<PAGE>

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

                                   FORM 10-QSB

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

                  For the Quarterly Period Ended March 31, 2002

                        Commission File Number: 33-77568

                          VALLEY FINANCIAL CORPORATION

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

                             36 Church Avenue, S.W.
                             Roanoke, Virginia 24011

                    (Address of principal executive offices)

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

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

At April 30, 2002, 1,213,207 shares of the issuer's common stock, no par value,
were outstanding.

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



<PAGE>


                          VALLEY FINANCIAL CORPORATION
                                   FORM 10-QSB
                                 March 31, 2002

                                      INDEX

Part I.  FINANCIAL INFORMATION

         Item 1.  Financial Statements

                           Consolidated Balance Sheets                   3
                           Consolidated Statements of Income             4
                           Consolidated Statements of Cash Flows         5
                           Notes to Consolidated Financial Statements    6

         Item 2.  Management's Discussion and Analysis                   9

Part II.  OTHER INFORMATION

         Item 4.  Submission of Matters to a Vote of Security Holders   22

         Item 5.  Other Information                                     22

         Item 6.  Exhibits and Reports on Form 8-K                      22

SIGNATURES                                                              23

                                       2

<PAGE>


         PART 1 - FINANCIAL INFORMATION

Item 1.  Financial Statements.

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

<TABLE>
<CAPTION>
                                                               (Unaudited)
                                                                 March 31      December 31
                                                                  2002             2001
                                                               -----------     -----------
<S>                                                            <C>             <C>
Assets
Cash and due from banks                                        $  6,015         $  6,235
Money market investments:
         Federal funds sold                                          --               --
         Interest-bearing deposits in other banks                   191              143
                                                               --------         --------
                  Total money market investments                    191              143

Securities available for sale                                    34,106           31,338
Restricted equity securities                                      1,927            1,927
Loans:
         Commercial and industrial loans                         37,948           35,366
         Commercial real estate loans                            64,502           60,290
         Real estate construction                                10,988            9,005
         Residential real estate loans                           21,715           21,482
         Loans to individuals                                    21,954           21,430
                                                               --------         --------
                  Total loans                                   157,107          147,573
Less unearned income                                                (20)             (22)
Less allowance for loan losses                                   (1,655)          (1,468)
                                                               --------         --------
                  Net loans                                     155,432          146,083
Premises and equipment                                            4,415            4,084
Accrued interest receivable                                         917              930
Other assets                                                      3,888            3,128
                                                               --------         --------
                  Total assets                                 $206,891         $193,868
                                                               --------         --------

Liabilities and Shareholders' Equity
Deposits:
         Non-interest bearing demand deposits                  $ 22,892         $ 24,297
         Interest bearing demand deposits                         9,806           10,820
         Money market deposits                                   17,908           23,590
         Other savings deposits                                   2,561            2,220
         Certificates of deposits **100,000                      32,520           25,591
         Other time deposits                                     62,932           52,348
                                                               --------         --------
                  Total deposits                                148,619          138,866
                                                               --------         --------

Short-term borrowings                                             5,381            3,824
Securities sold under agreements to repurchase                    4,836            3,347
Accrued interest payable                                            856            1,104
Other liabilities                                                   645              423
Federal Home Loan Bank advances                                  30,000           30,000
                                                               --------         --------
                  Total liabilities                             190,337          177,564
                                                               --------         --------
Commitments and other contingencies

Preferred stock, no par value. Authorized 10,000,000
         shares; none issued and outstanding
Common stock, no par value.  Authorized 10,000,000
         shares; issued and outstanding 1,213,207 at
         March 31, 2002 and 1,213,207 at December
         31, 2001                                                12,295           12,295
Accumulated retained earnings                                     4,587            4,113
Accumulated other comprehensive loss                               (328)            (104)
                                                               --------         --------
                  Total shareholders' equity                     16,554           16,304
                                                               --------         --------
                  Total liabilities and shareholders' equity   $206,891         $193,868
                                                               --------         --------
</TABLE>

See accompanying notes to consolidated financial statements.

