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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the Quarterly Period Ended September 30, 2007

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from  to

Commission File Number: 000-28342



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VALLEY FINANCIAL CORPORATION



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|                         |  |                                     
|------------------------ |  | ------------------------------------
|VIRGINIA                 |  | 54-1702380                          
|(State of Incorporation) |  | (I.R.S. Employer Identification No.)

36 Church Avenue, S.W.

Roanoke, Virginia 24011

(Address of principal executive offices)

(540) 342-2265

(Issuers telephone number, including area code)



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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 ̈

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated and large accelerated filer in Rule 12b-2 of the
Exchange Act. (Check one):

Large accelerated filer ̈Accelerated filer ̈Non-accelerated
filer  x

Indicate by checkmark whether the registrant is a shell company (as defined by Rule
12b-2 of the Exchange Act.)    Yes ̈No  x

Transitional small business disclosure format:    Yes ̈No  x.

At November 12, 2007, 4,593,581 shares of common stock, no par value, of the registrant were outstanding.



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VALLEY FINANCIAL CORPORATION

FORM 10-Q

September 30, 2007

TABLE OF CONTENTS



|               |  |                       |  |                                                             |  |   
|-------------- |  | --------------------- |  | ----------------------------------------------------------- |  | --
|               |  |                      
|Part I.        |  | FINANCIAL INFORMATION |  |                                                            
|               |  |                       | 
|               |  | Item 1.               |  | Financial Statements                                        |  |   
|               |  |                       | 
|               |  |                       |  | Consolidated Balance Sheets                                 |  | 4 
|               |  |                       |  | Consolidated Statements of Income                           |  | 5 
|               |  |                       |  | Consolidated Statements of Cash Flows                       |  | 6 
|               |  |                       |  | Notes to Consolidated Financial Statements                  |  | 7 
|               |  |                       | 
|               |  | Item 2.               |  | Management's Discussion and Analysis                        |  | 17
|               |  |                       | 
|               |  | Item 3.               |  | Quantitative and Qualitative Disclosures about Market Risk  |  | 34
|               |  |                       | 
|               |  | Item 4T.              |  | Controls and Procedures                                     |  | 35
|               |  |                      
|Part II.       |  | OTHER INFORMATION     |  |                                                            
|               |  |                       | 
|               |  | Item 1.               |  | Legal Proceedings                                           |  | 35
|               |  |                       | 
|               |  | Item 1A.              |  | Risk Factors                                                |  | 35
|               |  |                       | 
|               |  | Item 2.               |  | Unregistered Sales of Equity Securities and Use of Proceeds |  | 36
|               |  |                       | 
|               |  | Item 3.               |  | Defaults Upon Senior Securities                             |  | 36
|               |  |                       | 
|               |  | Item 4.               |  | Submission of Matters to a Vote of Security Holders         |  | 36
|               |  |                       | 
|               |  | Item 5.               |  | Other Information                                           |  | 37
|               |  |                       | 
|               |  | Item 6.               |  | Index to Exhibits                                           |  | 37
|               | 
|SIGNATURES     |  | 40                   
|               | 
|CERTIFICATIONS |  | 41                   



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Cautionary Statement Regarding Forward-Looking Statements

This report contains statements concerning the Companys expectations, plans, objectives, future financial performance, and other statements that are
not historical facts. These statements may constitute forward-looking statements as defined by federal securities laws. These statements may address issues that involve estimates and assumptions made by management and risks and
uncertainties. Actual results could differ materially from historical results or those anticipated by such statements. Factors that could have a material adverse effect on the operations and future prospects of the Company include, but are not
limited to, changes in:



| | 1. | interest rates
| | -- | --------------



| | 2. | general economic conditions, either nationally or regionally
| | -- | ------------------------------------------------------------



| | 3. | the legislative/regulatory climate
| | -- | ----------------------------------



| | 4. | monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board
| | -- | --------------------------------------------------------------------------------------------------------------------------



| | 5. | demand for loan products
| | -- | ------------------------



| | 6. | deposit flows
| | -- | -------------



| | 7. | competitive pressures among depository and other financial institutions
| | -- | -----------------------------------------------------------------------



| | 8. | demand for financial services in our market area
| | -- | ------------------------------------------------



| | 9. | technology and
| | -- | --------------



| | 10. | accounting principles, policies and guidelines.
| | --- | -----------------------------------------------

These risks and
uncertainties should be considered in evaluating the forward-looking statements contained herein. We caution readers not to place undue reliance on those statements, which speak only as of the date of this report.



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##### Table of Contents

PART 1  FINANCIAL INFORMATION

|Item 1. | Financial Statements.
|------- | ---------------------

VALLEY FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)



|                                                                                                                                                                  |  |                    |         |   |                   |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------- | -
|                                                                                                                                                                  |  | (Unaudited)9/30/07 |         |   | (Audited)12/31/06 |  
|Assets                                                                                                                                                            |  |                    |         |   |                   |   |         |  
|Cash and due from banks                                                                                                                                           |  | $                  | 10,712  |   |                   | $ | 9,778   |  
|Interest-bearing deposits in banks                                                                                                                                |  |                    | 94      |   |                   |   | 91      |  
|Federal funds sold                                                                                                                                                |  |                    |        |   |                   |   | 16,630  |  
|Securities available-for-sale                                                                                                                                     |  |                    | 57,813  |   |                   |   | 48,405  |  
|Securities held-to-maturity (approximate market values of $17,607 at September 30, 2007 and $19,940 at December 31,
2006)                                         |  |                    | 17,709  |   |                   |   | 20,133  |  
|Restricted equity securities                                                                                                                                      |  |                    | 4,738   |   |                   |   | 5,079   |  
|Loans, net of allowance for loan losses of $5,368 at September 30, 2007 and $5,658 at December 31, 2006                                                           |  |                    | 482,483 |   |                   |   | 465,394 |  
|Premises and equipment, net                                                                                                                                       |  |                    | 6,500   |   |                   |   | 6,873   |  
|Bank owned life insurance                                                                                                                                         |  |                    | 11,505  |   |                   |   | 11,117  |  
|Accrued interest receivable                                                                                                                                       |  |                    | 3,392   |   |                   |   | 2,954   |  
|Other assets                                                                                                                                                      |  |                    | 4,646   |   |                   |   | 5,482   |  
|                                                                                                                                                                  |  |                    |         |   |                   |   |         |  
|Total assets                                                                                                                                                      |  | $                  | 599,592 |   |                   | $ | 591,936 |  
|                                                                                                                                                                  |  |                    |         |   |                   |   |         |  
|                                                                                                                                                                  |  |                   
|Liabilities and Shareholders Equity                                                                                                                              |  |                    |         |   |                   |   |         |  
|Liabilities:                                                                                                                                                      |  |                    |         |   |                   |   |         |  
|Noninterest-bearing deposits                                                                                                                                      |  | $                  | 15,398  |   |                   | $ | 18,663  |  
|Interest-bearing deposits                                                                                                                                         |  |                    | 418,581 |   |                   |   | 422,826 |  
|                                                                                                                                                                  |  |                    |         |   |                   |   |         |  
|Total deposits                                                                                                                                                    |  |                    | 433,979 |   |                   |   | 441,489 |  
|                                                                                                                                                                  |  |                   
|Federal funds purchased and securities sold under agreements to repurchase                                                                                        |  |                    | 42,070  |   |                   |   | 21,635  |  
|Short-term borrowings                                                                                                                                             |  |                    | 23,000  |   |                   |   | 25,000  |  
|Long-term borrowings                                                                                                                                              |  |                    | 40,000  |   |                   |   | 48,000  |  
|Guaranteed preferred beneficial interests in the Companys junior subordinated debentures                                                                         |  |                    | 16,496  |   |                   |   | 16,496  |  
|Accrued interest payable                                                                                                                                          |  |                    | 4,594   |   |                   |   | 3,133   |  
|Other liabilities                                                                                                                                                 |  |                    | 2,129   |   |                   |   | 2,782   |  
|                                                                                                                                                                  |  |                    |         |   |                   |   |         |  
|Total liabilities                                                                                                                                                 |  |                    | 562,268 |   |                   |   | 558,535 |  
|                                                                                                                                                                  |  |                   
|Commitments and other contingencies                                                                                                                               |  |                    |        |   |                   |   |        |  
|                                                                                                                                                                  |  |                   
|Shareholders equity:                                                                                                                                             |  |                    |         |   |                   |   |         |  
|Preferred stock, no par value. Authorized 10,000,000 shares; none issued and outstanding                                                                          |  |                    |        |   |                   |   |        |  
|Common stock, no par value. Authorized 10,000,000 shares; issued and outstanding 4,368,581 at September 30, 2007 and 4,112,074 at
December 31, 2006, respectively |  |                    | 19,493  |   |                   |   | 17,212  |  
|Retained earnings                                                                                                                                                 |  |                    | 18,198  |   |                   |   | 16,488  |  
|Accumulated other comprehensive income (loss)                                                                                                                     |  |                    | (367    | ) |                   |   | (299    | )
|                                                                                                                                                                  |  |                    |         |   |                   |   |         |  
|Total shareholders equity                                                                                                                                        |  |                    | 37,324  |   |                   |   | 33,401  |  
|                                                                                                                                                                  |  |                    |         |   |                   |   |         |  
|Total liabilities and shareholders equity                                                                                                                        |  | $                  | 599,592 |   |                   | $ | 591,936 |  
|                                                                                                                                                                  |  |                    |         |   |                   |   |         |  

See accompanying notes to consolidated financial statements.



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VALLEY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except
share and per share data)



|                                                                                                      |  |                |           |   |                |   |           |         |  |   |           |   |  |   |           |  
|----------------------------------------------------------------------------------------------------- |  | -------------- | --------- | - | -------------- | - | --------- | ------- |  | - | --------- | - |  | - | --------- | -
|                                                                                                      |  | 3 Months Ended |           |   | 9 Months Ended |  
|                                                                                                      |  | 9/30/07        |           |   | 9/30/06        |   |           | 9/30/07 |  |   | 9/30/06   |  
|Interest Income:                                                                                      |  |                |           |   |                |   |           |         |  |   |           |   |  |   |           |  
|Interest and fees on loans                                                                            |  | $              | 8,994     |   |                | $ | 8,322     |         |  | $ | 26,311    |   |  | $ | 23,305    |  
|Interest on securities - taxable                                                                      |  |                | 854,      |   |                |   | 642       |         |  |   | 2,409     |   |  |   | 1,644     |  
|Interest on securities - nontaxable                                                                   |  |                | 109       |   |                |   | 136       |         |  |   | 362       |   |  |   | 411       |  
|Interest on deposits in banks                                                                         |  |                | 27        |   |                |   | 9         |         |  |   | 136       |   |  |   | 16        |  
|                                                                                                      |  |                |           |   |                |   |           |         |  |   |           |   |  |   |           |  
|Total interest income                                                                                 |  |                | 9,984     |   |                |   | 9,109     |         |  |   | 29,218    |   |  |   | 25,376    |  
|                                                                                                      |  |                |           |   |                |   |           |         |  |   |           |   |  |   |           |  
|Interest Expense:                                                                                     |  |                |           |   |                |   |           |         |  |   |           |   |  |   |           |  
|Interest on deposits                                                                                  |  |                | 4,476     |   |                |   | 3,841     |         |  |   | 13,074    |   |  |   | 10,034    |  
|Interest on short-term borrowings                                                                     |  |                | 371       |   |                |   | 239       |         |  |   | 964       |   |  |   | 871       |  
|Interest on long-term borrowings                                                                      |  |                | 485       |   |                |   | 639       |         |  |   | 1,617     |   |  |   | 1,429     |  
|Interest on guaranteed preferred beneficial interests in the Companys junior subordinated debentures |  |                | 302       |   |                |   | 209       |         |  |   | 892       |   |  |   | 588       |  
|Interest on federal funds purchased and securities sold under agreements to repurchase                |  |                | 390       |   |                |   | 212       |         |  |   | 1,026     |   |  |   | 757       |  
|                                                                                                      |  |                |           |   |                |   |           |         |  |   |           |   |  |   |           |  
|Total interest expense                                                                                |  |                | 6,024     |   |                |   | 5,140     |         |  |   | 17,573    |   |  |   | 13,679    |  
|                                                                                                      |  |                |           |   |                |   |           |         |  |   |           |   |  |   |           |  
|Net interest income                                                                                   |  |                | 3,960     |   |                |   | 3,969     |         |  |   | 11,645    |   |  |   | 11,697    |  
|                                                                                                      |  |                |           |  
|Provision for loan losses                                                                             |  |                | 482       |   |                |   | 387       |         |  |   | 1,324     |   |  |   | 1,093     |  
|                                                                                                      |  |                |           |   |                |   |           |         |  |   |           |   |  |   |           |  
|Net interest income after provision for loan losses                                                   |  |                | 3,478     |   |                |   | 3,582     |         |  |   | 10,321    |   |  |   | 10,604    |  
|                                                                                                      |  |                |           |   |                |   |           |         |  |   |           |   |  |   |           |  
|Noninterest Income:                                                                                   |  |                |           |   |                |   |           |         |  |   |           |   |  |   |           |  
|Service charges on deposit accounts                                                                   |  |                | 284       |   |                |   | 261       |         |  |   | 889       |   |  |   | 708       |  
|Realized gains/(loss) on sales of securities                                                          |  |                | 0         |   |                |   | (2        | )       |  |   | (50       | ) |  |   | (3        | )
|Realized gains on sale of derivative instruments                                                      |  |                | 0         |   |                |   | 0         |         |  |   | 51        |   |  |   |          |  
|Income earned on bank owned life insurance                                                            |  |                | 131       |   |                |   | 129       |         |  |   | 388       |   |  |   | 373       |  
|Other income on real estate loans                                                                     |  |                | 20        |   |                |   | 38        |         |  |   | 53        |   |  |   | 96        |  
|Gain/(loss) on disposal of equipment                                                                  |  |                | (4        | ) |                |   | 8         |         |  |   | (4        | ) |  |   | 8         |  
|Other income                                                                                          |  |                | 138       |   |                |   | 248       |         |  |   | 442       |   |  |   | 482       |  
|                                                                                                      |  |                |           |   |                |   |           |         |  |   |           |   |  |   |           |  
|Total noninterest income                                                                              |  |                | 569       |   |                |   | 682       |         |  |   | 1,769     |   |  |   | 1,664     |  
|                                                                                                      |  |                |           |   |                |   |           |         |  |   |           |   |  |   |           |  
|Noninterest Expense:                                                                                  |  |                |           |   |                |   |           |         |  |   |           |   |  |   |           |  
|Compensation expense                                                                                  |  |                | 1,592     |   |                |   | 1,535     |         |  |   | 4,875     |   |  |   | 4,551     |  
|Occupancy expense                                                                                     |  |                | 180       |   |                |   | 181       |         |  |   | 560       |   |  |   | 508       |  
|Equipment expense                                                                                     |  |                | 131       |   |                |   | 138       |         |  |   | 409       |   |  |   | 402       |  
|Data processing expense                                                                               |  |                | 182       |   |                |   | 149       |         |  |   | 493       |   |  |   | 456       |  
|Advertising and marketing expense                                                                     |  |                | 65        |   |                |   | 143       |         |  |   | 221       |   |  |   | 298       |  
|Audit fees                                                                                            |  |                | 85        |   |                |   | 63        |         |  |   | 273       |   |  |   | 209       |  
|Franchise and purchased tax credit expense                                                            |  |                | 85        |   |                |   | 68        |         |  |   | 689       |   |  |   | 202       |  
|Business manager expense                                                                              |  |                | 64        |   |                |   | 70        |         |  |   | 215       |   |  |   | 198       |  
|Deposit expense                                                                                       |  |                | 56        |   |                |   | 58        |         |  |   | 184       |   |  |   | 211       |  
|Loan expenses                                                                                         |  |                | 50        |   |                |   | 51        |         |  |   | 126       |   |  |   | 162       |  
|Computer software expense                                                                             |  |                | 94        |   |                |   | 108       |         |  |   | 260       |   |  |   | 296       |  
|Other expense                                                                                         |  |                | 510       |   |                |   | 322       |         |  |   | 1,471     |   |  |   | 966       |  
|                                                                                                      |  |                |           |   |                |   |           |         |  |   |           |   |  |   |           |  
|Total noninterest expense                                                                             |  |                | 3,094     |   |                |   | 2,886     |         |  |   | 9,776     |   |  |   | 8,459     |  
|                                                                                                      |  |                |           |   |                |   |           |         |  |   |           |   |  |   |           |  
|Income before income taxes                                                                            |  |                | 953       |   |                |   | 1,378     |         |  |   | 2,314     |   |  |   | 3,809     |  
|                                                                                                      |  |                |           |   |                |   |           |         |  |   |           |   |  |   |           |  
|Income tax expense                                                                                    |  |                | 343       |   |                |   | 392       |         |  |   | 311       |   |  |   | 1,083     |  
|                                                                                                      |  |                |           |   |                |   |           |         |  |   |           |   |  |   |           |  
|Net income                                                                                            |  | $              | 610       |   |                | $ | 986       |         |  | $ | 2,003     |   |  | $ | 2,726     |  
|                                                                                                      |  |                |           |   |                |   |           |         |  |   |           |   |  |   |           |  
|Earnings per share                                                                                    |  |                |           |   |                |   |           |         |  |   |           |   |  |   |           |  
|Basic earnings per share                                                                              |  | $              | 0.15      |   |                | $ | 0.24      |         |  | $ | 0.48      |   |  | $ | 0.67      |  
|                                                                                                      |  |                |           |   |                |   |           |         |  |   |           |   |  |   |           |  
|Diluted earnings per share                                                                            |  | $              | 0.14      |   |                | $ | 0.23      |         |  | $ | 0.47      |   |  | $ | 0.64      |  
|                                                                                                      |  |                |           |   |                |   |           |         |  |   |           |   |  |   |           |  
|Weighted average shares                                                                               |  |                | 4,187,268 |   |                |   | 4,108,493 |         |  |   | 4,158,134 |   |  |   | 4,098,440 |  
|                                                                                                      |  |                |           |   |                |   |           |         |  |   |           |   |  |   |           |  
|Diluted average shares                                                                                |  |                | 4,236,253 |   |                |   | 4,219,531 |         |  |   | 4,229,725 |   |  |   | 4,209,550 |  
|                                                                                                      |  |                |           |   |                |   |           |         |  |   |           |   |  |   |           |  
|Dividends declared per share                                                                          |  | $              |          |   |                | $ |          |         |  | $ | 0.07      |   |  | $ | 0.07      |  
|                                                                                                      |  |                |           |   |                |   |           |         |  |   |           |   |  |   |           |  

