<PAGE>

                                  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, 2001

                        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, 2001, 1,213,207 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, 2001

                                      INDEX

<TABLE>
<S>                                                                           <C>
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         23

         Item 5.  Other Information                                           23

         Item 6.  Exhibits and Reports on Form 8-K                            23


SIGNATURES                                                                    24
</TABLE>

                                       2

<PAGE>




         PART 1 - FINANCIAL INFORMATION


Item 1.  Financial Statements.

                          VALLEY FINANCIAL CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                      (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                                                (Unaudited)
                                                                                September 30      December 31
                                                                                    2001             2000
                                                                                ------------      -----------
<S>                                                                             <C>               <C>
Assets
Cash and due from banks                                                         $      5,304      $     3,988
Money market investments:
         Federal funds sold                                                               88                -
         Interest-bearing deposits in other banks                                      1,697              113
                                                                                ------------      -----------
                  Total money market investments                                       1,785              113

Securities available for sale                                                         25,323           36,873
Restricted equity securities                                                           1,327            1,010
Loans:
         Commercial and industrial loans                                              34,200           30,070
         Commercial real estate loans                                                 50,331           43,146
         Real estate construction                                                      9,700            5,879
         Residential real estate loans                                                22,060           18,926
         Loans to individuals                                                         19,878           16,467
                                                                                ------------      -----------
                  Total loans                                                        136,169          114,488
Less unearned income                                                                     (22)             (51)
Less allowance for loan losses                                                        (1,369)          (1,190)
                                                                                ------------      -----------
                  Net loans                                                          134,778          113,247
Premises and equipment                                                                 3,697            3,075
Accrued interest receivable                                                            1,011            1,266
Other assets                                                                             484              592
                                                                                ------------      -----------
                  Total assets                                                  $    173,709      $   160,164
                                                                                ============      ===========

Liabilities and Shareholders' Equity
Deposits:

         Non-interest bearing demand deposits                                   $     20,215      $    17,254
         Interest bearing demand deposits                                              9,368            7,293
         Money market deposits                                                        19,472           19,302
         Other savings deposits                                                        1,981            1,836
         Certificates of deposits *100,000                                            25,383           16,668
         Other time deposits                                                          58,764           67,521
                                                                                ------------      -----------
                  Total deposits                                                     135,183          129,874
                                                                                ------------      -----------
Short-term borrowings                                                                      -            1,762
Securities sold under agreements to repurchase                                         5,387            1,983
Accrued interest payable                                                               1,819            1,523
Other liabilities                                                                        268              367
Federal Home Loan Bank advances                                                       15,000           10,000
                                                                                ------------      -----------
                  Total liabilities                                                  157,657          145,509
                                                                                ------------      -----------
Commitments and other contingencies

Preferredstock, 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 1,213,207 at
         September 30, 2001 and 1,213,207 at December
         31, 2000                                                                     12,299           12,299
Accumulated retained earnings                                                          3,543            2,401
Accumulated other comprehensive income (loss)                                            210              (45)
                                                                                ------------      -----------
                  Total shareholders' equity                                          16,052           14,655
                                                                                ------------      -----------
                  Total liabilities and shareholders' equity                    $    173,709      $   160,164
                                                                                ============      ===========
</TABLE>

* Denotes greater than

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, 2001         January 1, 2000
                                                                        Through                 Through
                                                                   September 30, 2001     September  30, 2000
                                                                   ------------------     -------------------
<S>                                                                <C>                    <C>
Interest Income:
         Interest and fees on loans                                     $8,036                   $6,880
         Interest on money market investments                               30                       47
         Interest on securities - taxable                                1,355                    1,379
         Interest on securities - nontaxable                               274                      293
                                                                        ------                   ------
                  Total interest income                                  9,695                    8,599
                                                                        ------                   ------