                                       3

<PAGE>

                          VALLEY FINANCIAL CORPORATION
                        CONSOLIDATED STATEMENTS OF INCOME
                                   (Unaudited)
                      (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                                For the Period   For the Period
                                                                January 1, 2002  January 1, 2001
                                                                    Through           Through
                                                                March 31, 2002    March 31, 2001
                                                                --------------    --------------
<S>                                                            <C>                <C>
Interest Income:
         Interest and fees on loans                                $ 2,685            $ 2,595
         Interest on money market investments                            5                 16
         Interest on securities - taxable                              407                483
         Interest on securities - nontaxable                            72                 96
                                                                   -------            -------
                  Total interest income                              3,169              3,190
                                                                   -------            -------

Interest Expense:
         Interest on certificates of deposit ** 100,000                270                294
         Interest on other deposits                                    666              1,243
         Interest on Federal Home Loan Bank advances                   309                184
         Interest on repurchase agreements                              15                 49
         Interest on borrowed funds                                      7                 32
                                                                   -------            -------
                  Total interest expense                             1,267              1,802
                                                                   -------            -------

                  Net interest income                                1,902              1,388

Provision for loan losses                                              187                 37
                                                                   -------            -------

         Net interest income after provision for loan losses         1,715              1,351
                                                                   -------            -------
Noninterest income:
         Service charges on deposit accounts                           106                 86
         Other fee income                                               64                 21
         Securities gains (losses)                                      --                 (2)
                                                                   -------            -------
                  Total noninterest income                             170                105
                                                                   -------            -------

Noninterest expense:
         Compensation expense                                          672                529
         Occupancy                                                      85                 72
         Data processing and equipment                                 130                110
         Other expense                                                 331                296
                                                                   -------            -------
                  Total noninterest expense                          1,218              1,007
                                                                   -------            -------

Net income before taxes                                                667                449

Provision for income taxes                                             193                110
                                                                   -------            -------

Net income                                                         $   474            $   339
                                                                   =======            =======

Basic earnings per share                                           $  0.26            $  0.19
                                                                   =======            =======

Diluted earnings per share                                         $  0.25            $  0.18
                                                                   =======            =======
</TABLE>

See accompanying notes to consolidated financial statements.

** denotes greater than

                                       4

<PAGE>


                          VALLEY FINANCIAL CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)
                      (In thousands, except per share data)
<TABLE>
<CAPTION>
                                                              For the Period    For the Period
                                                              January 1, 2002   January 1, 2001
                                                                  Through           Through
                                                               March 31, 2002   March 31, 2001
                                                              ---------------   --------------
<S>                                                           <C>               <C>
Cash Flows From Operating Activities:
         Net income                                            $    474           $    339
         Adjustments to reconcile net income to net
         cash provided by operating activities:
                  Provision for loan losses                         187                 37
                  Depreciation and amortization                      85                 65
                  Net losses on sale of securities                   --                  2
                  Amortization (accretion) of premiums and
                    discounts                                        11                 10
                  Decrease in unearned fees                          (2)                (9)
                  Decrease in interest receivable                    13                 93
                  (Increase) decrease in other assets                54                (16)
                  Decrease in accrued interest payable             (248)              (126)
                  Increase (decrease) in other liabilities          222                (17)
                                                               --------           --------
Net cash provided by operating activities                           796                378
                                                               --------           --------

Cash Flows From Investing Activities:
         Increase in money market investments                       (48)            (1,325)
         Purchases of premises and equipment                       (406)              (148)
         Purchases of securities available-for-sale              (5,148)            (6,739)
         Purchases of restricted equity securities                   --               (250)
         Proceeds from sales, calls, and maturities of
           securities available-for-sale                          2,030              7,647
         Purchase of bank owned life insurance                     (671)                --
         Increase in value of bank owned life insurance             (38)                --
         Increase in loans                                       (9,534)            (7,267)
                                                               --------           --------
Net cash used in investing activities                           (13,815)            (8,082)
                                                               --------           --------

Cash Flows From Financing Activities:
         Increase in time deposits greater than $100,000          6,929              3,210
         Increase (decrease) in other time deposits              10,584             (3,548)
         Increase (decrease) in other deposits                   (7,760)             2,085
         Increase (decrease) in short-term borrowings             1,557             (1,762)
         Increase in securities sold under agreements
            to repurchase                                         1,489              2,279
         Proceeds from Federal Home Loan Bank advances               --              5,000
                                                               --------           --------
Net cash provided by financing activities                        12,799              7,264
                                                               --------           --------

Net Decrease in Cash and Due From Banks                            (220)              (440)

Cash and Due From Banks at Beginning of Period                    6,235              3,988
                                                               --------           --------
Cash and Due From Banks at End of Period                       $  6,015           $  3,548
                                                               ========           ========

Supplemental disclosure of cash flow information:
         Cash paid during the period for interest              $  1,515           $  1,928
                                                               --------           --------
         Cash paid during the period for taxes                 $     45           $     --
                                                               ========           ========
</TABLE>

See accompanying notes to consolidated financial statements.