See accompanying notes to consolidated financial statements.



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##### Table of Contents

VALLEY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands, except
share and per share data)



|                                                                                                  |  |                |         |   |         |   |         |  
|------------------------------------------------------------------------------------------------- |  | -------------- | ------- | - | ------- | - | ------- | -
|                                                                                                  |  | 9 Months Ended |        
|                                                                                                  |  | 9/30/07        |         |   | 9/30/06 |  
|Cash flows from operating activities                                                              |  |                |         |   |         |   |         |  
|Net income                                                                                        |  | $              | 2,003   |   |         | $ | 2,726   |  
|Adjustments to reconcile net income to net cash provided by operating activities:                 |  |                |         |   |         |   |         |  
|Provision for loan losses                                                                         |  |                | 1,324   |   |         |   | 1,093   |  
|Depreciation and amortization                                                                     |  |                | 606     |   |         |   | 563     |  
|Stock option expense                                                                              |  |                | 108     |   |         |   | 120     |  
|(Increase) decrease in deferred income taxes                                                      |  |                | 185     |   |         |   | (475    | )
|Net losses on sale of securities                                                                  |  |                | 50      |   |         |   | 3       |  
|Net gain on disposal of derivative                                                                |  |                | (51     | ) |         |   |        |  
|Net (gains) losses on disposal of equipment                                                       |  |                | 3       |   |         |   | (8      | )
|Net amortization of bond premiums/discounts                                                       |  |                | 114     |   |         |   | 132     |  
|(Increase) in accrued interest receivable                                                         |  |                | (438    | ) |         |   | (747    | )
|(Increase) decrease in other assets                                                               |  |                | 726     |   |         |   | (112    | )
|Increase in value of life insurance contracts                                                     |  |                | (388    | ) |         |   | (373    | )
|Increase in accrued interest payable                                                              |  |                | 1,461   |   |         |   | 1,323   |  
|Increase (decrease) in other liabilities                                                          |  |                | (436    | ) |         |   | 127     |  
|                                                                                                  |  |                |         |   |         |   |         |  
|Net cash provided by operating activities                                                         |  |                | 5,267   |   |         |   | 4,372   |  
|                                                                                                  |  |                |         |   |         |   |         |  
|Cash flows from investing activities                                                              |  |                |         |   |         |   |         |  
|(Increase) decrease in interest-bearing deposits in banks                                         |  |                | (3      | ) |         |   | 203     |  
|(Increase) decrease in federal funds sold                                                         |  |                | 16,630  |   |         |   | (459    | )
|Purchases of premises and equipment                                                               |  |                | (260    | ) |         |   | (844    | )
|Purchases of securities available-for-sale                                                        |  |                | (15,954 | ) |         |   | (12,187 | )
|Purchases of restricted equity securities                                                         |  |                | (109    | ) |         |   | (1,317  | )
|Proceeds from sales/calls/paydowns/maturities of securities available-for-sale                    |  |                | 6,451   |   |         |   | 3,976   |  
|Proceeds from paydowns on securities held-to-maturity                                             |  |                | 2,357   |   |         |   | 454     |  
|Principal repayments of restricted equity securities                                              |  |                | 450     |   |         |   | 225     |  
|Purchase of bank owned life insurance                                                             |  |                |        |   |         |   | (1,700  | )
|Proceeds from the sale of fixed assets                                                            |  |                |        |   |         |   | 8       |  
|(Increase) in loans, net                                                                          |  |                | (18,413 | ) |         |   | (47,761 | )
|                                                                                                  |  |                |         |   |         |   |         |  
|Net cash used in investing activities                                                             |  |                | (8,851  | ) |         |   | (59,402 | )
|                                                                                                  |  |                |         |   |         |   |         |  
|Cash flows from financing activities                                                              |  |                |         |   |         |   |         |  
|(Decrease) in noninterest-bearing deposits                                                        |  |                | (3,265  | ) |         |   | (2,140  | )
|Increase (decrease) in interest-bearing deposits                                                  |  |                | (4,245  | ) |         |   | 53,789  |  
|Increase (decrease) in short-term borrowings                                                      |  |                | (2,000  | ) |         |   | 2,000   |  
|Increase (decrease) in federal funds purchased and securities sold under agreements to repurchase |  |                | 20,435  |   |         |   | (11,247 | )
|Increase (decrease) in long-term borrowings                                                       |  |                | (8,000  | ) |         |   | 11,000  |  
|Cash dividends paid                                                                               |  |                | (580    | ) |         |   | (573    | )
|Proceeds from issuance of common stock                                                            |  |                | 2,173   |   |         |   | 132     |  
|                                                                                                  |  |                |         |   |         |   |         |  
|Net cash provided by financing activities                                                         |  |                | 4,518   |   |         |   | 52,961  |  
|                                                                                                  |  |                |         |   |         |   |         |  
|Net Increase (decrease) in cash and due from banks                                                |  |                | 934     |   |         |   | (2,069  | )
|                                                                                                  |  |                |         |   |         |   |         |  
|Cash and due from banks at beginning of year                                                      |  |                | 9,778   |   |         |   | 9,746   |  
|                                                                                                  |  |                |         |   |         |   |         |  
|Cash and due from banks at end of year                                                            |  | $              | 10,712  |   |         | $ | 7,677   |  
|                                                                                                  |  |                |         |   |         |   |         |  
|Supplemental disclosure of cash flow information:                                                 |  |                |         |   |         |   |         |  
|Cash paid during the period for interest                                                          |  | $              | 16,112  |   |         | $ | 12,356  |  
|                                                                                                  |  |                |         |   |         |   |         |  
|Cash paid during the period for taxes                                                             |  | $              | 396     |   |         | $ | 1,479   |  
|                                                                                                  |  |                |         |   |         |   |         |  

See accompanying notes to consolidated financial statements.



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VALLEY FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

September 30, 2007 (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 2006 Annual Report on Form
10-K.

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. To comply with Federal Reserve regulations, the Bank is required to maintain certain average reserve balances. The daily cash reserve requirement for the two weeks including
September 30, 2007 was $20, less cash on hand in the amount of $1,198, or a net of $0.

As a condition of our correspondent bank
agreement, the Bank is also required to maintain a target balance. The target balance as of September 30, 2007 was $250.



|(3) | Securities
|--- | ----------

The carrying values, unrealized gains,
unrealized losses, and approximate fair values of available-for-sale and held-to-maturity investment securities at September 30, 2007 are shown in the tables below. As of September 30, 2007, investments (including both available-for-sale
and held-to-maturity) and restricted equity securities with amortized costs and fair values of $63,506 and $63,376, 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. At September 30, 2007 we evaluated our investment portfolio and determined all unrealized losses presented in the table below are not related to an issuers financial
condition but are due to changes in the level of interest rates and no declines are deemed to be other than temporary in nature.

The
following table sets forth the composition of securities available for sale at September 30, 2007. Securities available-for-sale are carried at approximate market value.



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Available-for-Sale Investment Portfolio  Category Distribution

(dollars in thousands)



|                                    |  |                |        |                 |   |                  |  |                        |     |  |   |       
|----------------------------------- |  | -------------- | ------ | --------------- | - | ---------------- |  | ---------------------- | --- |  | - | ------
|                                    |  | AmortizedCosts |        | UnrealizedGains |   | UnrealizedLosses |  | ApproximateFair Values
|U. S. Government and federal agency |  | $              | 716    |                 | $ | 1                |  | $                      |    |  | $ | 717   
|                                    |  |                |        |                
|Government-sponsored enterprises    |  |                | 24,505 |                 |   | 82               |  |                        | 114 |  |   | 24,473
|                                    |  |                |        |                
|Mortgage-backed securities          |  |                | 16,995 |                 |   | 41               |  |                        | 249 |  |   | 16,787
|                                    |  |                |        |                
|Collateralized mortgage obligations |  |                | 11,891 |                 |   |                 |  |                        | 351 |  |   | 11,540
|                                    |  |                |        |                
|States and political subdivisions   |  |                | 4,163  |                 |   | 38               |  |                        | 4   |  |   | 4,197 
|                                    |  |                |        |                
|Corporate debt securities           |  |                | 100    |                 |   |                 |  |                        | 1   |  |   | 99    
|                                    |  |                |        |                 |   |                  |  |                        |     |  |   |       
|Total securities available-for-sale |  | $              | 58,370 |                 | $ | 162              |  | $                      | 719 |  | $ | 57,813
|                                    |  |                |        |                 |   |                  |  |                        |     |  |   |       

The following table sets forth the composition of securities held-to-maturity at
September 30, 2007. Securities held to maturity are carried at amortized cost.

Held-to-Maturity Investment Portfolio 
Category Distribution

(dollars in thousands)



|                                    |  |                |        |                 |   |                  |  |                        |     |  |   |       
|----------------------------------- |  | -------------- | ------ | --------------- | - | ---------------- |  | ---------------------- | --- |  | - | ------
|                                    |  | AmortizedCosts |        | UnrealizedGains |   | UnrealizedLosses |  | ApproximateFair Values
|U. S. Government and federal agency |  | $              | 7,953  |                 | $ |                 |  | $                      | 55  |  | $ | 7,898 
|                                    |  |                |        |                
|Mortgage-backed securities          |  |                | 2,016  |                 |   |                 |  |                        | 52  |  |   | 1,964 
|                                    |  |                |        |                
|Collateralized mortgage obligations |  |                | 527    |                 |   |                 |  |                        | 34  |  |   | 493   
|                                    |  |                |        |                
|States and political subdivisions   |  |                | 7,213  |                 |   | 68               |  |                        | 29  |  |   | 7,252 
|                                    |  |                |        |                 |   |                  |  |                        |     |  |   |       
|Total securities held-to-maturity   |  | $              | 17,709 |                 | $ | 68               |  | $                      | 170 |  | $ | 17,607
|                                    |  |                |        |                 |   |                  |  |                        |     |  |   |       



|(4) | Allowance for Loan Losses
|--- | -------------------------

The following table summarizes
the loan loss experience for the nine-month periods ended September 30, 2007 and 2006.