Interest Expense:
         Interest on certificates of deposit * 100,000                   1,000                      594
         Interest on other deposits                                      3,527                    3,191
         Interest on Federal Home Loan Bank advances                       615                      417
         Interest on repurchase agreements                                 134                      111
         Interest on borrowed funds                                         44                      197
                                                                        ------                   ------
                  Total interest expense                                 5,320                    4,510
                                                                        ------                   ------

                  Net interest income                                    4,375                    4,089
Provision for loan losses                                                  194                      203
                                                                        ------                   ------

         Net interest income after provision for loan losses             4,181                    3,886
                                                                        ------                   ------

Noninterest income:
         Service charges on deposit accounts                               284                      251
         Other fee income                                                   67                       43
         Securities gains (losses)                                          93                       --
                                                                        ------                   ------
                  Total noninterest income                                 444                      294
                                                                        ------                   ------


Noninterest expense:
         Compensation expense                                            1,578                    1,420
         Occupancy                                                         227                      176
         Data processing and equipment                                     347                      293
         Other expense                                                     883                      776
                                                                        ------                   ------
                  Total noninterest expense                              3,035                    2,665
                                                                        ------                   ------

Net income before taxes                                                  1,590                    1,515
Provision  for income taxes                                                448                      450
                                                                        ------                   ------

Net income                                                              $1,142                   $1,065
                                                                        ======                   ======

Basic earnings per share                                                $ 0.94                   $ 1.05
                                                                        ======                   ======

Diluted earnings per share                                              $ 0.92                   $ 1.00
                                                                        ======                   ======
</TABLE>

* greater than

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, 2001           July 1, 2000
                                                                          Through                Through
                                                                     September 30, 2001     September 30, 2000
                                                                     ------------------     ------------------
<S>                                                                  <C>                    <C>
Interest Income:
         Interest and fees on loans                                       $2,783                  $2,485
         Interest on money market investments                                  9                      22
         Interest on securities - taxable                                    417                     472
         Interest on securities - nontaxable                                  84                      98
                                                                          ------                  ------
                Total interest income                                      3,293                   3,077
                                                                          ------                  ------

Interest Expense:
         Interest on certificates of deposit *100,000                        367                     231
         Interest on other deposits                                        1,098                   1,157
         Interest on Federal Home Loan Bank advances                         217                     152
         Interest on repurchase agreements                                    40                      47
         Interest on borrowed funds                                            4                     113
                                                                          ------                  ------
                Total interest expense                                     1,726                   1,700
                                                                          ------                  ------

                Net interest income                                        1,567                   1,377
Provision for loan losses                                                     74                      40
                                                                          ------                  ------

         Net interest income after provision for loan losses               1,493                   1,337
                                                                          ------                  ------

Noninterest income:
         Service charges on deposit accounts                                 103                      99
         Other fee income                                                     20                      17
         Securities gains (losses)                                            53                      --
                                                                          ------                  ------
                Total noninterest income                                     176                     116
                                                                          ------                  ------

Noninterest expense:
         Compensation expense                                                535                     476
         Occupancy                                                            78                      58
         Data processing and equipment                                       120                      96
         Other expense                                                       282                     262
                                                                          ------                  ------
                Total noninterest expense                                  1,015                     892
                                                                          ------                  ------

Net income before taxes                                                      654                     561

Provision for income taxes                                                   199                     180
                                                                          ------                  ------

Net income                                                                $  455                  $  381
                                                                          ======                  ======

Basic earnings per share                                                  $ 0.38                  $ 0.38
                                                                          ======                  ======

Diluted earnings per share                                                $ 0.37                  $ 0.36
                                                                          ======                  ======
</TABLE>

