of unrealized losses on securities available-for-sale, net of
related deferred tax liability. At December 31, 1998, total shareholders' equity
was $9,157. Exclusive of unrealized gains(losses) on investment securities,
shareholders' equity was $9,725 at September 30, 1999 and $8,987 at December 31,
1998.

The Company had net income of $734 for the nine months ended September 30, 1999
compared with $480 recorded for the nine months ended September 30, 1998, a 53%
increase. Net income for the three months ended September 30, 1999 was $320, a
45% increase over the $220 recorded for the third quarter of 1998. The
significant improvement in profitability in both the nine and three month
periods results from higher net interest income partially offset by increased
noninterest expenses in virtually all categories.

Profitability as measured by the Company's return on average assets ("ROA") was
 .84% for the nine months ended September 30, 1999 compared to .73% for the same
period in 1998. ROA for the third quarter of 1999 was 1.00% versus .85% in the
third quarter of 1998. Return on average equity ("ROE") was 10.50% for the nine
months ended September 30, 1999 compared to 7.62% for the same period in 1998.
ROE for the third quarter of the year was 13.21% in 1999 and 11.54% in 1998. The
calculation of ROE excludes the effect of any unrealized gains or losses on
investment securities.


RESULTS OF OPERATIONS

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

Net interest income was $3,133 for the nine months ended September 30, 1999 and
is attributable to interest income from loans and securities exceeding the cost
of interest paid on deposits and borrowed funds. Net interest income for the
first nine months of 1999 increased 34% from $2,339 for the same period in 1998.
The net interest margin on a fully taxable equivalent ("FTE") basis was 3.92%
for the first nine months of 1999, an increase of 8 basis points from the 3.84%
reported for the same period in 1998. The increase in the margin from year to
year is attributable to lower yields on earning assets being more than offset by
a lower cost of funds.

For the three months ended September 30, 1999 net interest income was $1,133 and
the FTE net interest margin was 3.89%. Net interest income was $869 and the net
interest margin was 3.73% for the third quarter of 1998.

PROVISION FOR LOAN LOSSES. A provision for loan losses of $161 was provided
during the nine months ended September 30, 1999, a decrease of $33 or 17% over
the same period in 1998, in recognition of management's estimate of inherent
risks associated with lending activities. Due to the Bank's

                                       11
<PAGE>

limited operating history, this estimate is primarily based on industry
practices and consideration of local economic factors. The amount of the
provision for loan losses is a charge against current earnings, and actual loan
losses are charged against the allowance for loan losses. The allowance for loan
losses was $856 as of September 30, 1999 and represented approximately 1.01% of
net loans outstanding versus 1.00% of net loans at December 31, 1998 (see Note 4
to the Consolidated Financial Statements). Despite the $13,977 growth or 20%
increase in gross loans from December 31, 1998 to September 30, 1999, the
provision expense did not surpass the amount recorded for the nine-month period
ended September 30, 1998 due to the substantial 42% growth in loans between
December 31, 1997 and September 30, 1998.

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

NONINTEREST INCOME. Noninterest income of $247 in the nine months ended
September 30, 1999 consisted of service charges and fees on accounts and other
miscellaneous income, and represented an increase of $61 or 33% over the $186
reported for the same period one year earlier. For the three months ended
September 30, 1999 noninterest income was $101, an increase of $37 or 58% over
the $64 reported for the third quarter of 1998. Future levels of noninterest
income are expected to increase as a direct result of business growth and
expansion.

NONINTEREST EXPENSE. Noninterest expense for the first nine months of 1999 was
$2,215, an increase of $559 or 34% over the same period in 1998. The largest
components of the increase were compensation expense as additional employees
were hired due to growth, growth-related data processing expense, marketing
expense due to the opening of our newest branch in Salem, office supplies due to
the opening of the above-referenced branch, and increases in various other
expense categories, partially offset by a decrease in loan closing costs
incurred in a home equity line of credit promotion in 1998. Noninterest expense
for the quarter ended September 30, 1999 was $757, an increase of $197 or 35%
over the third quarter of 1998. Noninterest expenses are expected to increase in
future years as a direct result of business growth and expansion.

YEAR 2000. The Year 2000 issue arises from computer programs being written using
two digits rather than four to abbreviate the year portion of dates. Computer
hardware, software and devices with imbedded technology that are time-sensitive
may not recognize the abbreviation "00" as meaning the year 2000, but instead
read it as the year 1900. This could result in system failures or
miscalculations causing disruption of normal operations including, among other
things, a temporary impairment of the ability to process transactions, calculate
interest payments correctly or engage in routine business activities.

The Company has undertaken various initiatives intended to ensure that its
computer equipment and software will function properly with respect to dates in
the year 2000 and thereafter. Included in the initiatives are information
technology ("IT") systems such as accounting, data processing, financial
transaction processing, ATM and telephone, and non-IT systems such as alarm
systems, fax machines, copiers, heating and air conditioning controls and
elevator controls. Both IT and non-IT

                                       12
<PAGE>

systems may contain imbedded technology. The Company's initiatives include
awareness of the problem, assessing the size and complexity of the effort in the
context of the Company's systems, renovation of non-compliant systems through
upgrade or replacement, validation through testing of Year 2000 compliance and
implementation of compliant systems. The Company also is taking steps to
ascertain the Year 2000 compliance status of its major customers and vendors,
and to develop contingency plans in the event of unexpected failure of one or
more of its mission-critical systems.