Allowance for Loan Losses

(dollars in thousands)



|                          |  |         |        |   |         |   |       |  
|------------------------- |  | ------- | ------ | - | ------- | - | ----- | -
|                          |  | 9/30/07 |        |   | 9/30/06 |  
|Balance at January 1      |  | $       | 5,658  |   |         | $ | 4,124 |  
|Provision for loan losses |  |         | 1,324  |   |         |   | 1,093 |  
|Recoveries:               |  |         |        |   |         |   |       |  
|Commercial                |  |         |       |   |         |   | 3     |  
|Loans to individuals      |  |         | 2      |   |         |   | 2     |  
|Charged off loans:        |  |         |        |   |         |   |       |  
|Commercial                |  |         | (1,612 | ) |         |   | (3    | )
|Loans to individuals      |  |         | (4     | ) |         |   |      |  
|                          |  |         |        |   |         |   |       |  
|Balance at September 30   |  | $       | 5,368  |   |         | $ | 5,219 |  
|                          |  |         |        |   |         |   |       |  



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|(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 tables summarize earnings per share and the shares utilized in the computations:



|        |  |                                     |           |                 |   |           |  |         |           |  |   |          
|------- |  | ----------------------------------- | --------- | --------------- | - | --------- |  | ------- | --------- |  | - | ---------
|        |  | Earnings Per Share                 
|        |  | 9 Months Ending                     |           | 3 Months Ending
|        |  | 9/30/07                             |           | 9/30/06         |   | 9/30/07   |  | 9/30/06
|Basic   |  | $                                   | 0.48      |                 | $ | 0.67      |  | $       | 0.15      |  | $ | 0.24     
|Diluted |  | $                                   | 0.47      |                 | $ | 0.64      |  | $       | 0.14      |  | $ | 0.23     
|        | 
|        |  | Weighted Average Shares Outstanding
|        |  | 9 Months Ending                     |           | 3 Months Ending
|        |  | 9/30/07                             |           | 9/30/06         |   | 9/30/07   |  | 9/30/06
|Basic   |  |                                     | 4,158,134 |                 |   | 4,098,440 |  |         | 4,187,268 |  |   | 4,108,493
|Diluted |  |                                     | 4,229,725 |                 |   | 4,209,550 |  |         | 4,236,253 |  |   | 4,219,531



|(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 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, 2007 and 2006, total comprehensive income (loss) was $1,935 and $2,986 respectively.

The
information that follows discloses the reclassification adjustments and the income taxes related to the net unrealized gains (losses) on securities available-for-sale and net unrealized gains (losses) on derivatives not held for trading that are
included in other comprehensive income (loss), net of income taxes for the nine- and three-month periods ended September 30, 2007 and 2006.



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|                                                                                                          |  |                                      |     |   |                                      |   |      |         |  |   |         |   |  |   |      |  
|--------------------------------------------------------------------------------------------------------- |  | ------------------------------------ | --- | - | ------------------------------------ | - | ---- | ------- |  | - | ------- | - |  | - | ---- | -
|                                                                                                          |  | 9 Months Ended(dollars in thousands) |     |   | 3 Months Ended(dollars in thousands) |  
|                                                                                                          |  | 9/30/07                              |     |   | 9/30/06                              |   |      | 9/30/07 |  |   | 9/30/06 |  
|Net unrealized gains (losses) on securities available-for-sale:                                           |  |                                      |     |   |                                      |   |      |         |  |   |         |   |  |   |      |  
|Net unrealized holding gains (losses) during the year                                                     |  | $                                    | (47 | ) |                                      | $ | 201  |         |  | $ | 711     |   |  | $ | 908  |  
|Less reclassification adjustments for realized gains (losses) included in net income, net of tax          |  |                                      | 33  |   |                                      |   | (2   | )       |  |   | 33      |   |  |   |     |  
|Net unrealized gains (losses) on derivatives not held-for trading, net of tax (benefit)                  |  |                                      | (55 | ) |                                      |   | 193  |         |  |   |        |   |  |   | 449  |  
|Less reclassification adjustments for realized (losses) on derivatives included in net income, net of tax |  |                                      | (34 | ) |                                      |   |      |         |  |   |        |   |  |   |      |  
|Income tax benefit (expense)                                                                              |  |                                      | 35  |   |                                      |   | (132 | )       |  |   | (243    | ) |  |   | (462 | )
|                                                                                                          |  |                                      |     |   |                                      |   |      |         |  |   |         |   |  |   |      |  
|Other comprehensive income (loss), net of income taxes                                                    |  | $                                    | (68 | ) |                                      | $ | 260  |         |  | $ | 501     |   |  | $ | 895  |  
|                                                                                                          |  |                                      |     |   |                                      |   |      |         |  |   |         |   |  |   |      |  



|(7) | Financial Instruments With Off-Balance Sheet Risk
|--- | -------------------------------------------------

In the
normal course of business to meet the financing needs of its customers, the Company is a party to financial instruments with off-balance-sheet risk, which involve commitments to extend credit. These instruments involve, to varying degrees, elements
of credit risk in excess of the amount recognized in the consolidated balance sheets.

The Companys exposure to credit loss in the
event of nonperformance by the other party to the financial instruments for commitments to extend credit is represented by the contractual amount of those instruments. The same credit policy is used in making commitments as is used for
on-balance-sheet risk. At September 30, 2007 outstanding commitments to extend credit were $147,392 as compared to $173,379 at December 31, 2006.

Commitments to extend credit are agreements to lend to a customer as long as there is no breach of any condition established in the contract. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. The commitments may expire without ever being drawn upon; therefore, the total commitment amounts do not necessarily represent future cash outlays for the Company.



|(8) | Related Party Transactions
|--- | --------------------------

The Bank has entered into
transactions with its directors, significant shareholders and their affiliates (related parties). Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral,
as those prevailing at the same time for comparable transactions with other customers, and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features. As of September 30, 2007 aggregate
loans outstanding to directors, executive officers, and principal shareholders totaled $24,287. An analysis of loan activity to directors, executive officers, and principal shareholders is as follows:

Loans to Related Parties

(dollars in
thousands)



|                                    |  |   |        |  
|----------------------------------- |  | - | ------ | -
|Balances as of January 1, 2007      |  | $ | 20,255 |  
|Addition of new director/officer(s) |  |   | 4,273  |  
|Advances                            |  |   | 4,842  |  
|Repayments                          |  |   | (5,083 | )
|                                    |  |   |        |  
|Balances as of September 30, 2007   |  | $ | 24,287 |  
|                                    |  |   |        |  



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|(9) | Long-Term Federal Home Loan Bank Advances
|--- | -----------------------------------------

The Company has
outstanding long-term debt with the Federal Home Loan Bank of Atlanta in the amount of $40.0 million as of September 30, 2007. There are four convertible advances in the amount of $5.0 million each and one convertible advance in the amount of
$7.0 million. The Federal Home Loan Bank of Atlanta has the option to convert $27.0 million in convertible advances on the conversion dates below, and on any quarterly interest payment date thereafter, with at least two business days notice. If
called, the four $5.0 million convertible advances and the one $7.0 million convertible advance will be converted into a 3-month London Interbank Offered Rate (LIBOR) based adjustable rate credit (ARC) at 3-month LIBOR. The remaining
loan is a structured advance with the Federal Home Loan Bank of Atlanta. This advance is a convertible advance in the amount of $13.0 million at 3-month LIBOR minus 0.50% per annum. The advance may be called on the two-year anniversary date by
the issuer. If it is not called, it will automatically convert to a fixed rate of 5.03% for the remaining eight-year maturity.

The
following table provides more information on the outstanding long-term advances as of September 30, 2007:

LONG-TERM FEDERAL HOME
LOAN BANK ADVANCES

(dollars in thousands)



|                 |  |                  |  |                   |  |              |   |  |                 |       
|---------------- |  | ---------------- |  | ----------------- |  | ------------ | - |  | --------------- | ------
|Advance Date     |  | Maturity Date    |  | Conversion Date   |  | Current Rate |   |  | 9/30/07 Balance
|December 2, 1999 |  | December 2, 2009 |  | Quarterly         |  | 5.46         | % |  | $               | 5,000 
|May 24, 2000     |  | May 24, 2010     |  | Quarterly         |  | 6.49         | % |  | $               | 5,000 
|February 9, 2001 |  | February 9, 2011 |  | Quarterly         |  | 4.97         | % |  | $               | 5,000 
|March 11, 2003   |  | March 11, 2013   |  | March 11, 2008    |  | 2.91         | % |  | $               | 7,000 
|June 29, 2006    |  | June 29, 2016    |  | June 29, 2008     |  | 4.63         | % |  | $               | 13,000
|November 9, 2006 |  | November 9, 2016 |  | November 10, 2008 |  | 4.28         | % |  | $               | 5,000 
|                 |  |                  |  |                   |  |              |   |  |                 |       
|                 |  |                  |  |                   |  | TOTAL        |   |  | $               | 40,000
|                 |  |                  |  |                   |  |              |   |  |                 |       



|(10) | Guaranteed Preferred Beneficial Interests in the Companys Junior Subordinated Debentures.
|---- | ------------------------------------------------------------------------------------------

Valley Financial (VA) Statutory Trust I, a statutory business trust (the Trust), was created by the Company on June 26, 2003, at which
time the Trust issued $4,000 in aggregate liquidation amount of $1 par value preferred capital trust securities which mature June 26, 2033. Distributions are payable on the securities at a floating rate equal to the 3-month London Interbank
Offered Rate (LIBOR) plus 3.10%, capped at 11.75%, and the securities may be prepaid at par by the Trust at any time after June 26, 2008. The principal assets of the Trust are $4,124 of the Companys junior subordinated
debentures which mature on June 26, 2033, and bear interest at a floating rate equal to the 3-month LIBOR plus 3.10%, capped at 11.75%, and which are callable by the Company after June 26, 2008. All $124 in aggregation liquidation amount
of the Trusts common securities are held by the Company.

Valley Financial (VA) Statutory Trust II, a statutory business trust
(Trust II), was created by the Company on September 26, 2005, at which time Trust II issued $7,000 in aggregate liquidation amount of $1 par value preferred capital trust securities which mature December 15, 2035. Distributions
are payable on the securities at a floating rate equal to the 3-month LIBOR plus 1.49%, and the securities may be prepaid at par by



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Trust II at any time after December 15, 2010. The principal assets of Trust II are $7,217 of the Companys junior subordinated debentures which
mature on December 15, 2035, and bear interest at a floating rate equal to the 3-month LIBOR plus 1.49%, and which are callable by the Company after December 15, 2010. All $217 in aggregation liquidation amount of Trust IIs common
securities are held by the Company.

Valley Financial Statutory Trust III, a statutory business trust (Trust III) was created
by the Company on December 15, 2006, at which time Trust III issued $5,000 in aggregate liquidation amount of $1 par value preferred capital trust securities which mature January 30, 2037. Distributions are payable on the securities at a
floating rate equal to the 3-month LIBOR plus 1.73%, and the securities may be prepaid at par by Trust III at any time after January 20, 2012. The principal assets of Trust III are $5,155 of the Companys junior subordinated debentures
which mature on January 30, 2037, and bear interest at a floating rate equal to the 3-month LIBOR plus 1.73%, and which are callable by the Company after January 30, 2012. All $155 in aggregation liquidation amount of Trust IIIs
common securities are held by the Company.



|(11) | Stock Based Compensation
|---- | ------------------------

We account for stock-based
compensation in accordance with, the Financial Accounting Standards Boards (FASB) Statement of Financial Accounting Standards No 123  revised 2004 (SFAS 123R), Share-Based Payment, (SFAS
No. 123R) which replaced SFAS No. 123, Accounting for Stock Based Compensation, and supersedes APB No. 25, Accounting for Stock Issued to Employees, and its related interpretations. Under the fair value
recognition provisions of this statement, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is the vesting
period. We currently use the Black-Scholes option pricing model to determine the fair value of stock options and restricted stock grants. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing
model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, actual and projected employee stock option
exercise behaviors, risk-free interest rate and expected dividends.

The Company has two share-based compensation plans, which are
described below. The compensation cost that has been charged against income for those plans was approximately $108 and $120 for the nine-month periods ended September 30, 2007 and 2006, respectively. The Company currently has 66,733
nonqualified stock options outstanding at September 30, 2007, which were fully vested as of January 1, 2007. There were no income tax implications for share-based compensation for the three-month or nine-month period ended
September 30, 2007.

Stock Option Plans

The Company has a 2005 Key Employee Equity Award Plan (the 2005 Plan). The 2005 Plan gives the Company flexibility in tailoring equity-based compensation awards for employees from time to time to the continuing objective of aligning
employee incentives with the interests of shareholders as the Company grows and develops. In addition to incentive and nonqualified stock options, the 2005 Plan permits the grant of restricted stock, stock appreciation rights and stock units to
persons designated as Key Employees. The 2005 Plan will remain in effect for ten years, subject to the right of the Board of Directors to terminate the 2005 Plan earlier, except with respect to awards made prior to and outstanding on
that date which remain valid in accordance with their terms. The maximum aggregate number of shares of the Companys common stock (no par value) that may be issued pursuant to awards made under the Plan may not exceed 250,000. Accordingly,
250,000 shares of authorized but unissued common stock are reserved for use in the 2005 Plan. Within the



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maximum limits, the Plan specifies that stock appreciation rights may not be granted with respect to more than 500 shares per recipient (2,000 shares for a
new employee recipient) per year; and restricted shares and stock units, respectively, may not be granted for more than 5,000 shares per year per recipient.

Additionally, the Company has a 1995 Incentive Stock Plan (the 1995 Plan) pursuant to which the Human Resources Committee of the Companys Board of Directors may grant stock options to officers and key employees.
The 1995 Plan authorizes grants of options to purchase up to 311,850 shares (adjusted for stock splits) of the Companys authorized but unissued common stock.

Under the 2005 Plan, there are options for 75,450 shares granted to officers and key employees currently outstanding as of September 30, 2007. Under the 1995 Plan, there are options for 143,232 shares granted to
officers and key employees currently outstanding as of September 30, 2007. All stock options (for both plans) have been granted with an exercise price equal to the stocks fair market value at the date of the grant. Stock options under the
Plan generally have 10-year terms, vest at the rate of 20 percent per year, and become fully exercisable five years from the date of the grant. Additionally under the 2005 Plan, there are 13,996 restricted stock grants (RSGs) that
have been granted to officers and key employees currently outstanding as of September 30, 2007. Of the total 13,996 RGSs, 12,225 RSGs will vest 100% on January 31, 2008 (Vesting Date) based upon successfully meeting
certain performance criteria. The Company determined at December 31, 2006 that the performance goals related to the vesting of the non-vested restricted stock grants are no longer probable of being met, therefore no compensation expense has
been recognized in relation to these grants for the nine-month period ended September 30, 2007. The remaining 1,771 RGSs were vested immediately upon grant date and compensation expense of $22 has been recognized for the nine-month period
ended September 30, 2007.

As of September 30, 2007, there are 11,441 shares available for grant under the 1995 Plan and 162,554
shares available for grant under the 2005 Plan. In addition, certain other options for shares (adjusted for stock splits), of which are outstanding, based on meeting certain past performance criteria have been granted.