* Denotes greater than

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, 2001        January 1, 2000
                                                                    Through               Through
                                                               September 30, 2001     September 30, 2000
                                                               ------------------     ------------------
<S>                                                            <C>                    <C>
Cash Flows From Operating Activities:
         Net income                                                 $  1,142              $  1,065
         Adjustments to reconcile net income to net
         cash provided by operating activities:
                  Provision for loan losses                              194                   203
                  Depreciation and amortization of bank
                    premises and equipment                               228                   195
                  Net gains on sale of securities                        (93)                   --
                  Amortization (accretion) of premiums and
                    discounts                                              9                    19
                  Decrease in unearned fees                              (29)                   (1)
                  (Increase) decrease in interest receivable             255                  (171)
                  Increase in other assets                               (49)                  (14)
                  Increase in accrued interest payable                   296                    36
                  Decrease in other liabilities                          (99)                 (365)
                                                                    --------              --------
Net cash provided by operating activities                              1,854                   967
                                                                    --------              --------

Cash Flows From Investing Activities:
         (Increase) decrease in money market investments              (1,672)                6,031
         Purchases of premises and equipment                            (824)                 (560)
         Purchases of securities available-for-sale                  (17,170)               (4,381)
         Purchases of restricted equity securities                      (317)                 (213)
         Proceeds from sales, calls, and maturities of
           securities available-for-sale                              29,190                   825
         Increase in loans                                           (21,696)              (17,402)
                                                                    --------              --------
Net cash used in investing activities                                (12,489)              (15,700)
                                                                    --------              --------

Cash Flows From Financing Activities:
         Increase in time deposits greater than $100,000               8,715                 2,355
         Increase (decrease) in other time deposits                   (8,757)                4,897
         Increase (decrease) in other deposits                         5,351                (3,808)
         Increase (decrease) in short-term borrowings                 (1,762)                6,258
         Proceeds from subordinated capital note                          --                 2,300
         Increase in securities sold under agreements
            to repurchase                                              3,404                 2,967
         Proceeds from Federal Home Loan Bank advances                 5,000                    --
                                                                    --------              --------
Net cash provided by financing activities                             11,951                14,969
                                                                    --------              --------
Net increase in Cash and Due From Banks                                1,316                   236

Cash and Due From Banks at Beginning of Period                         3,988                 4,027
                                                                    --------              --------
Cash and Due From Banks at End of Period                            $  5,304              $  4,263
                                                                    ========              ========

Supplemental disclosure of cash flow information:

         Cash paid during the period for interest                   $  5,024              $  4,474
                                                                    ========              ========
         Cash paid during the period for taxes                      $    478              $    837
                                                                    ========              ========
</TABLE>

See accompanying notes to consolidated financial statements.


                                       6

<PAGE>

                          VALLEY FINANCIAL CORPORATION

                   Notes to Consolidated Financial Statements
                               September 30, 2001
                                   (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 (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 2000 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. As of September 30, 2001, cash in
           the amount of $1.5 million was pledged to the Federal Home Loan Bank
           of Atlanta as collateral on advances.

                                       7

<PAGE>

(3)  Securities

          The carrying values, unrealized gains, unrealized losses and
     approximate fair values of investment securities at September 30, 2001 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, 2001, investments with amortized costs and fair values
     of $10,035 and $10,147, 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.

                                 Investment Portfolio - Category Distribution
                                           (dollars in thousands)

<TABLE>
<CAPTION>
                                              Amortized  Unrealized  Unrealized   Approximate
                                                Costs      Gains       Losses     Fair Values
<S>                                           <C>        <C>         <C>          <C>
U.S. Treasury                                  $   198     $     7     $     0      $   205

U.S. Government agencies                         3,274           5           0        3,279

Mortgage-backed securities                       5,475         113           0        5,588

Collateralized mortgage obligations              9,451         146           0        9,597

States and political subdivisions                5,297          70         (27)       5,340

Corporate debt securities                        1,311           8          (5)       1,314

Restricted equity securities                     1,327           0           0        1,327
                                               -------     -------     -------      -------

     Total securities available for sale       $26,333     $   349     ($   32)     $26,650
                                               =======     =======     =======      =======
</TABLE>

(4)  Allowance for Loan Losses

          The following table summarizes the loan loss experience for the
     nine-month periods ended September 30, 2001 and 2000.