                                       5

<PAGE>

                          VALLEY FINANCIAL CORPORATION

                   Notes to Consolidated Financial Statements
                                 March 31, 2002
                                   (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
             2001 Annual Report on Form 10-KSB.

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

    (2)      Cash and Cash Equivalents

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

                                        6

<PAGE>

   (3)   Securities

                The carrying values, unrealized gains, unrealized losses and
         approximate fair values of investment securities at March 31, 2002 are
         shown in the table below. The entire investment portfolio is classified
         as available-for-sale in order to provide maximum liquidity for funding
         needs. As of March 31, 2002, investments with amortized costs and fair
         values of $22,408 and $22,109, respectively, were pledged as collateral
         for public deposits, a line of credit available from the Federal Home
         Loan Bank, customer sweep accounts, and for other purposes as required
         or permitted by law.

                  Investment Portfolio - Category Distribution
                             (dollars in thousands)

<TABLE>
<CAPTION>
                                                          Amortized  Unrealized  Unrealized   Approximate
                                                            Costs       Gains      Losses     Fair Values
                                                            -----       -----      ------     -----------
          <S>                                             <C>        <C>           <C>         <C>
          U.S. Treasury                                   $   199    $    4         $  0       $    203

          U.S. Government agencies                          3,022        12          (38)         2,996

          Mortgage-backed securities                        6,288        39          (71)         6,256

          Collateralized mortgage obligations              17,332         2         (309)        17,025

          States and political subdivisions                 6,960        32         (166)         6,826

          Corporate debt securities                           800         -            -            800

          Restricted equity securities                      1,927         0            0          1,927
                                                          -------    ------       ------       --------
               Total securities available for sale        $36,528    $   89        ($584)      $ 36,033
                                                          =======    ======       ======       ========
</TABLE>

   (4)   Allowance for Loan Losses

                The following table summarizes the loan loss experience for the
         three-month periods ended March 31, 2002 and 2001.

                            Allowance for Loan Losses
                             (dollars in thousands)

                                                             2002        2001
                                                            ------      ------
                Balance at January 1                        $1,468      $1,190

                Provision for loan losses                      187          37

                Recoveries                                       0           0

                Charged off loans                                0           0
                                                            ------      ------
                Balance at March 31                         $1,655      $1,227
                                                            ======      ======

                                        7

<PAGE>

      (5)  Earnings Per Share

                    Basic earnings per share is based upon the weighted
           average number of common shares outstanding during the period.
           The weighted average shares outstanding for the diluted
           earnings per share computations were adjusted to reflect the
           assumed conversion of shares available under stock options.
           The following table summarizes the shares utilized (adjusted
           for the three-for-two stock split declared declared on April
           24, 2002 to shareholders of record April 30, 2002 and payable
           on May 30, 2002) in the computations:

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

           Three months ending March 31:        Basic             Diluted
                                                -----             -------

                        2002                   1,819,810         1,880,293
                                               =========         =========

                        2001                   1,819,810         1,871,781
                                               =========         =========

      (6)  Comprehensive Income

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

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

                    The adoption of Statement 130 on January 1, 1998 did
           not have any effect on the consolidated financial position,
           results of operations or liquidity of the Company. However,
           Statement 130 does have an effect on financial statement
           displays presented by the Company since the Company has net
           unrealized gains (losses) on available-for-sale securities, an
           item of other comprehensive income (loss). For the three
           months ended March 31, 2002 and 2001, total comprehensive
           income was $250 and $517, respectively.

                                       8

<PAGE>

     The information that follows discloses the reclassification adjustments and
the income taxes related to securities available-for-sale that are included in
other comprehensive income (loss), net of income taxes for the three month
periods ended March 31, 2002 and 2001.

<TABLE>
<CAPTION>
                                                                   For the Three Months Ended    For the Three Months Ended
                                                                         March 31, 2002                March 31, 2001
                                                                         --------------                --------------
<S>                                                                <C>                           <C>
 Net unrealized gains (losses) on securities available-for-sale:
  Net unrealized holding gains (losses) during the year                    $     (339)                    $     268
    Less reclassification adjustments for losses included
      in net income                                                                 -                             1

  Income tax benefit (expense)                                                    115                           (91)
                                                                           ----------                     ---------
        Other comprehensive income (loss), net of income taxes             $     (224)                    $     178
                                                                           ==========                     =========
</TABLE>

Item 2.  Management's Discussion and Analysis.