The share-based awards granted under the aforementioned Plans have similar characteristics, except that some awards have been granted in options and
certain awards have been granted in restricted stock. Therefore, the following disclosures have been disaggregated for the stock option and restricted stock awards of the Plans due to their dissimilar characteristics.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. The risk-free interest rate is based
on the U.S. Treasury rate for the expected life at the time of grant. Volatility is based on the volatilities of our trading history. The expected life is based on the average life of the options of 10 years and the weighted average vesting
period of 5 years, and forfeitures are estimated based on the Companys history. The following table illustrates the assumptions for the Black-Scholes model used in determining the fair value of options granted to employees for the
nine-month periods ended September 30, 2007 and 2006.



|                        |  |                                      |   |  |                                     |  
|----------------------- |  | ------------------------------------ | - |  | ----------------------------------- | -
|                        |  | Nine Months Ended September 30, 2007 |   |  | Nine Months EndedSeptember 30, 2006 |  
|Dividend yield          |  | 0.01                                 | % |  | 0.02                                | %
|Risk-free interest rate |  | 4.47                                 | % |  | 4.70                                | %
|Volatility              |  | 20.94                                | % |  | 20.83                               | %
|Expected life           |  | 7.3 years                            |   |  | 10 years                            |  



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Total stock-based compensation recognized as compensation expense on our consolidated statement of income
is as follows:



|                           |  |                                      |    |                                      |   |         |  |         |     |  |   |    
|-------------------------- |  | ------------------------------------ | -- | ------------------------------------ | - | ------- |  | ------- | --- |  | - | ---
|                           |  | 3 Months Ended(dollars in thousands) |    | 9 Months Ended(dollars in thousands)
|                           |  | 9/30/07                              |    | 9/30/06                              |   | 9/30/07 |  | 9/30/06
|Option Grants              |  | $                                    | 23 |                                      | $ | 20      |  | $       | 86  |  | $ | 61 
|Restricted Stock Grants    |  |                                      |   |                                      |   | 20      |  |         | 22  |  |   | 59 
|                           |  |                                      |    |                                      |   |         |  |         |     |  |   |    
|Total Compensation Expense |  | $                                    | 23 |                                      | $ | 40      |  | $       | 108 |  | $ | 120
|                           |  |                                      |    |                                      |   |         |  |         |     |  |   |    

The restricted stock grant expense for the nine-months ended September 30, 2007 relates to
one grant of 1,771 shares that was granted and fully vested during the first quarter of 2007 to an officer of the Company who is not a Named Executive Officer.

As of September 30, 2007, there was $262 of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested stock-based payments granted to employees. A maturity schedule of the
unrecognized compensation cost as of September 30, 2007 is as follows:



|                  |  |                |    |      |   |      |  |      |    |      |   |      |  |       |    |  |   |   |  |   |    
|----------------- |  | -------------- | -- | ---- | - | ---- |  | ---- | -- | ---- | - | ---- |  | ----- | -- |  | - | - |  | - | ---
|                  |  | Remaining 2007 |    | 2008 |   | 2009 |  | 2010 |    | 2011 |   | 2012 |  | Total
|Compensation Cost |  | $              | 22 |      | $ | 85   |  | $    | 79 |      | $ | 49   |  | $     | 24 |  | $ | 3 |  | $ | 262

Total unrecognized compensation cost will be adjusted for future grants and future changes in estimated
forfeitures.

General Stock Option Information

A summary of option activity under the stock option plans during the nine-month period ended September 30, 2007 is presented below:



|                       |  |                     |  |                                    |       |                                   |           
|---------------------- |  | ------------------- |  | ---------------------------------- | ----- | --------------------------------- | ----------
|                       |  | Options Outstanding |  | WeightedAverage Exercise Price
($) |       | Weighted Average Contractual Term
|Balance, 12/31/06      |  | 338,500             |  | $                                  | 6.68  |                                   | 3.99 years
|                       |  |                     | 
|Exercised              |  | 69,853              |  | $                                  | 4.64  |                                   |           
|                       |  |                     | 
|Authorized             |  |                     |  |                                    |       |                                   |           
|Forfeited              |  | 12,720              |  | $                                  | 11.88 |                                   |           
|Granted                |  | 31,850              |  | $                                  | 12.20 |                                   |           
|Expired                |  | 2,363               |  | $                                  | 3.25  |                                   |           
|                       |  |                     |  |                                    |       |                                   |           
|Outstanding at 9/30/07 |  | 285,415             |  | $                                  | 7.60  |                                   | 4.11 years
|                       |  |                     |  |                                    |       |                                   |           
|Exercisable at 9/30/07 |  | 212,125             |  | $                                  | 5.90  |                                   | 2.63 years
|                       |  |                     |  |                                    |       |                                   |           



14



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##### Table of Contents

There were no options granted during the three-month period ended September 30, 2007. There were
2,580 exercised during the three-month period ended September 30, 2007, with a weighted average exercise price of $5.77 per option. There were 1,600 options forfeited during the three-month period ended September 30, 2007 with a weighted
average exercise price of $13.00.

The aggregate intrinsic value of options exercised during the three-month and nine-month periods ended
September 30, 2007 was $11, and $440 respectively. The total intrinsic value of options exercised during the three-month and nine-month periods ended September 30, 2006 was $0 and $301 respectively.

Cash received from option exercises under all share-based payment arrangements for the three and nine-month periods ended September 30, 2007 was $15
and $324, respectively. Cash received from option exercises under all share-based payment arrangements for the three and nine-month periods ended September 30, 2006 was $0 and $132, respectively.

Information regarding the stock options outstanding at September 30, 2007 is summarized below:



|                         |  |                    |  |                                             |  |                                 |       |                    |         |                                |   |      
|------------------------ |  | ------------------ |  | ------------------------------------------- |  | ------------------------------- | ----- | ------------------ | ------- | ------------------------------ | - | -----
|Range of Exercise Prices |  | Number Outstanding |  | Weighted Average Remaining Contractual Life |  | Weighted Average Exercise Price |       | Number Exercisable |         | Weighted Average ExercisePrice
|$3.18 - $3.81            |  | 66,733             |  | 0.78 years                                  |  | $                               | 3.18  |                    | 66,733  |                                | $ | 3.18 
|$5.08 - $5.94            |  | 102,132            |  | 2.06 years                                  |  | $                               | 5.23  |                    | 102,132 |                                | $ | 5.23 
|$7.14 - $12.85           |  | 87,600             |  | 7.86 years                                  |  | $                               | 11.68 |                    | 32,760  |                                | $ | 10.95
|$13.00 - $14.23          |  | 28,950             |  | 7.63 years                                  |  | $                               | 13.80 |                    | 10,500  |                                | $ | 13.93
|                         |  |                    |  |                                             |  |                                 |       |                    |         |                                |   |      
|Totals                   |  | 285,415            |  | 4.11 years                                  |  | $                               | 7.60  |                    | 212,125 |                                | $ | 5.90 
|                         |  |                    |  |                                             |  |                                 |       |                    |         |                                |   |      

The aggregate intrinsic value of options outstanding and options exercisable as September 30,
2007 was $995 and $991, respectively. The aggregate intrinsic value of options outstanding and options exercisable as of September 30, 2006 was $2,247 and $2,127, respectively.

A summary of the status of the Companys non-vested restricted stock as of September 30, 2007, and changes during the nine months then ended is
presented below:



|                       |  |                                        |  |                                  |  |                                       |       
|---------------------- |  | -------------------------------------- |  | -------------------------------- |  | ------------------------------------- | ------
|                       |  | Non-Vested RestrictedStock Outstanding |  | VestedRestrictedStockOutstanding |  | WeightedAverage Grant Date Fair
Value
|Balance, 12/31/06      |  | 15,075                                 |  |                                 |  | $                                     | 12.56 
|                       |  |                                        | 
|Authorized             |  |                                       |  |                                 |  |                                       |      
|Forfeited              |  | 2,850                                  |  |                                 |  | $                                     | 12.50 
|Granted Vested         |  |                                      |  | 1,771                           |  | $                                     | 12.20
|                       |  |                                        |  |                                  |  |                                       |       
|Outstanding at 9/30/07 |  | 12,225                                 |  | 1,771                            |  | $                                     | 12.52 
|                       |  |                                        |  |                                  |  |                                       |       



15



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##### Table of Contents

The fair value of each restricted stock grant is equal to the stock price on the date of grant and
assumes the performance goals will be achieved. The Company determined at December 31, 2006 that the performance goals related to the vesting of the non-vested restricted stock grants are no longer probable of being met, therefore no
compensation expense has been recognized in relation to these grants for the nine-month period ended September 30, 2007.

Policy for issuing shares
upon option exercise

Options shall be exercised by the delivery of a written notice to the Company in the form prescribed by the HR
Committee setting forth the number of shares with respect to which the option is to be exercised, accompanied by full payment for the shares. The option price shall be payable to the Company in full either in cash, by delivery of shares of stock
valued at fair market value at the time of exercise, delivery of a promissory note (in the HR Committees sole discretion), or by a combination of the foregoing. As soon as practicable, after receipt of written notice and payment, the Company
shall deliver to the participant, stock certificates (new shares) in an appropriate amount based upon the number of options exercised, issued in the participants name. No participant who is awarded options shall have rights as a shareholder in
connection with the shares subject to such options until the date of exercise of the options.



|(12) | Other Items
|---- | -----------

On July 2, 2007, the Company paid its
seventh consecutive semi-annual cash dividend on the Companys stock, in the amount of $0.07 per share, payable on to shareholders of record June 1, 2007.

On September 28, 2007, Valley Financial Corporation accepted subscriptions to sell 409,884 shares of common stock at $10.50 per share in a private offering, for an aggregate offering price of $4,303,782. We
recorded $92,000 in stock issuance costs related to the private placement offering. We received a fairness opinion from Davenport & Company LLC that the consideration of $10.50 per share for the sale of the shares is fair, from a financial
point of view, to the Company. The shares were purchased by members of Valleys senior management and Board of Directors, and to an institutional investor with no prior ownership. We received $1,941,282 in offering proceeds and issued 184,884
shares of common stock prior to the end of the quarter. The remaining $2,362,500 in offering proceeds, for 225,000 shares of common stock, was received subsequent to quarter-end.

A new entity, Valley Financial Corporation Properties, LLC was created on July 13, 2007. The purpose of this non banking entity is to provide credit
intermediary services to Valley Financial Corporation. There has been no activity to date.



16



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##### Table of Contents

|Item 2. | Managements Discussion and Analysis.
|------- | -------------------------------------

Managements discussion and analysis of the financial condition and results of operations of the Company as of and for the nine months ended September 30, 2007 and 2006 is as follows. The discussion should be read in conjunction
with the Companys Consolidated Financial Statements and Notes on the December 31, 2006 Form 10-K.

Critical Accounting Policies

The preparation of financial statements requires us to make estimates and assumptions. Those accounting policies that require our most
difficult, subjective or complex judgments and uncertainties include (1) the allowance for loan losses and (2) impaired loans. Further information about these critical policies is described below.

Allowance for Loan Losses: Certain credit risks are inherent in making loans. We seek to prudently assess these risks and manage them effectively.
We have internal credit policies and procedures in place to reduce repayment risks. These policies and procedures include:



| |  |  | officer and customer limits
| | - |  | ---------------------------



| |  |  | periodic loan documentation review, and
| | - |  | ---------------------------------------



| |  |  | follow-up on exceptions to credit policies.
| | - |  | -------------------------------------------

We establish the allowance for loan losses through charges to earnings through a provision for loan losses. Loan losses are charged against the allowance when we believe that the collection of the principal is unlikely. Subsequent
recoveries of losses previously charged against the allowance are credited to the allowance. The allowance represents an amount that, in our judgment, will be appropriate to absorb probable losses on existing loans that may become uncollectible. The
allowance for loan losses is evaluated on a regular basis by management.

On a quarterly basis, we perform a detailed analysis of the
allowance for loan losses to verify the adequacy and appropriateness of the allowance in meeting possible losses in the loan portfolio. In analyzing our current portfolio to determine the appropriate level of the allowance for loan losses, we first
segregate our portfolio into loans within the scope of FAS 114 (potentially impaired loans) and FAS 5 (non-impaired loan pools). Included in our potentially impaired loan category are our current watch list credits plus any additional
credits which have been past due three or more times within the past 12-month period. We individually review these potentially impaired loans under FAS 114 and make a determination if the loan in fact is impaired. We consider a loan impaired when it
is probable that we will be unable to collect all interest and principal payments as scheduled in the loan agreement. We do not consider a loan impaired during a period of delay in payment if we expect the ultimate collection of all amounts due. If
it is found to be impaired, an allowance is established when the collateral value, discounted cash flows, or observable market price of the impaired loan is lower than the carrying value of that loan. We recognize any impairment by creating a
valuation allowance with a corresponding charge to the provision for loan losses or by adjusting an existing valuation allowance for the impaired loan with a corresponding charge or credit to bad-debt expense. The valuation allowance becomes our
specificl reserves for the specific loan.

We take the balance of our portfolio and add back to it any loans that were included
in the potentially impaired loan category but that were found not to be impaired. We then segregate the remaining portfolio into specific categories based on type of loan and review the groups of loans to estimate loss under FAS 5. We apply a
specific loss factor to each category based upon our historical loss experience for each category of loans over



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##### Table of Contents

the previous five year ends. The loss factor is multiplied by the outstanding balance in the loan category to estimate potential loss for our allowance for
loan losses. We then evaluate certain environmental and qualitative factors that are relevant to our portfolio and make a risk assessment of low, medium, or high for each factor. An additional loss factor is assigned to the portfolio according to
the risk assessment. This evaluation is inherently subjective, because it requires estimates that may be significantly revised as more information becomes available. We believe the allowance for loan losses is appropriate to provide for expected
losses in the loan portfolio, but there are no assurances that it will be.

Our internal loan and credit process review program is managed
through our Enterprise Risk Management division and is intended to reduce and control the risks associated with the lending process on an ongoing basis. It includes monitoring the lending activities of all bank personnel and an assessment of the
effectiveness, with respect to underwriting and processing new loans, preventing insider abuse, minimizing lender liability risk exposure, and ensuring timely follow-up and corrective action for loans showing signs of deterioration in quality. We
have engaged independent third party reviewers to assist with the process on a quarterly basis. Bank regulators also periodically review the loan portfolio and other assets to assess their quality, and we employ a second independent, third party
loan review firm for external loan review on a semi-annual basis as well.

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. There are currently eight full-service branch locations, operating in various locations throughout the Cities of Roanoke and Salem, Town of Vinton, and the County of Roanoke. The Bank also has a
wealth management subsidiary, Valley Wealth Management Services, Inc. which markets investment and insurance products. Net income derived for the new subsidiary is not significant at this time.