                            Allowance for Loan Losses
                             (dollars in thousands)

                                              2001              2000
                                             ------            ------
          Balance at January 1               $1,190            $  910
          Provision for loan losses             194               203
          Recoveries                              0                 0
          Charged off loans
             Commercial                          (7)                0
             Credit Cards                        (8)               (1)
                                             ------            ------
          Balance at September 30            $1,369            $1,112
                                             ======            ======

                                       8

<PAGE>

(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 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

                       2001                  1,213,207    1,240,789
                                             =========    =========

                       2000                  1,013,207    1,060,870
                                             =========    =========

     Nine months ending September 30:

                       2001                  1,213,207    1,245,847
                                             =========    =========

                       2000                  1,013,207    1,060,560
                                             =========    =========


(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 (loss). For the nine months ended September 30,
     2001 and 2000, total comprehensive income was $1,397 and

                                       9

<PAGE>

          $1,395, respectively. For the three months ended September 30, 2001
          and 2000, total comprehensive income was $596 and $716, respectively.

               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
          (loss), net of income taxes for the nine and three month periods ended
          September 30, 2001 and 2000.

<TABLE>
<CAPTION>
                                                                    For the Nine Months Ended      For the Nine Months Ended
                                                                        September 30, 2001             September 30, 2000
                                                                        ------------------             ------------------
<S>                                                                 <C>                            <C>
Net unrealized gains (losses) on securities available-for-sale:
  Net unrealized holding gains (losses) during the year                 $       479                    $        500
    Less reclassification adjustments for gains included
      in net income                                                             (61)                              -
  Income tax benefit (expense)                                                 (163)                           (170)
                                                                              -----                           -----
        Other comprehensive income (loss), net of income taxes          $       255                    $        330
                                                                              =====                           =====

<CAPTION>
                                                                    For the Three Months Ended     For the Three Months Ended
                                                                        September 30, 2001             September 30, 2000
                                                                        ------------------             -----------------
<S>                                                                 <C>                            <C>
Net unrealized gains (losses) on securities available-for-sale:
  Net unrealized holding gains (losses) during the quarter              $       266                    $        507
    Less reclassification adjustments for gains included
      in net income                                                             (35)                              -
  Income tax benefit (expense)                                                  (90)                           (172)
                                                                              -----                           -----
        Other comprehensive income (loss), net of income taxes          $       141                    $        335
                                                                              =====                           =====
</TABLE>

Item 2. Management's Discussion and Analysis.

     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, 2001 and 2000. 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, 2001 were $173.7 million, up 8.4% from $160.2
million at December 31, 2000. The principal components of the Company's assets
at the end of the period were $26.7 million in securities available-for-sale,
including restricted equity securities, and $136.2 million in gross loans.

                                       10

<PAGE>

         Total liabilities at September 30, 2001 were $157.7 million, up 8.4%
from $145.5 million at December 31, 2000 with the increase represented by a $5.3
million growth in deposits, a $3.4 million growth in securities sold under
agreements to repurchase, and a $5.0 million advance from the Federal Home Loan
Bank of Atlanta finalized in the first quarter, partially offset by a $1.8
million decrease in short-term borrowings.

         Total shareholders' equity at September 30, 2001 was $16.1 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,
$10,000 in proceeds from the exercise of stock options, increased by accumulated
retained earnings of $3.5 million and $210,000 of net unrealized gains on
securities available-for-sale, net of related deferred tax liability. At
December 31, 2000 total shareholders' equity was $14.7 million. Exclusive of
unrealized gains (losses) on investment securities, shareholders' equity was
$15.8 million at September 30, 2001 and $14.7 million at December 31, 2000.