     The following is management's discussion and analysis of the financial
condition and results of operations of the Company as of and for the three
months ended March 31, 2002 and 2001. The discussion should be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto.

Overview

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

     Total assets at March 31, 2002 were $206.9 million, up 6.7% from $193.9
million at December 31, 2001. The principal components of the Company's assets
at the end of the period were $36.0 million in securities available-for-sale,
including restricted equity securities, and $157.1 million in gross loans.

     Total liabilities at March 31, 2002 were $190.3 million, up 7.2% from
$177.6 million at December 31, 2001 with the increase represented by a $9.7
million growth in deposits, a $1.5 million growth in securities sold under
agreements to repurchase, and a $1.6 million increase in short-term borrowings.

     Total shareholders' equity at March 31, 2002 was $16.6 million consisting
of $9.1 million in net proceeds from the Company's initial public offering, $3.2
million in net proceeds from the Company's secondary offering, $10,000 in
proceeds from the exercise of stock options, increased by accumulated retained
earnings of $4.6 million and $328,000 of net unrealized losses on securities
available-for-sale, net of related deferred tax liability. Total shareholders'
equity was $16.6 million at March 31, 2002 compared with $16.3 million at
December 31, 2001, an increase of $300,000 or 1.8%. Exclusive of unrealized
losses on investment securities, shareholders' equity was $16.9 million at March
31, 2002 and $16.4 million at December 31, 2001.

                                       9

<PAGE>

     The Company had net income of $474,000 for the three months ended March 31,
2002 compared with $339,000 recorded for the three months ended March 31, 2001,
an increase of $135,000 or 39.8%. An improved net interest margin in the first
three months of 2002 as compared to the first three months of 2001 combined with
increased noninterest income, offset by increases in noninterest expense in all
categories, contributed to the 39.8% increase in net income.

     Profitability as measured by the Company's return on average assets ("ROA")
was .96% for the three months ended March 31, 2002 compared to .84% for the same
period in 2001. Return on average equity ("ROE") was 11.51% for the three months
ended March 31, 2002 compared to 9.25% for the same period in 2001. The
calculation of ROE excludes the effect of any unrealized gains or losses on
investment securities.

Net Interest Income

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

     Net interest income was $1.9 million for the three months ended March 31,
2002 and is attributable to interest income from loans and securities exceeding
the cost of interest paid on deposits and borrowed funds. Net interest income
for the first three months of 2002 increased 35.7% from $1.4 million for the
same period in 2001. The net interest margin on a fully taxable equivalent ("FTE
") basis was 4.22% for the first three months of 2002, an increase of 50 basis
points from the 3.72% reported for the same period in 2001. The Bank produced
the 50 basis point increase by working diligently during 2001 to reprice
deposits significantly downward and by restructuring the investment portfolio to
shorten maturities and to obtain a more attractive yield, thus providing the
Bank the 50 basis point increase. The Bank's cost of funds ratio was 2.84% for
the quarter ended March 31, 2002, down 213 basis points from the 4.97% reported
for the first quarter of 2001. The Bank's yield on earning assets was 6.97% for
the quarter ended March 31, 2002, down 141 basis points from the 8.38% reported
for the first quarter of 2001.

Noninterest Income

     Noninterest income of $170,000 in the three months ended March 31, 2002
consisted of service charges and fees on accounts and other fee income, and
represented an increase of $65,000 or 61.9% over the $105,000 reported for the
same period one year earlier. The largest component of the increase is
attributable to tax-exempt income earned on bank owned life insurance in the
amount of $36,000. Future levels of noninterest income are expected to increase
as a direct result of business growth and expansion.

                                       10

<PAGE>

Noninterest Expense

     Noninterest expense for the first three months of 2002 was $1.2 million, an
increase of $200,000 or 20.0% over the $1.0 million reported for the same period
in 2001. Expenses associated with the opening of the Bank's sixth full-service
branch on May 20, 2002 are included in the quarter ended March 31, 2002, while
expenses associated with the opening of the Bank's fifth full-service branch on
May 7, 2001 are included in the quarter ended March 31, 2001. Expenses
associated with the introduction of online banking at the Bank's virtual branch
in May 2002 also contributed to the increase in noninterest expense in the first
quarter of 2002 as compared to the first quarter of 2001. All major categories
of noninterest expense increased due to growth and expansion. Noninterest
expenses are expected to increase in future years as a direct result of business
growth and expansion.