Performance Summary

The following table shows our
key performance ratios for the period ended September 30, 2007 and December 31, 2006 and September 30, 2006:

Key
Performance Ratios



|                               |  |                       |      |   |                         |   |      |                       |  |   |       |  
|------------------------------ |  | --------------------- | ---- | - | ----------------------- | - | ---- | --------------------- |  | - | ----- | -
|                               |  | 9 months Ended9/30/07 |      |   | 12 months Ended12/31/06 |   |      | 9 months Ended9/30/06 | 
|Return on average assets       |  |                       | 0.46 | % |                         |   | 0.54 | %                     |  |   | 0.70  | %
|Return on average equity (1)   |  |                       | 7.63 | % |                         |   | 8.67 | %                     |  |   | 11.11 | %
|Net interest margin (2)        |  |                       | 2.85 | % |                         |   | 3.14 | %                     |  |   | 3.20  | %
|Cost of funds                  |  |                       | 4.34 | % |                         |   | 3.85 | %                     |  |   | 3.74  | %
|Yield on earning assets        |  |                       | 7.08 | % |                         |   | 6.93 | %                     |  |   | 6.87  | %
|Basic net earnings per share   |  | $                     | 0.48 |   |                         | $ | 0.70 |                       |  | $ | 0.67  |  
|Diluted net earnings per share |  | $                     | 0.47 |   |                         | $ | 0.68 |                       |  | $ | 0.64  |  

---

| | (1) | The calculation of ROE excludes the effect of any unrealized gains or losses on investment securities available-for-sale.
| | --- | -------------------------------------------------------------------------------------------------------------------------

| | (2) | Calculated on a fully taxable equivalent basis (FTE)
| | --- | ------------------------------------------------------



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For the nine months ended September 30, 2007, we reported net income of $2,003,000 compared with
$2,726,000 for the same nine months of 2006, a 27% decrease. Diluted earnings per share were down 26% from $0.64 in 2006 to $0.47 in 2007. For the three months ended September 30, 2007, we reported net income of $610,000 compared with net
income of $986,000 for the third quarter of 2006, a 38.1% decrease. Diluted earnings per share were $0.14 in the third quarter of 2007 compared to $0.22 in the second quarter, a decrease of 36.4%. Our third quarter net income produced returns on
average assets and average shareholders equity of 0.41% and 6.74%, respectively, compared to returns of 0.64% and 10.55% for the second quarter of 2007. The net interest margin for the third quarter of 2007 was 2.84%, down 1 basis point
sequentially from the second quarter of 2007, and down 25 basis points compared to the 3.09% for the third quarter of 2006. Our third quarter performance was adversely impacted due to higher credit costs associated with the Companys
residential construction portfolio. We continue to see a weakening in residential construction activity as well as a decline in the market values of both land and completed housing inventory. On a positive note, we do not have any sub-prime mortgage
loans in our residential portfolio.

Additionally, our credit quality ratios as of September 30, 2007 continue to show improvement.
The non-performing asset ratio declined to 1.38% from 1.56% at December 31, 2006. As of September 30, 2007, we had 0.00% of loans that were 90 days or more past due compared to 0.13% of total loans as of December 31, 2006. The
provision for loan losses in the third quarter of 2007 amounted to $482,000 compared to $387,000 reserved in the same period last year. We charged-off $1,167,000 (of which $990,000 had been specifically reserved) of one of our previously disclosed
problem loans during the third quarter of 2007. However, on a positive note, we are encouraged by several recent developments that have occurred with our previously disclosed commercially-oriented problem loan issues. Positive resolutions, if they
should occur, could have a positive impact on our fourth quarter. While we presently believe any potential loss exposure has been fully reserved and the remaining balance is secured by customer assets pledged as collateral, it is obviously a
situation that can change, and we are constantly monitoring it.

Growth

The following table shows our key growth indicators:

Key Growth Indicators

(dollars in thousands)



|                      |  |         |         |          |   |         |  |   |        
|--------------------- |  | ------- | ------- | -------- | - | ------- |  | - | -------
|                      |  | 9/30/07 |         | 12/31/06 |   | 9/30/06
|Investment securities |  | $       | 80,260  |          | $ | 73,617  |  | $ | 66,836 
|Loans, net            |  | $       | 482,483 |          | $ | 465,394 |  | $ | 456,921
|Deposits              |  | $       | 433,979 |          | $ | 441,489 |  | $ | 416,965
|Total assets          |  | $       | 599,592 |          | $ | 591,936 |  | $ | 556,339

In comparison to the same period last year, our total assets grew by $43.6 million or 7.8%; net
loans grew by $25.6 million or 5.6%; and total deposits decreased by $17.0 million or 4.1%. During the first quarter of 2007, we made a strategic decision to allow higher cost certificates of deposits to run off at maturity due to our unusually
large federal funds sold position at December 31, 2006 and due to a softening in loan demand. Based on current market conditions, we do anticipate that our growth rates will show declines in 2007 when compared to 2006.

Total liabilities at September 30, 2007 were $562.2 million, up 0.7% from $558.5 million at December 31, 2006. The $7.5 million decrease in
deposits and $10 million decrease in FHLB advances was offset by $20.4 million increase in federal funds purchased and securities sold under agreements to repurchase.



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##### Table of Contents

Shareholders Equity

Total shareholders equity at September 30, 2007 was $37.3 million compared to $33.4 million at December 31, 2006, an increase of $3.9 million or 11.7%. We closed on $1.9 million of the private
placement offering prior to the end of the quarter. The remaining $2.4 million in proceeds were received after quarter end. Total shareholders equity (exclusive of unrealized gains (losses) on investment securities and derivatives) was $37.7
million at September 30, 2007 compared with $33.7 million at December 31, 2006, an increase of $4.0 million or 11.9%.

Net Income

We earned net income of $2,003,000 for the nine months ended September 30, 2007, a decrease of $723,000 or 26.5% over the
$2,726,000 reported for the same period in 2006. We earned net income of $610,000 for the three-month period ended September 30, 2007, a decrease of $376,000 or 38.1% over the $986,000 net income reported for the same period in 2006. Our
performance year-to-date has been adversely impacted by the increase in our specific reserves and our unusually high level of non-performing assets. Additionally, we have continued to see the net interest margin under considerable pressure from the
relatively flat yield curve and the intense competition for deposits. A successful resolution of our problem credit issues remains the top priority of senior management for the remainder of 2007.

Net Interest Income

Net interest income is our
principal source of earnings and is calculated as the amount which loan and investment (earning assets) income exceeds the interest expense on deposits and borrowings (interest-bearing liabilities). 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.

Total interest income was $29,218,000 for the nine months ended September 30, 2007, an increase of $3,842,000 or 15.1% over the $25,376,000 reported for the same period in 2006. Total interest income was $9,984,000 for the three months
ended September 30, 2007, an increase of $875,000 or 9.6% over the $9,109,000 reported for the three months ended September 30, 2006.

Total interest expense was $17,573,000 for the nine months ended September 30, 2007, an increase of $3,894,000 or 28.5% over the $13,679,000 reported for the same period in 2006. Total interest expense was $6,024,000 for the three
months ended September 30, 2007, an increase of $884,000 or 17.2% over the $5,140,000 reported for the three months ended September 30, 2006.

As a result of the above, net interest income was $11,645,000 for the nine months ended September 30, 2007, a decrease of $52,000 or 0.4% from the $11,697,000 reported for the same period in 2006. Net interest
income was $3,960,000 for the three months ended September 30, 2007, a decrease of $9,000 or 0.2% from the $3,969,000 reported for the same period in 2006. Our net interest margin was 2.85% for the nine months ended September 30, 2007,
down 35 basis points compared to the 3.20% reported for the same period last year. Our net interest margin has been adversely affected by our unusually high level of non-performing assets. While we have continued to see the net interest margin under
considerable pressure from the intense competition for deposits and the relatively flat yield curve, our non-performing assets accounted for a 17 basis point decline in our net interest margin for the nine months ended September 30, 2007.
Additionally, in comparison to the same period last year, we have additional interest expense related to the trust preferred offering completed in December 2006. We do believe managing our net interest margin will continue to be challenging,
however, anticipate we will see



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##### Table of Contents

improvement as soon as we are able to resolve the credit quality issues related to our existing non-performing assets, absent other factors which may
negatively impact our net interest margin.

Interest Rate Risk

Interest rate risk is the risk to earnings or capital generated by the effects of changes in interest rates on our on- and off-balance sheet positions, and can take one or more of several forms:



| |  |  | Repricing risk comes from timing mismatches in the ability to alter contractual rates earned on financial assets held or paid on interest-bearing
liabilities.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Basis risk refers to changes in the underlying relationships between market rates or indices, which result in a narrowing of the spread earned on a loan or
investment relative to its cost of funds.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Option risk arises from embedded options in many financial instruments such as:
| | - |  | ---------------------------------------------------------------------------------



| |  |  | interest rate options,
| | - |  | ----------------------



| |  |  | loan prepayment options,
| | - |  | ------------------------



| |  |  | deposit early withdrawal options,
| | - |  | ---------------------------------



| |  |  | callable Federal Home Loan Bank advances, and
| | - |  | ---------------------------------------------



| |  |  | prepayment of the underlying collateral of asset-backed securities.
| | - |  | -------------------------------------------------------------------

Embedded options are complex risk positions that are difficult to predict and offset, and are a large component of our overall interest rate risk.

We have established risk measures, limits, policy guidelines and internal control mechanisms for managing our overall asset/liability management
(ALM) position. The responsibility for interest rate risk control resides with management, with oversight by the board of directors and the ALCO Oversight Committee. We seek to balance the return potential of the ALM position against the
desire to limit volatility in earnings.

At least quarterly, we measure the ALM position using earnings simulation modeling to estimate
what assets and liabilities would re-price, and to what extent, within a one-year period in response to an immediate 200 and 100 basis point change in the Prime Rate, as well as in response to more gradual interest rate change. Our objective is to
keep the change in net interest income over twelve months at or below 5%, and the change in net income at or below 10%, under an immediate 200 basis point interest rate shock scenario.

The model also incorporates managements forecasts for balance sheet growth, noninterest income and noninterest expense. The interest rate scenarios
are used for analytical purposes and do not necessarily represent managements view of future market movements. Rather, these are intended to provide a measure of the degree of volatility interest rate movements may apply to our earnings.
Modeling the sensitivity of earnings to interest rate risk is highly dependent on numerous assumptions embedded in the simulation model. While the earnings sensitivity analysis incorporates managements best estimate of interest rate and
balance sheet dynamics under various market rate movements, the actual behavior and resulting earnings impact likely will differ from that projected. Our cumulative repricing gap for the 90-day time period indicates a liability-sensitive position as
of June 30, 2007 (the most recent date for which information is currently available).

We also estimate interest sensitivity by
calculating the net present value of the balance sheets cash flows or the residual value of future cash flows ultimately due to shareholders. This calculation is known as Economic Value of Equity or EVE and is generally considered
a better measure of long-term interest sensitivity than is IRS. Our objective is for the result to change 25% or less in an immediate 300 basis point interest rate shock scenario; 20% or less in an immediate 200 basis point interest rate shock
scenario; and 15% or less in an immediate 100 basis point interest rate shock scenario.



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##### Table of Contents

Derivative Financial Instruments

For asset/liability management purposes, we may use interest rate swap agreements to hedge interest rate risk exposure to declining rates. Such derivatives are used as part of the asset/liability management process
and are linked to specific assets, and have a high correlation between the contract and the underlying item being hedged, both at inception and throughout the hedge period.

Interest rate swaps are contracts in which a series of cash flows from interest are exchanged over a prescribed period, based upon a notional amount. The
notional amount on which the interest payments are based is not exchanged. The Company entered into its first such derivative instrument in April 2006 when it entered into a forward-start interest rate swap agreement (Agreement) to
convert a portion of its variable rate loans to a fixed rate (cash flow hedge). We entered into this agreement to protect the Company from interest rate exposure during a period of declining rates. The effective period of the Agreement was
April 19, 2007 through April 19, 2009.

During the first quarter of 2007, we terminated this interest rate swap agreement due to
the shift of the Banks balance sheet to a more liability-sensitive position and the changing interest rate environment as compared to when the Company entered into the Agreement. We recorded a realized gain on the termination of the Agreement
of $50,629.

Noninterest Income

Noninterest income for the three months ended September 30, 2007 and 2006 is shown in the following table:

Noninterest
Income

(dollars in thousands)



|                                           |  |                        |     |   |                        |   |     |                        |  |        |  
|------------------------------------------ |  | ---------------------- | --- | - | ---------------------- | - | --- | ---------------------- |  | ------ | -
|                                           |  | 3 months Ended 9/30/07 |     |   | 3 months Ended 9/30/06 |   |     | % Increase/ (Decrease) | 
|                                           |  |                       
|                                           |  |                       
|Service charges on deposits                |  | $                      | 284 |   |                        | $ | 261 |                        |  | 8.8    | %
|Gain or loss on sale of other assets       |  |                        | (4  | ) |                        |   | 8   |                        |  | -150.0 | %
|Income earned on bank owned life insurance |  |                        | 131 |   |                        |   | 129 |                        |  | 1.6    | %
|Other income                               |  |                        | 158 |   |                        |   | 286 |                        |  | 44.8   | %
|Realized securities gains/losses           |  |                        |    |   |                        |   | (2  | )                      |  | 100    | %
|                                           |  |                        |     |   |                        |   |     |                        |  |        |  
|Total noninterest income                   |  | $                      | 569 |   |                        | $ | 682 |                        |  | -16.6  | %
|                                           |  |                        |     |   |                        |   |     |                        |  |        |  

Noninterest income for the nine months ended September 30, 2007 and 2006 is as follows:

Noninterest Income

(dollars in thousands)



|                                           |  |                        |       |   |                        |   |       |                       |  |         |  
|------------------------------------------ |  | ---------------------- | ----- | - | ---------------------- | - | ----- | --------------------- |  | ------- | -
|                                           |  | 9 months Ended 9/30/07 |       |   | 9 months Ended 9/30/06 |   |       | %Increase/ (Decrease) | 
|                                           |  |                       
|                                           |  |                       
|Service charges on deposits                |  | $                      | 889   |   |                        | $ | 708   |                       |  | 25.6    | %
|Gain or loss on sale of other assets       |  |                        | (4    | ) |                        |   | 8     |                       |  | -150.0  | %
|Income earned on bank owned life insurance |  |                        | 388   |   |                        |   | 373   |                       |  | 4.0     | %
|Other income                               |  |                        | 495   |   |                        |   | 578   |                       |  | -14.4   | %
|Realized derivatives gains/losses          |  |                        | 51    |   |                        |   |      |                       |  | N/M     |  
|Realized securities gains/losses           |  |                        | (50   | ) |                        |   | (3    | )                     |  | 1566.75 | %
|                                           |  |                        |       |   |                        |   |       |                       |  |         |  
|Total noninterest income                   |  | $                      | 1,769 |   |                        | $ | 1,664 |                       |  | 6.3     | %
|                                           |  |                        |       |   |                        |   |       |                       |  |         |  



22



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##### Table of Contents

Service charges on deposit accounts consist of a variety of charges imposed on demand deposits,
interest-bearing deposits and savings deposit accounts. These include, but are not limited to, the following:



| |  |  | Demand deposit monthly activity fees
| | - |  | ------------------------------------



| |  |  | Service charges for checks for which there are non-sufficient funds or overdraft charges
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | ATM transaction fees
| | - |  | --------------------



| |  |  | Debit card transaction fees
| | - |  | ---------------------------

The principal factors
that may affect current or future income for service charges on deposit accounts are:



| |  |  | Internally generated growth
| | - |  | ---------------------------



| |  |  | Acquisitions of other banks/branches or de novo branches
| | - |  | --------------------------------------------------------



| |  |  | Adjustments to service charge structures
| | - |  | ----------------------------------------

The increase in service charges on deposit accounts for both periods listed above is primarily due to an increase in our fee rates for non-sufficient funds and overdraft charges.