         The Company had net income of $1.1 million for the nine months ended
September 30, 2001 compared with $1.1 million recorded for the nine months ended
September 30, 2000, a non-existent increase. Net income for the three months
ended September 30, 2001 was $455,000, a 19.4% increase over the $381,000
recorded for the third quarter of 2000. A shrinking net interest margin is a
primary factor in the essentially-flat earnings for the first nine months of
2001 as compared to the same period in 2000. Also contributing to flat earnings
year-to-date was an increase in noninterest income, offset by increases in
noninterest expense in all categories.

         Profitability as measured by the Company's return on average assets
("ROA") was .91% for the nine months ended September 30, 2001 compared to .98%
for the same period in 2000. ROA for the second quarter of 2001 was 1.05% versus
1.00% in the third quarter of 2000. Return on average equity ("ROE") was 10.00%
for the nine months ended September 30, 2001 compared to 13.41% for the same
period in 2000. ROE for the third quarter of the year was 11.59% in 2001 and
13.77% in 2000. The calculation of ROE excludes the effect of any unrealized
gains or losses on investment securities. Return on equity was reduced by the
200,000 additional shares of common stock issued in the secondary offering
completed in November 2000.


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 $4.4 million for the nine months ended
September 30, 2001 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 2001 increased 7.3% from $4.1
million for the same period in 2000. The net interest margin on a fully taxable
equivalent ("FTE ") basis was 3.75% for the first nine months of 2001, a
decrease of 28 basis points from the 4.03%

                                       11

<PAGE>

reported for the same period in 2000. During the first nine months of 2001, the
Federal Reserve has cut rates by 4.00%. Approximately one third of the Bank's
loan portfolio is comprised by adjustable rate loans which repriced immediately
in response to the Federal Reserve action, while the Bank's certificates of
deposits, the largest category of deposits, are fixed rate and locked in for a
year or longer. As a result, the Company's net interest margin has declined,
adversely impacting the net interest income and net income presented for the
year ended September 30, 2001. Almost all of the Bank's highest-cost time
deposits will reprice within the fourth quarter, which will improve the margin
significantly.

          For the three months ended September 30, 2001 net interest income was
$1.6 million and the FTE net interest margin was 3.88%. Net interest income was
$1.4 million and the net interest margin was 3.84% for the third quarter of
2000.

Noninterest Income

          Noninterest income of $444,000 in the nine months ended September 30,
2001 consisted of service charges and fees on accounts, other fee income and
securities gains and losses, and represented an increase of $150,000 or 51.0%
over the $294,000 reported for the same period one year earlier. Securities
gains and losses totaled $93,000 for the nine months ended September 30, 2001
and is comprised of $73,000 from sales of securities and a $20,000 gain
generated from the pushdown of securities from the parent company to the Bank at
fair market value in a capital injection effective April 20, 2001. For the three
months ended September 30, 2001 noninterest income was $176,000 an increase of
$60,000 or 51.7% over the $116,000 reported for the third quarter of 2000.
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 2001 was $3.0
million, an increase of $300,000 or 11.1% over the $2.7 million reported for the
same period in 2000. Two large contributors to the increase in noninterest
expense are expenses associated with the opening of the Bank's fifth
full-service branch on May 7, 2001 and $35,000 in a rezoning request denied in
connection with an attempted acquisition of a parcel of property for a future
branch site. Noninterest expense for the quarter ended September 30, 2001 was
$1.0 million, an increase of $123,000 or 13.8% over the third quarter of 2000.
Noninterest expenses are expected to increase in future years as a direct result
of business growth and expansion.

Income Taxes

          To reflect the Company's anticipated federal income tax liability, an
expense of $448,000 and $450,000 at an effective tax rate of 28.2% and 29.7% was
recognized in the nine months ended September 30, 2001 and September 30, 2000,
respectively. The provision for income taxes was $199,000 and $180,000 for the
third quarter of 2001 and 2000, respectively. The third quarter expense for 2001
and 2000 equated to an effective tax rate of 30.4% and 32.1%, respectively.