Income Taxes

     To reflect the Company's anticipated federal income tax liability, an
expense of $193,000 and $110,000 at an effective tax rate of 28.9% and 24.5% was
recognized in the three months ended March 31, 2002 and March 31, 2001,
respectively.

Investment Securities

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

     Investment securities, including restricted equity securities, at March 31,
2002 were $36.0 million, an increase of $2.7 million or 8.1% from their level of
$33.3 million on December 31, 2001. The increase of $2.7 million is primarily
due to purchases in the amount of $5.1 million, offset by principal repayments
in the amount of $2.0 million. See Note 3 to the Consolidated Financial
Statements.

Loan Portfolio

     The Company's total loans were $157.1 million at March 31, 2002, an
increase of $9.5 million or 6.4% from the $147.6 million reported at December
31, 2001. The Company's ratio of total loans to total funding sources (customer
deposits, securities sold under agreements to repurchase, federal funds
purchased and Federal Home Loan Bank advances) stood at 83.2% at March 31, 2002
and 83.9% at December 31, 2001. Management seeks to maintain the ratio of loans
to funding sources at a maximum of 85%.

                                       11

<PAGE>

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

     The following table summarizes the loan portfolio by category as of the
three-month periods ended March 31, 2002 and 2001 and the year ended December
31, 2001.

                             Loan Portfolio Summary
                             (dollars in thousands)
                                     March 31,    December 31,     March 31,
                                       2002           2001           2001
                                       ----           ----           ----
Commercial and industrial            $ 37,948      $ 35,366       $ 31,244
Commercial real estate                 64,502        60,290         42,750
Real estate construction               10,988         9,005          7,097
Residential real estate                21,715        21,482         22,904
Loans to individuals                   21,954        21,430         17,760
                                     --------      --------       --------
Total loans                          $157,107      $147,573       $121,755
                                     ========      ========       ========

Loan Category Analysis

     Commercial Loans. Commercial and industrial loans accounted for 24.1% of
the loan portfolio as of March 31, 2002 and stood at $37.9 million versus $35.4
million three months earlier. Such loans generally are made to provide operating
lines of credit, to finance the purchase of inventory or equipment, and for
other business purposes. The credit worthiness of the borrower is analyzed and
re-evaluated on a periodic basis. Most commercial loans are collateralized with
business assets such as accounts receivable, inventory and equipment. Even with
substantial collateral such as all the assets of the business and personal
guarantees, commercial lending involves considerable risk of loss in the event
of a business downturn or failure of the business.

     Commercial Real Estate Loans. Commercial real estate construction and
commercial real estate mortgages represent interim and permanent financing of
commercial properties that are secured by real estate, and were 41.1% of total
loans at March 31, 2002. Outstanding loans in this category equaled $64.5
million and $60.3 million at March 31, 2002 and December 31, 2001, respectively.
The Company prefers to make commercial real estate loans secured by
owner-occupied properties. These borrowers are engaged in business activities
other than real estate, and the primary source of repayment is not solely
dependent on conditions in the real estate market.

                                       12

<PAGE>

     Real Estate Construction Loans. Real estate construction loans represent
interim financing on residential and commercial properties under construction,
and are secured by real estate. Once construction is completed and the loan
becomes permanent, the loans are reclassified as commercial real estate loans
which are secured by commercial property or residential real estate loans which
are secured by first deeds of trust. Outstanding loans in this category totaled
$11.0 million (7.0% of total loans) at March 31, 2002 as compared to $9.0
million at December 31, 2001.

     Residential Real Estate Loans. Residential real estate loans are secured by
first deeds of trust on 1-4 family residential properties. This category had
$21.7 million in loans (13.8% of total loans) at March 31, 2002 and $21.5
million in such loans at December 31, 2001. To mitigate interest rate risk, the
Company usually limits the final maturity of residential real estate loans held
for its own portfolio to 15-20 years and offers a bi-weekly payment option to
encourage faster repayment. Residential real estate lending involves risk
elements when there is lack of timely payment and/or a decline in the value of
the collateral.

     Loans to Individuals. Loans to individuals include installment loans and
home equity lines of credit/loans secured by junior liens on residential real
estate. The loan proceeds typically are used to purchase vehicles, finance home
remodeling or higher education, or for other consumer purposes. Loans to
individuals totaled $22.0 million (14.0% of total loans) at March 31, 2002
compared to $21.4 million at December 31, 2001.