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

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

As part of its board-approved Year 2000 Action Plan, the Company established a
budget for Year 2000 compliance. For the nine months ended September 30, 1999
total expenditures were $46, with $9 expensed and $37 recorded as capital
expenditures with useful lives of 3-5 years. Actual expenditures were $16 for
the year ended December 31, 1998, recorded as a reduction to net income. Total
expenditures, primarily for testing, software upgrades and consultants, are not
expected to exceed $100. The costs of Year 2000 identification, assessment,
remediation and testing efforts and the dates on which the Company currently
believes it will complete such efforts are based upon management's best
estimates, which were derived using numerous assumptions regarding future
events, including the continued availability of certain resources, third-party
remediation plans and other factors. There can be no assurance that these
estimates will prove to be accurate, and actual results may differ materially
from those currently anticipated. Specific factors that could cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in Year 2000 issues, the ability to identify, assess,
remediate and test all relevant IT systems and imbedded technology, and similar
uncertainties.

                                       13
<PAGE>

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

INCOME TAXES. To reflect the Company's anticipated federal income tax liability,
an expense of $270 and $195 at an effective tax rate of 27% and 29% was
recognized in the nine months ended September 30, 1999 and September 30, 1998,
respectively. The provision for income taxes was $123 and $87 for the third
quarter of 1999 and 1998, respectively. The third quarter expense for 1999 and
1998 equated to an effective tax rate of 28%.

LIQUIDITY AND ASSET/LIABILITY MANAGEMENT

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

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

The Company's asset liquidity is provided by cash and due from banks, federal
funds sold, investments available for sale, managing investment
maturities/prepayments and loan repayments. The Company's ratio of liquid assets
to deposits and short-term borrowings was 37% at September 30, 1999 and 35% at
December 31, 1998. The Company sells excess funds as overnight federal funds
sold to provide an immediate source of liquidity. The Company had Federal funds
sold of $3,703 and $1,699 at September 30, 1999 and December 31, 1998,
respectively.

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.

                                       14
<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. As of
September 30, 1999, the Bank is in the process of establishing a credit line
through the discount window of the Federal Reserve Bank of Richmond as an
additional source of cash flow. 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.

INTEREST RATE RISK

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

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

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

                                       15
<PAGE>

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.

INVESTMENT PORTFOLIO

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

Investment securities at September 30, 1999 were $32,785, an increase of $6,667
or 26% from their level of $26,118 on December 31, 1998. The increase was
attributable to investment of funds available from deposit growth and the
purchase of investment securities with the proceeds of an additional $5,000
advance from the Federal Home Loan Bank of Atlanta during the second quarter.
For more information on the investment portfolio, see Note 3 to the Consolidated
Financial Statements.

LOAN PORTFOLIO

The Company's total loans were $85,599 at September 30, 1999, an increase of
$13,977 or 20% from the $71,622 reported at December 31, 1998. The Company's
ratio of net loans to total deposits stood at 78% at September 30, 1999 and 79%
at December 31, 1998. Management seeks to maintain the ratio of loans to
deposits in a range of 70% to 85%.

The loan portfolio primarily consists of commercial, real estate (including real
estate term loans,

                                       16
<PAGE>

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

COMMERCIAL LOANS. Commercial and industrial loans accounted for 26% of the loan
portfolio as of September 30, 1999 and stood at $22,049 versus $17,794 nine
months earlier. Such loans generally are made to provide operating lines of
credit, to finance the purchase of inventory or equipment, and for other
business purposes. The creditworthiness of the borrower is analyzed and
re-evaluated on a periodic basis. Most commercial loans are collateralized with
business assets such as accounts receivable, inventory and equipment. Even with
substantial collateral such as all the assets of the business and personal
guarantees, commercial lending involves considerable risk of loss in the event
of a business downturn or failure of the business.

COMMERCIAL REAL ESTATE LOANS. Commercial real estate construction and commercial
real estate mortgages represent interim and permanent financing of commercial
properties that are secured by real estate, and were 37% of total loans at
September 30, 1999. Outstanding loans in this category equaled $31,505 and
$22,040 at September 30, 1999 and December 31, 1998, respectively. The Company
prefers to make commercial real estate loans secured by owner-occupied
properties. These borrowers are engaged in business activities other than real
estate, and the primary source of repayment is not solely dependent on
conditions in the real estate market.

RESIDENTIAL REAL ESTATE LOANS. Residential real estate loans are secured by
first deeds of trust on 1-4 family residential properties. This category had
$19,124 in loans (22% of total loans) at September 30, 1999 and $19,140 in such
loans at December 31, 1998. 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 $12,921 (15% of total loans) at September 30, 1999 compared
to $12,648 at December 31, 1998.