                                       12

<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 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. The entire investment portfolio is
classified as available-for-sale in order to provide maximum liquidity for
funding needs.

         Investment securities, including restricted equity securities, at
September 30, 2001 were $26.7 million, a decrease of $11.2 million or 29.6% from
their level of $37.9 million on December 31, 2000. The decrease of $11.2 million
is primarily due to principal payments in the amount of $4.0 million and excess
proceeds from called and sold securities, which were not reinvested in the
securities portfolio, of approximately $7.7 million. For more information on the
investment portfolio, see Note 3 to the Consolidated Financial Statements.

Loan Portfolio

         The Company's total loans were $136.2 million at September 30, 2001, an
increase of $21.7 million or 19.0% from the $114.5 million reported at December
31, 2000. The Company's ratio of total loans to total deposits stood at 100.7%
at September 30, 2001 and 88.1% at December 31, 2000. The ratio clearly reflects
stronger loan growth than deposit growth during the first nine months of 2001.
Management seeks to maintain the ratio of loans to deposits in a range of 70% to
85%.

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

         The following table summarizes the loan portfolio by category as of the
nine-month periods ended September 30, 2001 and 2000 and the year ended December
31, 2000.

                                       13

<PAGE>

                             Loan Portfolio Summary
                             (dollars in thousands)


                                September 30,      December 31,    September 30,
                                   2001               2000            2000
                                   ----               ----            ----
Commercial and industrial       $ 34,200          $ 30,070          $ 27,383
Commercial real estate            50,331            43,146            38,139
Real estate construction           9,700             5,879             8,075
Residential real estate           22,060            18,926            18,878
Loans to individuals              19,878            16,467            16,316
                                --------          --------          --------
Total loans                     $136,169          $114,488          $108,791
                                ========          ========          ========


Loan Category Analysis

     Commercial Loans. Commercial and industrial loans accounted for 25.1% of
the loan portfolio as of September 30, 2001 and stood at $34.2 million versus
$30.1 million 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 credit worthiness 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 37.0% of total
loans at September 30, 2001. Outstanding loans in this category equaled $50.3
million and $43.1 million at September 30, 2001 and December 31, 2000,
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.

     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
$9.7 million (7.1% of total loans) at September 30, 2001 as compared to $5.9
million at December 31, 2000.

     Residential Real Estate Loans. Residential real estate loans are secured by
first deeds of trust on 1-4 family residential properties. This category had
$22.1 million in loans (16.2% of total loans) at September 30, 2001 and $18.9
million in such loans at December 31, 2000. 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.

                                       14

<PAGE>

     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 $19.9 million (14.6% of total loans) at September 30, 2001
compared to $16.5 million at December 31, 2000.

Summary of Allowance for Loan Losses

     Certain credit risks are inherent in making loans. The Company prudently
assesses these risks and attempts to manage them effectively. Repayment risks
are reduced 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 adequate to absorb
probable losses. Some of the factors which management considers in determining
the appropriate level of the allowance for loan 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 our market area. Bank regulators also
periodically review the loan portfolio and other assets to assess their quality.
The provision for loan loses 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. The Company believes the allowance for loan losses is
adequate to provide for any losses in the loan portfolio.

     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.

     A provision for loan losses of $194,000 was provided during the nine months
ended September 30, 2001, a decrease of $9,000 or 4.4% over the same period in
2000, in recognition of management's estimate of inherent risks associated with
lending activities. The allowance for loan losses was $1.4 million as of
September 30, 2001 and represented approximately 1.0% of net loans outstanding
versus 1.1% of net loans at December 31, 2000 (see Note 4 to the Consolidated
Financial Statements). A total of $30,000 in specific reserves, on one
commercial loan placed on nonaccrual status in April 1999 is included in the
balance of the allowance for loan losses as of September 30, 2001. Of the
$30,000 specific reserve, $20,000 was accrued during the second quarter of 2000.
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.