Summary of Allowance for Loan Losses

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

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

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

                                       13

<PAGE>

     A provision for loan losses of $187,000 was provided during the three
months ended March 31, 2002, an increase of $150,000 or 405.4% over the same
period in 2001, in recognition of management's estimate of inherent risks
associated with lending activities. The allowance for loan losses was $1.7
million as of March 31, 2002 and represented approximately 1.1% of net loans
outstanding versus 1.0% of net loans at December 31, 2001 (see Note 4 to the
Consolidated Financial Statements). A total of $60,000 in specific reserves, on
one commercial loan placed on nonaccrual status in April 1999, is included in
the balance of the allowance for loan losses as of March 31, 2002. Of the
$60,000 specific reserve, $30,000 was accrued during the first quarter of 2002.
During the first quarter of 2001, $25,000 of specific reserves accrued during
2000 on a second commercial loan were reversed when the loan was repaid.
Additional factors contributing to the increase in provision expense are growth
in average loans outstanding and a gradual increase in reserve to 1.1% of
average loans outstanding throughout 2002, which was begun in March 2002.

Nonperforming Assets and Impaired Loans

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

     A restructured loan is a loan in which the original contract terms have
been modified due to a borrower's financial condition or there has been a
transfer of assets in full or partial satisfaction of the loan. A modification
of original contractual terms is generally a concession to a borrower that a
lending institution would not normally consider. The entire balance of
restructured loans as disclosed below is comprised of one loan customer. Due to
a good loan to value ratio, a timely and proper review of credit quality and
restructuring of the loan, the Company was able to collect all amounts of
principal and interest.

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

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

     Nonperforming assets at March 31, 2002, December 31, 2001 and March 31,
2001 are presented in the following table.

                                       14

<PAGE>

                              Nonperforming Assets
                             (dollars in thousands)

                                              March 31,  December 31,  March 31,
                                               2002         2001         2001
                                               ----         ----         ----
Nonaccrual loans                               $440         $514         $ 85
Loans past due 90 days or more                  388           25          165
Restructured loans                                -            -          208
                                               ----         ----         ----
Total nonperforming loans                       828          539          458
                                               ----         ----         ----
Foreclosed, repossessed and idled properties      -            -            -
                                               ----         ----         ----
Total nonperforming assets                     $828         $539         $458
                                               ====         ====         ====


     If the nonaccrual loans disclosed above had performed in accordance with
their original terms, additional interest income in the amount of $9,000,
$23,000, and $2,000, respectively would have been recorded for the three month
period ended March 31, 2002, the year ended December 31, 2001 and the three
month period ended March 31, 2001.

     The total recorded investment in impaired loans was $828,000, $539,000 and
$824,000, respectively for the three month period ended March 31, 2002, the year
ended December 31, 2001 and the three-month period ended March 31, 2001. The
loan loss allowance related to impaired loans was $60,000, $30,000 and $30,000,
respectively for the above-referenced time periods.

Other Assets

     The Company's other assets were $3.9 million at March 31, 2002, an increase
of $800,000 over the $3.1 million reported as of December 31, 2001. An
additional purchase of bank owned life insurance on key employees contributed to
$671,000 of the total increase during the first quarter of 2002. Bank owned life
insurance on key employees in the amount of $2.3 million was purchased in the
fourth quarter of 2001. Bank owned life insurance comprises a total of $3.0
million of the $3.9 million other assets balance as of March 31, 2002.

Deposits

     As of March 31, 2002 total deposits were $148.6 million, an increase of
$9.7 million or 7.0% from their level of $138.9 million at December 31, 2001.
Certificates of deposit increased by $17.5 million to a total of $95.4 million
at March 31, 2002, up from $77.9 million at December 31, 2001. The major
categories of decreases were non-interest bearing deposits, interest bearing
demand deposits, and money market accounts in the amounts of $1.4 million, $1.0
million, and $5.7 million, respectively.

                                       15

<PAGE>

     At March 31, 2002 noninterest-bearing demand deposits were $22.9 million or
15.4% of total deposits. On December 31, 2001 noninterest-bearing demand
deposits were $24.3 million or 17.5% of total deposits. Nonmaturity deposits
(noninterest bearing demand deposits, interest bearing demand deposits, money
market accounts and savings accounts) were $53.2 million or 35.8% of total
deposits at March 31, 2002, compared with $61.0 million or 43.9% of total
deposits at December 31, 2001. Total interest bearing deposits stood at $125.7
million at March 31, 2002, an increase of $11.1 million or 9.7% over their level
of $114.6 million at December 31, 2001.