Other fee income consists of several categories, primarily the following:



| |  |  | Fees for the issuance of official checks
| | - |  | ----------------------------------------



| |  |  | Fees for wire transfers
| | - |  | -----------------------



| |  |  | Safe deposit box rent
| | - |  | ---------------------



| |  |  | Income from the sale of customer checks
| | - |  | ---------------------------------------



| |  |  | Income on real estate loans
| | - |  | ---------------------------



| |  |  | Extension fees, insurance premiums, and letter of credit fees
| | - |  | -------------------------------------------------------------



| |  |  | Income earned from Valley Wealth Management, Inc.
| | - |  | -------------------------------------------------

Levels of income derived from these categories vary. For example, general market conditions and new insurance premiums purchased affect the income earned on bank owned life insurance. Fees for the issuance of official
checks and customer check sales tend to grow as new branches are added. Fee schedules, while subject to change, generally do not alone yield a significant or discernable increase in income when they change. For both periods above, the decrease in
other income is primarily attributable to decrease in gross income earned from our investment subsidiary, Valley Wealth Management Services, Inc. Expenses for Valley Wealth Management Services, Inc. are included in noninterest expenses. Net income
for the subsidiary is not significant at this time.



23



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##### Table of Contents

Noninterest Expense

Noninterest expense for the three month period ended September 30 2007 and 2006 is shown in the following table:

Noninterest Expense

(dollars in thousands)



|                                           |  |                        |       |                        |       |                        |       |  
|------------------------------------------ |  | ---------------------- | ----- | ---------------------- | ----- | ---------------------- | ----- | -
|                                           |  | 3 months Ended 9/30/07 |       | 3 months Ended 9/30/06 |       | % Increase/ (Decrease) |      
|                                           |  |                       
|                                           |  |                       
|Compensation expense                       |  | $                      | 1,592 |                        | 1,535 |                        | 3.7   | %
|Occupancy expense                          |  |                        | 180   |                        | 181   |                        | -0.6  | %
|Equipment expense                          |  |                        | 131   |                        | 138   |                        | -5.1  | %
|Data processing expense                    |  |                        | 182   |                        | 149   |                        | 22.1  | %
|Advertising and marketing expenses         |  |                        | 65    |                        | 143   |                        | -54.5 | %
|Audit fees                                 |  |                        | 85    |                        | 63    |                        | 34.9  | %
|Franchise and purchased tax credit expense |  |                        | 85    |                        | 68    |                        | 25.0  | %
|Business manager expense                   |  |                        | 64    |                        | 70    |                        | -8.6  | %
|Deposit expense                            |  |                        | 56    |                        | 58    |                        | 10.3  | %
|Loan expense                               |  |                        | 50    |                        | 51    |                        | -2.0  | %
|Computer software expense                  |  |                        | 94    |                        | 108   |                        | -13.0 | %
|Other expense                              |  |                        | 510   |                        | 322   |                        | 55.9  | %
|                                           |  |                        |       |                        |       |                        |       |  
|Total noninterest expense                  |  | $                      | 3,094 |                        | 2,886 |                        | 7.2   | %
|                                           |  |                        |       |                        |       |                        |       |  

Noninterest expense for the nine months ended September 30, 2007 and 2006 is as follows:

Noninterest Expense

(dollars in thousands)



|                                           |  |                        |       |                        |       |                        |       |  
|------------------------------------------ |  | ---------------------- | ----- | ---------------------- | ----- | ---------------------- | ----- | -
|                                           |  | 9 months Ended 9/30/07 |       | 9 months Ended 9/30/06 |       | % Increase/ (Decrease) |      
|                                           |  |                       
|                                           |  |                       
|Compensation expense                       |  | $                      | 4,875 |                        | 4,551 |                        | 7.1   | %
|Occupancy expense                          |  |                        | 560   |                        | 508   |                        | 10.2  | %
|Equipment expense                          |  |                        | 409   |                        | 402   |                        | 1.7   | %
|Data processing expense                    |  |                        | 493   |                        | 456   |                        | 8.1   | %
|Advertising and marketing expense          |  |                        | 221   |                        | 298   |                        | -25.8 | %
|Audit fees                                 |  |                        | 273   |                        | 209   |                        | 30.6  | %
|Franchise and purchased tax credit expense |  |                        | 689   |                        | 202   |                        | 241.1 | %
|Business manager expense                   |  |                        | 215   |                        | 198   |                        | 8.6   | %
|Deposit expense                            |  |                        | 184   |                        | 211   |                        | -12.8 | %
|Loan expense                               |  |                        | 126   |                        | 162   |                        | -22.2 | %
|Computer software expense                  |  |                        | 260   |                        | 296   |                        | -12.2 | %
|Other expense                              |  |                        | 1,471 |                        | 966   |                        | 52.3  | %
|                                           |  |                        |       |                        |       |                        |       |  
|Total noninterest expense                  |  | $                      | 9,776 |                        | 8,459 |                        | 15.6  | %
|                                           |  |                        |       |                        |       |                        |       |  



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##### Table of Contents

Our non-interest expenses have increased during 2007 by 15.6% over the same period last year. A few items
to note are as follows:



| |  |  | Compensation expense has increased over the prior year due to officer merit increases effective January 1, 2007. Additionally, our expense for salary deferral
is lower than the same period last year as a result of lower loan growth.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Occupancy and equipment expense increases are primarily attributable to the new occupancy (and related equipment
purchases) of the 6thand 7thfloors of our main
headquarters. We did not take occupancy of the new floors until the end of the first quarter of 2006.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The increase in our data processing expense is related to our conversion to an imaged item processing environment during
the 2ndhalf of 2007.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our advertising/marketing expenses year to date are less than the same period last year as we have not embarked upon any major advertising campaigns during 2007.
The relatively soft loan demand has eliminated the need for extensive certificate of deposit advertising for 2007.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Audit fees have increased due to additional regulatory costs associated with compliance. We anticipate audit fees to
increase during the 4thquarter of 2007 as we complete our activities related to preparation for the management attestation required as of
December 31, 2007 related to the Sarbanes-Oxley Act.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The increase in franchise and purchased tax credit expense is primarily related to the write-off of a tax credit
investment during the 2ndquarter of 2007. (See discussion in Income Taxes below).
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Deposit expense is down year over year due to the write-off of $30,000 related to a fraudulent check scheme that occurred during the first quarter of 2006.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The decline in loan expense is due to lower loan growth than in the same period last year.
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | Included in our other expense is the significant increase in our FDIC insurance premiums as compared to the prior year and current expenses associated with our
network consultant which were charged to either equipment or computer software expense categories in prior years, depending on the nature of his work.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Noninterest expenses are expected to continue to increase as a direct result of business growth, expansion and complexity of banking operations, and compliance with the SarbanesOxley Act.

Income Taxes

To reflect our anticipated federal income tax liability, an expense of $311,000 with an effective tax rate of 13.4% was recognized for the nine months ended September 30, 2007, compared to an expense of
$1,083,000 at an effective tax rate of 28.4% recognized for the nine months ended September 30, 2006. The provision for income taxes for the third quarter of 2007 was $343,000 at an effective tax rate of 36.0% as compared to $392,000 at an
effective tax rate of 28.4% for the third quarter of 2006. During the second quarter of 2007, we recognized a federal tax credit and in accordance with APB Opinion No. 18, wrote off the corresponding investment tax credit asset as purchased tax
credit expense. Since the value of the asset was based on tax credits, the value of the asset declined as the tax credits were consumed. This substantially reduced our federal income tax expense over the same period in 2006. The tax provision for
the third quarter of 2007 included an increase in expense of $84,000 related to federal tax credits taken during the 2ndquarter of 2007 and the 4thquarter of 2006. The increase in expense is a true-up to the actual credits received based upon the tax forms received by the Company in September
2007.

Factors contributing to the difference between the effective tax rate and the statutory rate of 34% include provision
for loan loss reserves not allowed for tax purposes, tax-exempt interest income on municipal securities (net of disallowance), and purchased tax credits carried forward and tax-exempt income earned on bank-owned life insurance.



25



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##### Table of Contents

Investment Securities

Our investment portfolio is used both for investment income and liquidity purposes. At this time, we do not invest in derivatives or other types of high-risk securities. Unrealized gains and losses on securities
available-for-sale are recognized as direct increases or decreases in net shareholders equity. Funds not used for capital expenditures or lending activities are invested in the following:



| |  |  | Securities of the U.S. Government and its agencies
| | - |  | --------------------------------------------------



| |  |  | Treasury notes
| | - |  | --------------



| |  |  | Callable agency bonds
| | - |  | ---------------------



| |  |  | Noncallable agency bonds
| | - |  | ------------------------



| |  |  | Mortgage-backed securities and collateralized mortgage obligations
| | - |  | ------------------------------------------------------------------



| |  |  | Pools issued by government agencies
| | - |  | -----------------------------------



| |  |  | AAA rated corporate mortgage pools
| | - |  | ----------------------------------



| |  |  | Municipal bonds
| | - |  | ---------------



| |  |  | Taxable general obligation and revenue issues
| | - |  | ---------------------------------------------



| |  |  | Tax-exempt general obligation and revenue issues
| | - |  | ------------------------------------------------



| |  |  | Investment grade corporate bonds
| | - |  | --------------------------------



| |  |  | Restricted equity securities
| | - |  | ----------------------------



| |  |  | Federal Reserve Bank of Richmond shares
| | - |  | ---------------------------------------



| |  |  | Federal Home Loan Bank of Atlanta shares
| | - |  | ----------------------------------------



| |  |  | Community Bankers Bank shares
| | - |  | -----------------------------

Investment securities (available for sale and held to maturity), including restricted equity securities, at September 30, 2007 were $80.3 million, an increase of $6.7 million or 9.1% from their level of $73.6 million on
December 31, 2006. See Note 3 to the Consolidated Financial Statements.

Loan Portfolio

Our total loans were $487,851,000 at September 30, 2007, an increase of $16,800,000 or 3.6% from the $471,052,000 reported at December 31, 2006.
Our ratio of total loans to total funding sources (customer deposits, securities sold under agreements to repurchase, federal funds purchased, Federal Home Loan Bank advances, and guaranteed preferred beneficial interests in the Companys
junior subordinated debentures) stood at 87.8% at September 30, 2007 and 85.2% at December 31, 2006. Management seeks to maintain the ratio of loans to funding sources at a maximum of 90%.

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. We adjust the mix of lending and the terms of our 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 our primary and secondary 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 to the Consolidated Financial Statements or discussed below.

The following table summarizes the loan portfolio by category, net of deferred fees, as of the nine-month periods ended September 30, 2007 and 2006 and the year ended December 31, 2006:



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##### Table of Contents

Loan Portfolio Summary

(dollars in thousands)



|                                                           |  |         |  |          |  |         |  |       |  |         |  |      
|---------------------------------------------------------- |  | ------- |  | -------- |  | ------- |  | ----- |  | ------- |  | -----
|                                                           |  | 9/30/07 |  | 12/31/06 |  | 9/30/06
|                                                           |  | $       |  | %        |  | $       |  | %     |  | $       |  | %    
|Commercial                                                 |  | 85,933  |  | 17.6     |  | 93,400  |  | 19.8  |  | 96,737  |  | 21.0 
|Commercial real estate                                     |  | 176,264 |  | 36.1     |  | 174,882 |  | 37.2  |  | 171,404 |  | 37.1 
|Real estate construction                                   |  | 101,651 |  | 20.8     |  | 82,537  |  | 17.5  |  | 76,769  |  | 16.6 
|Residential real estate                                    |  | 116,667 |  | 23.9     |  | 112,022 |  | 23.8  |  | 109,289 |  | 23.6 
|Loans to individuals (except those secured by real estate) |  | 7,337   |  | 1.6      |  | 8,211   |  | 1.7   |  | 7,941   |  | 1.7  
|                                                           |  |         |  |          |  |         |  |       |  |         |  |      
|Total loans                                                |  | 487,852 |  | 100.0    |  | 471,052 |  | 100.0 |  | 462,140 |  | 100.0
|                                                           |  |         |  |          |  |         |  |       |  |         |  |      

Loan Category Analysis

Commercial Loans. Commercial 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.

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 either commercial real estate loans, which are secured by commercial property or residential real estate
loans, which are secured by first deeds of trust.

Residential Real Estate Loans. Residential real estate loans are secured by first
deeds of trust on 1-4 family residential properties. 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, although exceptions are made for
competitive reasons and under special programs. 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, home equity lines of credit, and loans secured by junior liens on
residential real estate. The loan proceeds typically are used to purchase vehicles, finance home remodeling, higher education, or for other consumer purposes.

Asset Quality

Summary of Allowance for Loan Losses

The allowance for loan losses represents an amount that, in our judgment, will be adequate to absorb any losses on existing loans that may become uncollectible, although there can be no assurance that this will be so.
The provision for loan losses increases the allowance, and loans charged off (net of recoveries) reduce the



27



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##### Table of Contents

allowance.