                                       15

<PAGE>

Nonperforming Assets and Impaired 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. The entire balance of
restructured loans as disclosed below is comprised of one loan customer. Due to
a good loan to value ratio, a timely and proper review of credit quality and
restructuring of the loans, the Company believes at the present time that all
amounts of principal and interest will be collected. However, the Company cannot
give assurance that unforeseen economic conditions or other circumstances will
not result in impairment.

     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 will review 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 September 30, 2001, December 31, 2000 and September
30, 2000 are presented in the following table.

                              Nonperforming Assets
                             (dollars in thousands)


<TABLE>
<CAPTION>
                                                 September 30,   December 31,  September 30,
                                                    2001             2000         2000
                                                    ----             ----         ----
<S>                                              <C>                <C>          <C>
Nonaccrual loans                                   $   75           $  102       $  102
Loans past due 90 days or more                        989               54          153
Restructured loans                                    403              230          299
                                                   ------           ------       ------
Total nonperforming loans                           1,467              386          554
                                                   ------           ------       ------

Foreclosed, repossessed and idled properties            -                -            -
                                                   ------           ------       ------
Total nonperforming assets                         $1,467           $  386       $  554
                                                   ======           ======       ======
</TABLE>

     If the nonaccrual loans disclosed above had performed in accordance with
their original terms, additional interest income in the amount of $5,000,
$9,000, and $8,000, respectively would have been recorded for the nine month
period ended September 30, 2001, the year ended December 31, 2000 and the nine
month period ended September 30, 2000.

                                       16

<PAGE>

     The total recorded investment in impaired loans was $1.5 million, $851,000
and $554,000, respectively for the nine month period ended September 30, 2001,
the year ended December 31, 2000 and the nine-month period ended September 30,
2000. The loan loss allowance related to impaired loans was $30,000, $55,000 and
$30,000, respectively for the above-referenced time periods.

Deposits

     As of September 30, 2001 total deposits were $135.2 million, an increase of
$5.3 million or 4.1% from their level of $129.9 million at December 31, 2000.
The major categories of increases were non-interest bearing demand deposits, NOW
accounts, money market accounts and savings accounts in the amounts of $3.0
million, $2.1 million, $170,000 and $145,000, respectively.

     At September 30, 2001 noninterest-bearing demand deposits were $20.2
million or 14.9% of total deposits. On December 31, 2000 noninterest-bearing
demand deposits were $17.3 million or 13.3% of total deposits. Nonmaturity
deposits (noninterest bearing demand deposits, interest bearing demand deposits,
money market accounts and savings accounts) were $51.0 million or 37.7% of total
deposits at September 30, 2001, compared with $45.7 million or 35.2% of total
deposits at December 31, 2000. Total interest bearing deposits stood at $115.0
million at September 30, 2001, an increase of $2.4 million or 2.1% over their
level of $112.6 million at December 31, 2000.

     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.

Short-Term Borrowings

     The Company placed in service a commercial sweep account program in third
quarter 1999. The balance in the program grew by $3.4 million from its level of
$2.0 million at December 31, 2000 to a total of $5.4 million as of September 30,
2001. 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 a 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.

     The Company's short-term borrowings decreased by $1.8 million during the
first nine months of 2001 to a balance of $0. See the liquidity section of this
discussion and analysis for further information on the preceding borrowings.