NONPERFORMING ASSETS. 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

                                       17
<PAGE>

process of being collected. In this case, the loan will continue to accrue
interest in despite its past due status. Once a month the Officers' Loan
Committee will review all loans on the bank's watch list to verify if any of the
loans should be placed on nonaccrual status.

The Company had nonaccrual loans of $88 and $0 at September 30, 1999 and
December 31, 1998, respectively. If the nonaccrual loans had performed in
accordance with their original terms, additional interest income in the amount
of $2 would have been recorded for the nine months ended September 30, 1999.

DEPOSITS

As of September 30, 1999 total deposits were $108,159, an increase of $18,133 or
20% from their level of $90,026 at December 31, 1998. The increase is largely
attributable to the opening on April 12, 1999 of the Bank's new Salem office and
a successful thirteen-month time deposit campaign.

At September 30, 1999 noninterest-bearing demand deposits were $14,869 or 14% of
total deposits. On December 31, 1998 noninterest bearing demand deposits were
$10,437 or 12% of total deposits. Nonmaturity deposits (noninterest bearing
demand deposits, interest bearing demand deposits, money market accounts and
savings accounts) were $46,422 or 43% of total deposits at September 30, 1999,
compared with $44,056 or 49% of total deposits at December 31, 1998. Total
interest bearing deposits stood at $93,290 at September 30, 1999, an increase of
$13,701 or 17% over their level of $79,589 at December 31, 1998.

The levels and mix of deposits are influenced by such factors as customer
service, interest rates paid, service charges and the convenience of banking
locations. Competition for deposits is intense from other depository
institutions and money market funds, some of which offer interest rates higher
than those paid by the Company. Management attempts to identify and implement
pricing and marketing strategies designed to control the overall cost of
deposits and to maintain a stable deposit mix.

CAPITAL RESOURCES

The Company's financial position at September 30, 1999 reflects liquidity and
capital levels currently adequate to fund anticipated near-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.

Total shareholders' equity was $9,149 at September 30, 1999 compared with $9,157
at December 31, 1998, a decrease of $8 or 0%. The decrease is attributable to a
$746 decrease in accumulated other comprehensive income offset by net income for
the first nine months of $734 and $4 from the issuance of common stock pursuant
to the exercise of stock options. Exclusive of unrealized gains (losses) on
investment securities, shareholders' equity was $9,725 at September 30, 1999 and
$8,987 at December 31, 1998.

                                       18
<PAGE>

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

------------------------------------------------------------------------
Ratio         9/30/99      12/31/98     9/30/98         Minimum
-------       -------      --------     --------        -------
------------------------------------------------------------------------
Tier 1         10.1%        11.3%        11.8%            4%
------------------------------------------------------------------------
Total          11.0%        12.2%        12.7%            8%
------------------------------------------------------------------------
Leverage        7.6%         8.7%         8.6%            4%
------------------------------------------------------------------------

It is anticipated that the Company's capital adequacy ratios will continue to
decline as long as the rate of asset growth continues to outstrip the rate of
internal capital generation through retention of earnings. If this trend
continues, the Company in the future will have to raise additional capital funds
or curtail its rate of asset growth.

RECENT AND FUTURE ACCOUNTING CONSIDERATIONS

In October 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 134, ACCOUNTING FOR
MORTGAGE-BACKED SECURITIES RETAINED AFTER THE SECURITIZATION OF MORTGAGE LOANS
HELD FOR SALE BY A MORTGAGE BANKING ENTERPRISE. SFAS No. 134 amends SFAS No. 65
to conform the subsequent accounting (under SFAS No. 115) for securities
retained after the securitization of mortgage loans by a mortgage banking
enterprise to the accounting applicable to nonmortgage banking enterprises. SFAS
No. 134 is effective for the quarter ended March 31, 1999. Also, in June 1998,
the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES. SFAS No. 133 provides guidance for accounting for all derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. SFAS No. 133 is effective for fiscal
years beginning after June 15, 1999. Neither statement has nor is expected to
have a material effect on the consolidated financial position or results of
operations of the Company.

                                       19
<PAGE>

PART II.  OTHER INFORMATION

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

There were no matters submitted to a vote of security holders during the
quarter.

ITEM 5.  OTHER INFORMATION.

None.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.

(a)      The Company filed the following exhibits for the quarter ended
         September 30, 1999:

         27.  Financial Data Schedule

(b)      The Company filed one report on Form 8-K during the quarter ended
         September 30, 1999. The report, dated July 29, 1999, reported the
         Company's consolidated financial results for the quarter ended June 30,
         1999.

                                       20

<PAGE>

                                   SIGNATURES



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
undersigned thereunto duly authorized.



                                       VALLEY FINANCIAL CORPORATION



November 12, 1999                          /s/ Ellis L. Gutshall
-----------------                         -----------------------------
Date                                           Ellis L. Gutshall, President
                                               and Chief Executive Officer



November 12, 1999                          /s/ A. Wayne Lewis
-----------------                         -----------------------------
Date                                           A. Wayne Lewis, Executive
                                               Vice President and Chief
                                               Financial Officer