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

Short-Term Borrowings

     The Company placed in service a commercial sweep account program in third
quarter 1999. The balance in the program grew by $1.5 million from its level of
$3.3 million at December 31, 2001 to a total of $4.8 million as of March 31,
2002. The program consists of establishing a demand deposit account in which the
Bank invests available balances daily in securities on an overnight basis
subject to repurchase. On the following business day, the Bank will repurchase
from the customer the securities for an amount equal to the amount of available
balances invested in the securities. Interest is calculated daily at the rate
applicable for each overnight period; however, it is posted to the customer
accounts only once per month. The contractual agreement states that a repurchase
agreement is not a deposit and therefore is not insured by the Federal Deposit
Insurance Corporation. Therefore, these repurchase balances are not reported as
deposits but as short-term borrowings.

     The Company's short-term borrowings increased by $1.6 million during the
first three months of 2002 to a balance of $5.4 million. See the liquidity
section of this discussion and analysis for further information on the preceding
borrowings.

Other Debt

     The Company has outstanding debt with the Federal Home Loan Bank of Atlanta
in the amount of $30.0 million as of March 31, 2002. There are four convertible
advances in the amount of $5.0 million currently drawn. There is also one
adjustable rate advance in the amount of $10.0 million currently drawn. The
Federal Home Loan Bank of Atlanta has the option to convert the four $5.0
million advances on the conversion dates below and any interest payment date
thereafter with at least two business days notice. The advance will be converted
into a 3-month LIBOR-based adjustable rate credit (ARC) at 3M LIBOR flat. The
$10.0 million advance is an ARC with a current rate of 2.02%, subject to change
on each quarterly interest payment date. The following table provides more
information on the outstanding advances as of March 31, 2002.

                                       16

<PAGE>

                         FEDERAL HOME LOAN BANK ADVANCES
                                 (000's omitted)

<TABLE>
<CAPTION>
                                                                 Interest
 Advance          Advance           Maturity                     Payment        Conversion
 Balance           Date               Date            Rate        Dates            Date
 -------           ----               ----            ----        -----            ----
<S>            <C>                <C>                 <C>       <C>            <C>
 $ 5,000,000   December 2, 1999   December 2, 2009    5.46%     Quarterly      December 4, 2000
 $ 5,000,000      May 24, 2000       May 24, 2010     6.49%     Quarterly        May 24, 2001
 $ 5,000,000   February 9, 2001   February 9, 2011    4.97%     Quarterly      February 9, 2004
 $ 5,000,000   November 7, 2001   November 7, 2011    3.91%     Quarterly      November 7, 2006
 $10,000,000   December 14, 2001  December 16, 2002  Variable   Quarterly            N/A
</TABLE>

Interest Rate Risk

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

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

         At least quarterly, the Company measures the ALM position using
earnings simulation modeling to estimate what assets and liabilities would
reprice, and to what extent, within a one-year period in response to an
immediate 200 basis point change in the Prime Rate, as well as in response to
more gradual interest rate change. The Company's objective is to keep the change
in net interest income over twelve months at or below 5% under an immediate 200
basis point interest rate shock scenario. The model also incorporates
Management's forecasts for balance sheet growth, noninterest income and
noninterest expense. The interest rate scenarios are used for analytical
purposes and do not necessarily represent Management's view of future market
movements. Rather, these are intended to provide a measure of the degree of
volatility interest rate movements may apply to the earnings of the Company.
Modeling the sensitivity of earnings to interest rate risk is highly dependent
on numerous assumptions embedded in the simulation model. While the earnings
sensitivity analysis incorporates Management's best estimate of interest rate
and balance sheet dynamics under various market rate movements, the actual
behavior and resulting earnings impact likely will differ from that projected.

                                       17

<PAGE>

Capital Adequacy

         The Company's financial position at March 31, 2002 reflects liquidity
and capital levels currently adequate to fund anticipated near-term business
expansion. Capital ratios are in excess of required regulatory minimums for a
well-capitalized institution. The adequacy of the Company's capital is reviewed
by management on an ongoing basis. Management seeks to maintain a capital
structure adequate to support anticipated asset growth and serve as a cushion to
absorb potential losses.

         Total shareholders' equity increased by $250,000 during the first
quarter of 2002. The increase is attributable to net income for the first three
months of $474,000 and a $224,000 decrease in accumulated other comprehensive
income. Exclusive of unrealized losses on investment securities, shareholders'
equity was $16.9 million at March 31, 2002 and $16.4 million at December 31,
2001.