                                       17

<PAGE>

Other Debt

     The Company has outstanding debt with the Federal Home Loan Bank of Atlanta
in the amount of $15.0 million, represented by three advances in the amount of
$5.0 million each. The oldest advance was drawn on December 2, 1999 with a
maturity date of December 2, 2009. Interest payments at a fixed rate of 5.46%
began on March 2, 2000 and will continue quarterly on the second day of each
anniversary month. The Federal Home Loan Bank of Atlanta has the option to
convert in whole this transaction to a three-month LIBOR-based floating rate
advance effective December 4, 2000. The second outstanding advance was drawn on
May 24, 2000 with a maturity date of May 24, 2010. Interest payments at a fixed
rate of 6.49% began on August 24, 2000 and will continue quarterly on the
twenty-fourth day of each anniversary month. The Federal Home Loan Bank of
Atlanta also has the option to convert this transaction in whole to a
three-month LIBOR-based floating rate advance effective May 24, 2001. The newest
outstanding advance was drawn on February 9, 2001 with a maturity date of
February 9, 2011. Interest payments at a fixed rate of 4.97% began on May 9,
2001 and will continue quarterly on the ninth day of each anniversary month. The
Federal Home Loan Bank of Atlanta also has the option to convert in whole this
transaction to a three-month LIBOR-based floating rate advance effective
February 9, 2004.

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

                                       18

<PAGE>

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.

Capital Adequacy

     The Company's financial position at September 30, 2001 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 $16.1 million at September 30, 2001 compared
with $14.7 million at December 31, 2000, an increase of $1.4 million or 9.5%.
The increase is attributable to net income for the first nine months of $1.1
million and a $255,000 increase in accumulated other comprehensive income.
Exclusive of unrealized gains (losses) on investment securities, shareholders'
equity was $15.8 million at September 30, 2001 and $14.7 million at December 31,
2000.

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

                                 Capital Ratios

  Ratio          9/30/01        12/31/00          9/30/00           Minimum
  -----          -------        --------          -------           -------

  Tier 1          11.0%          11.7%             9.3%               4%

  Total           11.9%          12.6%             12.2%              8%

  Leverage         9.2%           9.3%             7.3%               4%


Liquidity

     Asset/liability management activities arigned 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.

                                       19

<PAGE>

     The Company's asset liquidity is provided by cash and due from banks,
federal funds sold, investments available for sale, and through management of
investment maturities/prepayments and loan repayments. The Company's ratio of
liquid assets to deposits and short-term borrowings was 24.0% at September 30,
2001 and 31.4% at December 31, 2000. The Company sells excess funds as overnight
federal funds sold to provide an immediate source of liquidity. The Company had
federal funds sold of $88,000 and $0 at September 30, 2001 and December 31,
2000, respectively. During the first nine months of 2001, deposit growth and
securities sold under agreements to repurchase growth in the amounts of $5.3
million and $3.4 million, or a total of $8.7 million, have not kept pace with
loan growth in the amount of $21.7 million. In order to fund the Company's loan
growth, an additional Federal Home Loan Bank advance in the amount of $5.0
million was drawn during the first quarter of 2001. Additional funding for loan
growth was obtained by the year-to-date non-reinvestment of $11.7 million in
security proceeds from principal paydowns, sales, calls and maturities in the
security portfolio. Of the non-reinvested security proceeds amount, $88,000 was
sold as federal funds and $1.7 million was invested in an interest-bearing
deposit account as of September 30, 2001.

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

     In addition to asset liquidity, the Company would have liquidity available
to it through increasing certain categories of liabilities. It could purchase
overnight federal funds, borrow from correspondent banks, sell securities under
a repurchase agreement or obtain advances from the Federal Home Loan Bank. The
Bank has established 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.

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.

                                       20

<PAGE>

Recent and Future Accounting Considerations

     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.

     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

                                       21

<PAGE>

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 which
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 shall be 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.

                                       22

<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, 2001:

       None.

(b)    The Company filed one report on Form 8-K during the quarter ended
       September 30, 2001. The report, dated July 23, 2001, reported the
       Company's consolidated financial results for the quarter ended June 30,
       2001.

                                       23

<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 14, 2001                           /s/ Ellis L. Gutshall
---------------------                   ---------------------------------------
Date                                            Ellis L. Gutshall, President
                                                and Chief Executive Officer



November 14, 2001                           /s/ A. Wayne Lewis
---------------------                   ---------------------------------------
Date                                            A. Wayne Lewis, Executive
                                                Vice President and Chief
                                                Financial Officer

                                       24