In recognition of our estimate of
inherent risks associated with lending activities, a provision for loan losses of $1,324,000 was provided during the nine-months ended September 30, 2007, an increase of $231,000 or 21.1% over the $1,093,000 reported during the same period in
2006. The increase is primarily due to the increase in our specific reserves due to additional credit quality concerns. During the third quarter of 2007, we charged off $1,167,000 (of which $990,000 had been set aside as a specific reserve earlier
in 2007) of one of our previously disclosed problem loan relationships. We are encouraged by several recent developments that have occurred with our previously disclosed problem loan issues. Positive resolutions, should they occur, could have a
positive impact on our fourth quarter. Our provision for loan losses for the quarter ended September, 2007 was $482,000, an increase of $95,000 or 24.5% compared to the $387,000 reported during the same period of 2006.

The ratio of the allowance for loan losses to total loans outstanding was approximately 1.1% at September 30, 2007, which compares to approximately
1.2% of gross loans at December 31, 2006 (see Note 4 to the Consolidated Financial Statements). These estimates are primarily based on our historical loss experience, portfolio concentrations, evaluation of individual loans and economic
conditions.

We regularly review asset quality and re-evaluate the allowance for loan losses. However, 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 us 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. (See Allowance for Loan Losses under Critical Accounting Policies.)

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.

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.

For the nine
months ended September 30, 2007, our non-performing assets to total assets ratio decreased from 1.56% at December 31, 2006 to 1.38%. Additionally, our loans past due more than 90 days as a percentage of total loans decreased from 0.13% at
December 31, 2006 to 0.00% at September 30, 2007. A total of $1,056,000 in specific reserves is included in the balance of the allowance for loan losses as of September 30, 2007 for impaired loans, which compares to a total of
$1,050,000 as of December 31, 2006. The $1,056,000 in specific reserves is primarily concentrated in two large relationships within our overall loan portfolio. Although we presently believe any potential loss exposure has been fully reserved
and the remaining balance is secured by customer assets pledged as collateral, it is obviously a situation which can change, which we are constantly monitoring.



28



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##### Table of Contents

Nonperforming assets at September 30, 2007, December 31, 2006 and September 30, 2006
are presented in the following table:

Nonperforming Assets

(dollars in thousands)



|                                             |  |         |       |          |   |         |  |   |      
|-------------------------------------------- |  | ------- | ----- | -------- | - | ------- |  | - | -----
|                                             |  | 9/30/07 |       | 12/31/06 |   | 9/30/06
|Nonaccrual loans                             |  | $       | 8,271 |          | $ | 6,343   |  | $ | 4,970
|Loans past due 90 days or more               |  |         |      |          |   | 616     |  |   | 6    
|Restructured loans                           |  |         |       |          |   |        |  |   |     
|Other nonperforming loans (1)                |  |         |      |          |   | 2,265   |  |   | 2,580
|                                             |  |         |       |          |   |         |  |   |      
|Total nonperforming loans                    |  | $       | 8,271 |          | $ | 9,224   |  | $ | 7,556
|                                             |  |         |       |          |   |         |  |   |      
|Foreclosed, repossessed and idled properties |  |         |      |          |   |        |  |   |     
|                                             |  |         |       |          |   |         |  |   |      
|Total nonperforming assets                   |  | $       | 8,271 |          | $ | 9,224   |  | $ | 7,556
|                                             |  |         |       |          |   |         |  |   |      

---

|(1) | Other nonperforming loans include impaired loans which are not on nonaccrual status or past due 90 days or more.
|--- | ----------------------------------------------------------------------------------------------------------------

Each quarter, the Directors Loan Committee, composed of eight directors, reviews all loans and related action plans on our watch list and any loans
identified as substandard by the credit quality review. We believe that the above allocated reserves are appropriate for the impaired loans in our portfolio based upon a detailed review of the quality and pledged collateral of each individual loans
considered impaired at each of the above-referenced periods. (See Impairment of Loans under Critical Accounting Policies.)

If nonaccrual loans had performed in accordance with their original terms, additional interest income in the amount of $703,894 for the nine-month period ended September 30, 2007; $300,727 for the year ended December 31, 2006; and
$206,371 for the nine-month period ended September 30, 2006 would have been recorded.

Additionally, the Banks credit risk
process provides ongoing assessment of the loan portfolios risk profile in accordance with standard industry practices. Loan assets which do not support satisfactory risk ratings under this basis are subjected to a well-defined, ongoing
management and reporting process. These Watch-List loan assets were as follows as of September 30, 2007, December 31, 2006, and September 30, 2006:

Watch List Credits

(dollars in thousands)



|                   |  |         |        |   |          |   |        |         |  |   |        |  
|------------------ |  | ------- | ------ | - | -------- | - | ------ | ------- |  | - | ------ | -
|                   |  | 9/30/07 |        |   | 12/31/06 |   |        | 9/30/06 | 
|Watch List Credits |  | $       | 36,855 |   |          | $ | 19,562 |         |  | $ | 21,815 |  
|% of Total Loans   |  |         | 7.55   | % |          |   | 4.15   | %       |  |   | 4.72   | %

As can be seen from the above table, our
Watch-List increased significantly during the 3rdquarter of 2007 by $17.2 million. The additions were concentrated in three credit
relationships, of which none are deemed to be impaired. As such, there are no specific reserves allocated for the three new relationships added to the Watch-List.



29



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##### Table of Contents

Other Assets

We have purchased life insurance contracts on key employees, the tax-exempt income from which is the funding vehicle for the Companys Supplemental Executive Retirement Plan (SERP) and other employee benefit costs including
health insurance, dental insurance, life insurance, and 401(k) employer match. Bank owned life insurance was $11.5 million at September 30, 2007, an increase of $400,000 over the $11.1 million reported as of December 31, 2006. The increase
is due to the $400,000 increase in the cash surrender value of the life insurance contracts.

Deposits

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

The following table summarizes our total deposits for the nine
months ended September 30, 2007 and for the year ended December 31, 2006:

Deposit Summary

(dollars in thousands)



|                                       |  |         |  |          |  |                     |  |       |  |         |   |  |       |  
|-------------------------------------- |  | ------- |  | -------- |  | ------------------- |  | ----- |  | ------- | - |  | ----- | -
|                                       |  | 9/30/07 |  | 12/31/06 |  | Increase/(Decrease) | 
|                                       |  | $       |  | %        |  | $                   |  | %     |  | $       |   |  | %     |  
|Time deposits                          |  | 265,165 |  | 61.1     |  | 263,123             |  | 59.6  |  | 2,042   |   |  | 0.8   |  
|Interest bearing demand & money market |  | 100,894 |  | 23.2     |  | 93,444              |  | 21.2  |  | 7,450   |   |  | 7.9   |  
|Savings                                |  | 52,522  |  | 12.1     |  | 66,259              |  | 15.0  |  | (13,737 | ) |  | (20.7 | )
|                                       |  |         |  |          |  |                     |  |       |  |         |   |  |       |  
|Total interest bearing deposits        |  | 418,581 |  | 96.5     |  | 422,826             |  | 95.8  |  | (4,245  | ) |  | (1.0  | )
|Noninterest demand & official checks   |  | 15,398  |  | 3.5      |  | 18,663              |  | 4.2   |  | (3,265  | ) |  | (17.5 | )
|                                       |  |         |  |          |  |                     |  |       |  |         |   |  |       |  
|Total deposits                         |  | 433,979 |  | 100.0    |  | 441,489             |  | 100.0 |  | (7,510  | ) |  | (1.7  | )
|                                       |  |         |  |          |  |                     |  |       |  |         |   |  |       |  

We would prefer to have transaction accounts comprise a larger percentage of total deposits, but
in order to fund our loan growth; we often have to rely on higher-cost certificates of deposit. This reliance has been reduced to some degree with the addition of our money market account which has an interest rate tied directly to the WSJ Prime
rate. As of September 30, 2007, this new product offering had amassed over $72 million in deposit balances, providing not only substantial deposit growth to fund our asset growth, but expense savings, as well. Within the certificate of deposit
category, we have marketed CDs nationally to institutional depositors, primarily banks, thrift institutions and credit unions through an Internet-based rate posting service. National market CDs at September 30, 2007 were $14.5 million, an
increase of $1.7 million from the $12.8 million reported at December 31, 2006 and represent 5.9% of total CDs and 3.5% of total deposits at September 30, 2007.

Short-Term Borrowings

Total short-term borrowings (including federal funds purchased and securities
sold under agreements to repurchase) increased by $18.4 million from their level of $46.6 million at December 31, 2006 to a total of $65.1 million as of September 30, 2007. Short-term borrowings at September 30, 2007 include Federal
Home Loan Bank of Atlanta (FHLB) borrowings in the amount of $23.0 million, a federal funds purchased position of



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##### Table of Contents

$16.3 million and a commercial sweep account program in the amount of $25.8 million.

The FHLB borrowings include two adjustable rate credits and one variable rate advance. The first loan is a $10 million adjustable rate credit which
matures on December 18, 2007 and reprices quarterly on the date of each quarterly interest payment (rate of 5.62625% on September 30, 2007). The second loan is a $5 million adjustable rate credit which matures on October 31, 2007 and
reprices quarterly on the date of each quarterly interest payment (rate of 5.11875% on September 30, 2007). The variable rate advance in the amount of $8.0 million is priced at the Prime Rate minus 4% per annum (rate of 4.895% on
September 30, 2007) that matures June 30, 2008. We anticipate we will replace these short-term FHLB borrowings as they mature with new FHLB instruments based upon market terms at the time of maturity.

One of our short-term FHLB advances ($10 million at fixed rate of 3.09%) matured during the third quarter of 2007. We have elected to replace these funds
using our overnight federal funds purchased lines of credit, as the cost of funds is cheaper than replacing the funds with a new FHLB advance. As our loan demand firms back up, we anticipate entering into a new FHLB advance to offset the overnight
borrowings.

The commercial sweep program involves balances subject to repurchase agreements which are reported as short term borrowings
rather than deposits since they are not FDIC insured. The balance in the program is $25.8 million at September 30, 2007, an increase of $4.2 million or 19.4% from the $21.6 million level at December 31, 2006. The program consists of a
demand deposit account from which we invest available balances daily in securities on an overnight basis subject to repurchase. On the following business day, we 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.

Long-Term Borrowings

Federal Home Loan Bank advances
are relatively cost-effective funding sources and provide us with the flexibility to structure borrowings in a manner that aids in the management of interest rate risk and liquidity. Long-term convertible Federal Home Loan Bank advances totaled
$40.0 million at September 30, 2007 and $48.0 million at December 31, 2006. The decrease is due to the reclassification of an existing Federal Home Loan Bank of Atlanta (FHLB) borrowing of $8.0 million to short-term. (See
Footnote 9 of the Companys Consolidated Financial Statements for more information on the long-term advances.)

Guaranteed Preferred Beneficial
Interests in the Companys Junior Subordinated Debentures

Valley Financial Statutory Trust III, a statutory business trust
(Trust III) was created by the Company on December 15, 2006, at which time Trust III issued $5.0 million in aggregate liquidation amount of $1 par value preferred capital trust securities which mature January 30, 2037.
Distributions are payable on the securities at a floating rate equal to the 3-month LIBOR plus 1.73%, and the securities may be prepaid at par by Trust III at any time after January 20, 2012. The principal assets of Trust III are $5,155 of the
Companys junior subordinated debentures which mature on January 30, 2037, and bear interest at a floating rate equal to the 3-month LIBOR plus 1.73%, and which are callable by the Company after January 30, 2012. All $155 in
aggregation liquidation amount of Trust IIIs common securities are held by the Company.

Valley Financial (VA) Statutory Trust II, a statutory
business trust (Trust II), was created on September 26, 2005, at which time Trust II issued $7.0 million in aggregate liquidation amount of $1 par value preferred capital trust securities which mature December 15, 2035.
Distributions are payable on the securities at a floating rate equal to the 3-month London Interbank Offered Rate (LIBOR) plus 1.49%, and the securities may be prepaid at



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par by Trust II at any time after December 15, 2010. The principal assets of Trust II are $7.2 million of the Companys junior subordinated
debentures which mature on December 15, 2035, and bear interest at a floating rate equal to the 3-month LIBOR plus 1.49%, and which are callable by the Company after December 15, 2010. All $217,000 in aggregation liquidation amount of
Trust IIs common securities are held by the Company.

Valley Financial (VA) Statutory Trust I, a statutory business trust
(Trust I), was created on June 26, 2003, at which time the Trust issued $4.0 million in aggregate liquidation amount of $1 par value preferred capital trust securities which mature June 26, 2033. Distributions are payable on
the securities at a floating rate equal to the 3-month London Interbank Offered Rate (LIBOR) plus 3.10%, capped at 11.75%, and the securities may be prepaid at par by Trust I at any time after June 26, 2008. The principal assets of
Trust I are $4.1 million of the Companys junior subordinated debentures which mature on June 26, 2033, and bear interest at a floating rate equal to the 3-month LIBOR plus 3.10%, capped at 11.75%, and which are callable by the Company
after June 26, 2008. All $124,000 in aggregation liquidation amount of Trust Is common securities are held by the Company.

The
debenture proceeds from Trust I, Trust II, and Trust III are included in our Tier 1 capital for regulatory capital adequacy purposes to the extent that they do not exceed 25% of our total Tier I capital including the securities. This amount totaled
$12,567,000 (of the $16,000,000 outstanding) at September 30, 2007. The remaining $3,433,000 is included in the calculation of our total risk-based capital ratio as Tier 2 capital. Our obligations with respect to the issuance of Trust I, Trust
II, and Trust IIIs preferred securities and common securities constitute a full and unconditional guarantee of Trust I, Trust II, and Trust IIIs obligations with respect to the preferred securities and common securities. Subject to
certain exceptions and limitations, we may elect from time to time to defer interest payments on its junior subordinated debentures, which would result in a deferral of distribution payments on Trust I, Trust II, and Trust IIIs preferred trust
securities and common securities.

Capital Adequacy

We seek to maintain a capital structure adequate to support anticipated asset growth and serve as a cushion to absorb potential losses. Our financial position at September 30, 2007 reflects liquidity and capital
levels currently adequate to fund anticipated near-term business expansion. During the third quarter, the Company accepted subscriptions to sell 409,884 shares of its common stock at $10.50 per share in a private offering, for an aggregate offering
price of $4,303,782. As of September 30, 2007, proceeds of $1,941,282 were received for 184,884 shares. Proceeds for the remaining 225,000 totaling $2,362,500 were received on October 2, 2007.

We review the adequacy of our capital on an ongoing basis at the Company and Bank level and are committed to maintaining a total risk based capital ratio
of 10% or greater at the Bank level, as is required for a well capitalized institution.