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

                                 Capital Ratios

Ratio            3/31/02        12/31/01        3/31/01         Minimum
-----            -------        --------        -------         -------

Tier 1             9.9%          10.2%           11.5%            4%

Total             10.9%          11.1%           12.4%            8%

Leverage           8.5%           9.1%            9.2%            4%

Liquidity

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

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

         The Company's asset liquidity is provided by cash and due from banks,
money market investments, investments available for sale including restricted
equity securities, and through management of investment maturities/prepayments
and loan repayments. The Company's ratio of liquid assets to deposits and
short-term borrowings was 26.6% at March 31, 2002 and 27.1% at December 31,
2001. The Company sells excess funds as overnight federal funds sold to provide
an immediate source of liquidity. The Company had federal funds sold of $0 at
March 31, 2002 and December 31, 2001, respectively. During the first three
months of 2002, deposit growth and an increase in securities sold under
agreements to repurchase in the amounts of $9.7 million and $1.5

                                       18

<PAGE>

million, respectively, a total of $11.2 million, surpassed loan growth in the
amount of $9.5 million. The excess $1.7 million, coupled with $1.6 million in
additional fed funds borrowings during the first quarter, was used to fund
investment purchases in excess of principal paydowns in the amount of $3.1
million and the purchase of $671,000 in additional bank-owned life insurance.

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

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

Impact of Inflation

         The Consolidated Financial Statements and Notes thereto presented
herein have been prepared in accordance with generally accepted accounting
principles, which requires the measurement of financial position and operating
results in terms of historical dollars without considering changes in the
relative purchasing power of money over time due to inflation. Unlike most
industrial companies, nearly all the assets and liabilities of the Company and
the Bank are monetary in nature. As a result, interest rates have a greater
impact on the Company's performance than do the effects of changes in the
general rate of inflation and changes in prices. In addition, interest rates do
not necessarily move in the same direction or in the same magnitude as do the
prices of goods and services. Management seeks to manage the relationship
between interest-sensitive assets and liabilities in order to protect against
wide interest rate fluctuations, including those resulting from inflation.

Recent and Future Accounting Considerations

         In October 2001, the Financial Accounting Standards Board (FASB) issued
Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," which supercedes Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." Statement 144
also supercedes the accounting and reporting provisions of APB Opinion No. 30,
"Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for the disposal of a segment of a business. However,
it retains the requirement in Opinion No. 30 to report separately discontinued
operations and extends that reporting to a component of an entity that either
has been disposed of either by sale, abandonment, or distribution to owners or
is classified as held for sale.

                                       19

<PAGE>

Statement 144 carries over many of the fundamental provisions of Statement No.
121. Statement No. 144 is effective for fiscal years beginning after December
15, 2001. The Company adopted the provisions of this Statement effective January
1, 2002, as required. The adoption of the Statement did not have any effect on
the Company's financial position, results of operations, or liquidity.

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

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

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

                                       20

<PAGE>

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

     In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Statement 133 established standards for
accounting and reporting for derivative instruments, including certain
instruments embedded in other contracts and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
Statement requires that changes in a derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting.

     Statement 133 shall be effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000. Initial application of this Statement shall
be as of the beginning of an entity's fiscal quarter. Earlier application of all
of the provisions of this Statement is encouraged but is permitted only as of
the beginning of any fiscal quarter that begins after issuance of this
Statement. Earlier application of selected provisions of this Statement is not
permitted. This Statement shall not be applied retroactively to financial
statements of prior periods. Adoption of Statement 133 on January 1, 2000 did
not have any effect on the Bank's consolidated financial position, results of
operation or liquidity.

                                       21

<PAGE>

PART II.  OTHER INFORMATION

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

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

Item 5.  Other Information.

None.

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

(a)      The Company filed the following exhibits for the quarter ended March
         31, 2002:

         10.14  Valley Bank Supplement Retirement Plan is presented herein.

(b)      The Company filed one report on Form 8-K during the quarter ended March
         31, 2002. The report, dated January 25, 2002, reported the Company's
         consolidated financial results for the quarter ended December 31, 2001.

                                       22

<PAGE>

                                   SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



                                     VALLEY FINANCIAL CORPORATION



May 15, 2002                                  /s/ Ellis L. Gutshall
---------------------------          ------------------------------
Date                                          Ellis L. Gutshall, President
                                              and Chief Executive Officer

May 15, 2002                                  /s/ A. Wayne Lewis
---------------------------          ---------------------------
Date                                          A. Wayne Lewis, Executive
                                              Vice President and Chief
                                              Financial Officer

                                       23