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

Valley Financial Corporation



|         |  |         |   |  |          |   |  |         |  
|-------- |  | ------- | - |  | -------- | - |  | ------- | -
|Ratio    |  | 9/30/07 |   |  | 12/31/06 |   |  | 9/30/06 |  
|Tier 1   |  | 9.9     | % |  | 9.1      | % |  | 9.4     | %
|Total    |  | 11.6    | % |  | 11.2     | % |  | 10.5    | %
|Leverage |  | 8.5     | % |  | 7.9      | % |  | 8.2     | %



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The above capital ratios for 9/30/07 do not reflect the proceeds received after quarter-end from the
private placement offering.

For the periods indicated, the Bank had the following risk-based capital and leverage ratios:

Valley Bank



|         |  |         |   |  |          |   |  |         |  
|-------- |  | ------- | - |  | -------- | - |  | ------- | -
|Ratio    |  | 9/30/07 |   |  | 12/31/06 |   |  | 9/30/06 |  
|Tier 1   |  | 9.4     | % |  | 9.1      | % |  | 9.0     | %
|Total    |  | 10.5    | % |  | 10.2     | % |  | 10.1    | %
|Leverage |  | 8.1     | % |  | 7.9      | % |  | 7.9     | %

Total shareholders equity grew by $3.9 million or 11.7% from $33.4 million at
December 31, 2006 to $37.4 million at September 30, 2007. Earnings, proceeds from the exercise of incentive stock options, proceeds from the private placement offering (see Note 12 in the Consolidated Financial Statements), the change in
unrealized gains and losses for securities available-for-sale, and the reversal of unrealized gains and losses for derivatives not held for trading accounted for the net increase. We paid our seventh consecutive semi-annual cash dividend on the
Companys common stock, in the amount of $0.07 per share on July 2, 2007 to shareholders of record June 1, 2007.

Liquidity

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

Liquidity measures our ability to meet our maturing obligations and existing commitments, to withstand fluctuations in deposit levels, to fund our 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.

Liquid assets, which include cash and due from banks, interest-bearing deposits at other banks and non-pledged securities available-for-sale, at
September 30, 2007, totaled $21.5 million, a decrease of $14.0 million, compared to $35.5 million at December 31, 2006. The decrease in liquid assets is due primarily to the run-off of our federal funds sold position during the quarter.
Our funding sources consist of an established federal funds line with a regional correspondent bank totaling $12.0 million that had a $6.3 million balance as of September 30, 2007, three established federal funds lines with
third party banks totaling $23.0 million that had outstanding balances totaling $10.0 million as of September 30, 2007, and an established line with the FHLB that had $63.0 million outstanding under a total line of $82.0 million as of
September 30, 2007. We believe these arrangements will be renewed at maturity.

We sell excess funds as overnight federal funds sold
to provide an immediate source of liquidity. We had federal funds sold of $0 at September 30, 2007 and $16.8 million at December 31, 2006.

As a result of our management of liquid assets and our ability to generate liquidity through alternative funding sources, we believe we maintain overall liquidity sufficient to meet our depositors requirements
and satisfy our customers credit needs.



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Impact of Inflation

The Consolidated Financial Statements and Notes presented 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 our 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. We seek to manage the relationship between interest-sensitive assets and liabilities in order to protect against the effects of wide interest rate fluctuations, including those resulting from
inflation.

Recent and Future Accounting Considerations

In September 2006, the Emerging Issues Task Force affirmed and ratified EITF Issue No. 06-04 Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life
Insurance Arrangements. For endorsement split-dollar life insurance arrangements that provide a benefit to an employee that extends to postretirement periods, an employer should recognize a liability for future benefits in accordance with
Statement 106 or Opinion 12 (depending on whether a substantive plan is deemed to exist) based on the substantive agreement with the employee. For example, if the employer has effectively agreed to maintain a life insurance policy during the
employees retirement, the cost of the insurance policy during the postretirement periods should be accrued in accordance with either Statement 106 or Opinion 12. Similarly, if the employer has effectively agreed to provide the employee with a
death benefit, the employer should recognize a liability for the future death benefit in accordance with either Statement 106 or Opinion 12. This EITF is effective for fiscal years beginning after December 15, 2007 and will impact on the
Companys financial statements for fiscal year 2008.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities  Including an amendment of FASB Statement No. 115. This statement permits, but does not require, entities to measure many financial instruments at fair value. The objective is to
provide entities with an opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. Entities electing this option will apply it
when the entity first recognizes an eligible instrument and will report unrealized gains and losses on such instruments in current earnings. This statement 1) applies to all entities, 2) specifies certain election dates, 3) can be applied on an
instrument-by-instrument basis with some exceptions, 4) is irrevocable, and 5) applies only to entire instruments. One exception is demand deposit liabilities which are explicitly excluded as qualifying for fair value. With respect to SFAS
No. 115, available-for-sale and held-to-maturity securities at the effective date are eligible for the fair value option at that date. If the fair value option is elected for those securities at the effective date, cumulative unrealized gains
and losses at that date shall be included in the cumulative-effect adjustment and thereafter, such securities will be accounted for as trading securities. SFAS No. 159 is effective for the Company on January 1, 2008. The Company is
currently analyzing the fair value option provided under SFAS No. 159.



|Item 3. | Quantitative and Qualitative Disclosures about Market Risk
|------- | ----------------------------------------------------------

The principal goals of our asset and liability management strategy are the maintenance of adequate liquidity and the management of interest rate risk. Liquidity is the ability to convert assets to cash to fund depositors withdrawals
or borrowers loans without significant loss. Interest rate risk management balances the effects of interest rate changes on assets that earn interest or liabilities on which interest is paid, to protect the



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Bank from wide fluctuations in its net interest income which could result from interest rate changes.

We attempt to ensure that adequate funds are available at all times to meet the needs of our customers. On the asset side of the balance sheet, maturing
investments, loan payments, maturing loans, federal funds sold, and unpledged investment securities are principal sources of liquidity. On the liability side of the balance sheet, liquidity sources include core deposits, the ability to increase
large denomination certificates of deposit, federal fund lines from correspondent banks, borrowings from the FHLB and the Federal Reserve Bank, as well as the ability to generate funds through the issuance of long-term debt and equity.

Interest rate risk is the effect that changes in interest rates would have on interest income and interest expense as interest-sensitive assets and
interest-sensitive liabilities either re-price or mature. We attempt to maintain the portfolios of interest-earning assets and interest-bearing liabilities with maturities or re-pricing opportunities at levels that will afford protection from
substantial erosion of net interest margin, to the extent practical, from changes in interest rates.

We use a number of tools to manage
our interest rate risk, including simulating net interest income under various scenarios, monitoring the present value change in equity under the same scenarios, and monitoring the difference or gap between rate sensitive assets and rate sensitive
liabilities over various time periods. (See Interest Rate Risk in Item 2.)



|Item 4T. | Controls and Procedures.
|-------- | ------------------------

As of the end of the
period covered by the report, an evaluation was performed under the supervision and with the participation of the Companys management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and
procedures were effective. There have not been any changes in our internal control over financial reporting that occurred during the last quarter that has materially affected, or is reasonably likely to materially affect, internal control over
financial reporting.

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

PART II. OTHER INFORMATION



|Item 1. | Legal Proceedings.
|------- | ------------------

There were no pending legal
proceedings during the quarter.



|Item 1A. | Risk Factors.
|-------- | -------------

There were no changes to the risk
factors identified in the Companys Annual Report Form 10-K for the year ended December 31, 2006.



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|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds.
|------- | ------------------------------------------------------------

During the third quarter, the Company accepted subscriptions to sell 409,884 shares of its common stock at $10.50 per share in a private offering, for an aggregate offering price of $4,303,782. As of
September 30, 2007, proceeds of $1,941,282 were received for 184,884 shares. Proceeds for the remaining 225,000 totaling $2,362,500 were received on October 2, 2007.

The shares were purchased by members of Valley Banks senior management and Board of Directors, and by an institutional investor with no prior
ownership. A registration statement covering the shares has not been filed with the Securities and Exchange Commission, and accordingly, the shares are subject to certain restrictions on resale.



|Item 3. | Defaults Upon Senior Securities.
|------- | --------------------------------

There were no
defaults upon Senior Securities during the quarter.



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

There was no Submission of Matters to a Vote of Security Holders during the quarter.



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##### Table of Contents

|Item 5. | Other Information.
|------- | ------------------

None.



|Item 6. | Index to Exhibits
|------- | -----------------



|(a) | We filed the following exhibits for the quarter ended September 30, 2007:
|--- | -------------------------------------------------------------------------



|               |  |                                                                                                                                                                                                                                   
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                       
|3.1            |  | Articles of Incorporation (incorporated herein by reference to Exhibit No. 3.1 of Registration Statement No. 33-77568, on Form S-1, as amended).                                                                                  
|               | 
|3.2            |  | Bylaws (incorporated herein by reference to Exhibit No. 3.2 of Registration Statement No. 33-77568, on Form S-1, as amended).                                                                                                     
|               | 
|3.3            |  | Bylaws as amended July 19, 2003 (incorporated herein by reference to Exhibit 3.3 of Form 10-KSB filed March 30, 2005, File No. 000-28342).                                                                                        
|               | 
|10.2*          |  | Stock Option Agreement dated December 19, 1996, by and between the Company and Ellis L. Gutshall (incorporated herein by reference to Exhibit No. 10.4 of Form 10-KSB filed March 27, 1997, File
No. 33-77568).                   
|               | 
|10.3*          |  | Severance Agreement dated December 19, 1996, by and between the Company and Ellis L. Gutshall (incorporated herein by reference to Exhibit No. 10.3 of Form 10-KSB filed March 27, 1997, File No.
33-77568).                      
|               | 
|10.4*          |  | Stock Option Agreement dated January 29, 2001 by and between the Company and Ellis L. Gutshall (incorporated herein by reference to Exhibit No. 10.4 of Form 10-K filed March 28, 2006, File No.
33-77568).                       
|               | 
|10.5*          |  | Stock Option Agreement dated January 10, 2002, by and between the Company and Ellis L. Gutshall (incorporated herein by reference to Exhibit No. 10.5 of Form 10-K filed March 28, 2006, File No.
33-77568).                      
|               | 
|10.6*          |  | Stock Option Agreement dated July 5, 2005, by and between the Company and Ellis L. Gutshall (incorporated herein by reference to Exhibit No. 10.6 of Form 10-K filed March 28, 2006, File No.
33-77568).                          
|               | 
|10.7*          |  | Restricted Stock Agreement dated July 5, 2005, by and between the Company and Ellis L. Gutshall (incorporated herein by reference to Exhibit No. 10.7 of Form 10-K filed March 28, 2006, File No.
33-77568).                      
|               | 
|10.8*          |  | Employment agreement dated September 21, 2000, by and between the Company and Ellis L. Gutshall (incorporated herein by reference to Exhibit 10.2 of Form SB-2, filed September 27, 2000, and Form
SB-2/A filed October 25, 2000).



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|       |  |                                                                                                                                                                                                                                                
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       | 
|10.9*  |  | Valley Bank Supplemental Retirement Plan effective January 1, 2002 (incorporated herein by reference to Exhibit 10.14 of Form 10-QSB filed May 15, 2002, File No.
33-77568).                                                                   
|       | 
|10.10* |  | Split-Dollar Insurance Agreement dated August 20, 2003, by and between Valley Bank and Ellis L. Gutshall (incorporated herein by reference to Exhibit 10.16 of Form 10-QSB filed November 14,
2003, File No. 33-77568).                        
|       | 
|10.11  |  | Insurance Transfer Agreement dated December 31, 2003 by and among Valley Financial Corporation, Valley Bank, and Ellis L. Gutshall (incorporated herein by reference to Exhibit 10.20 of Form
10-KSB filed March 30, 2004, File No. 000-28342).
|       | 
|10.12* |  | Stock Option Agreement dated November 11, 2004, by and between the Company and John T. McCaleb (incorporated herein by reference to Exhibit No. 10.22 of Form 10-K filed March 28, 2006, File No.
33-77568).                                   
|       | 
|10.13* |  | Restricted Stock Agreement dated July 5, 2005, by and between the Company and John T. McCaleb (incorporated herein by reference to Exhibit No. 10.23 of Form 10-K filed March 28, 2006, File No.
33-77568).                                    
|       | 
|10.14* |  | Stock Option Agreement dated November 11, 2004, by and between the Company and Andrew B. Agee (incorporated herein by reference to Exhibit No. 10.24 of Form 10-K filed March 28, 2006, File No.
33-77568).                                    
|       | 
|10.15* |  | Restricted Stock Agreement dated July 5, 2005, by and between the Company and Andrew Agee (incorporated herein by reference to Exhibit No. 10.25 of Form 10-K filed March 28, 2006, File No.
33-77568).                                        
|       | 
|10.16* |  | Letter agreement regarding retirement of A. Wayne Lewis dated July 22, 2005, by and among the Company and A. Wayne Lewis (incorporated herein by reference to Exhibit 10.21 of Form 10-Q filed
November 14, 2005, File No. 33-77568).          
|       | 
|10.17* |  | Restricted Stock Agreement dated July 5, 2005, by and between the Company and Kimberly B. Snyder (incorporated herein by reference to Exhibit No. 10.27 of Form 10-K filed March 15, 2007, File
No. 33-77568).                                 
|       | 
|10.18* |  | Stock Option Agreement dated July 5, 2005, by and between the Company and Kimberly B. Snyder (incorporated herein by reference to Exhibit No. 10.28 of Form 10-K filed March 15, 2007, File No.
33-77568).                                     
|       | 
|10.19* |  | Restricted Stock Agreement dated August 10, 2005, by and between the Company and Kimberly B. Snyder (incorporated herein by reference to Exhibit No. 10.29 of Form 10-K filed March 15, 2007, File
No. 33-77568).                              
|       | 
|10.20* |  | Stock Option Agreement dated August 10, 2005 by, and between the Company and Kimberly B. Snyder (incorporated herein by reference to Exhibit No. 10.30 of Form 10-K filed March 15, 2007, File No.
33-77568).                                  



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|     |  |                                                                                                                                                                 
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|11.0 |  | Statement re Computation of Earnings per Share (filed herewith as Note 5).                                                                                      
|     | 
|31.1 |  | Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).                                               
|     | 
|31.2 |  | Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).                                               
|     | 
|32.1 |  | Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
|     | 
|32.2 |  | Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

---

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



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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, 2007 |  |  |  | /s/ Ellis L. Gutshall                                                   
|Date              |  |  |  | Ellis L. Gutshall, President and Chief Executive Officer                
|                  |  | 
|November 12, 2007 |  |  |  | /s/ Kimberly B. Snyder                                                  
|Date              |  |  |  | Kimberly B. Snyder, Executive Vice President and Chief Financial Officer



40