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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



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

For the Quarterly Period Ended June 30, 2007



| ̈ | 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

VALLEY FINANCIAL CORPORATION



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

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 ̈

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 August 10, 2007, 4,183,697 shares of common stock, no par value, of the registrant were outstanding.



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VALLEY FINANCIAL CORPORATION

FORM 10-Q

June 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  |  | 35
|                              |  |                                                            
|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                                           |  | 36
|                              |  |                                                            
|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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PART 1  FINANCIAL INFORMATION



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

VALLEY FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)



|                                                                                                                                                             |  |                     |         |   |                    |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------- | ------- | - | ------------------ | - | ------- | -
|                                                                                                                                                             |  | (Unaudited) 6/30/07 |         |   | (Audited) 12/31/06 |  
|                                                                                                                                                             |  |                    
|Assets                                                                                                                                                       |  |                     |         |   |                    |   |         |  
|Cash and due from banks                                                                                                                                      |  | $                   | 8,627   |   |                    | $ | 9,778   |  
|Interest-bearing deposits in banks                                                                                                                           |  |                     | 93      |   |                    |   | 91      |  
|Federal funds sold                                                                                                                                           |  |                     |        |   |                    |   | 16,630  |  
|Securities available-for-sale                                                                                                                                |  |                     | 50,307  |   |                    |   | 48,405  |  
|Securities held-to-maturity (approximate market values of $17,459 at June 30, 2007 and $19,940 at December 31, 2006)                                         |  |                     | 17.840  |   |                    |   | 20,133  |  
|Restricted equity securities                                                                                                                                 |  |                     | 5,188   |   |                    |   | 5,079   |  
|Loans, net of allowance for loan losses of $6,075 at June 30, 2007 and $5,658 at December 31, 2006                                                           |  |                     | 476,113 |   |                    |   | 465,394 |  
|Premises and equipment, net                                                                                                                                  |  |                     | 6,610   |   |                    |   | 6,873   |  
|Bank owned life insurance                                                                                                                                    |  |                     | 11,374  |   |                    |   | 11,117  |  
|Accrued interest receivable                                                                                                                                  |  |                     | 3,116   |   |                    |   | 2,954   |  
|Other assets                                                                                                                                                 |  |                     | 5,648   |   |                    |   | 5,482   |  
|                                                                                                                                                             |  |                     |         |   |                    |   |         |  
|Total assets                                                                                                                                                 |  | $                   | 584,916 |   |                    | $ | 591,936 |  
|                                                                                                                                                             |  |                     |         |   |                    |   |         |  
|Liabilities and Shareholders Equity                                                                                                                         |  |                     |         |   |                    |   |         |  
|Liabilities:                                                                                                                                                 |  |                     |         |   |                    |   |         |  
|Noninterest- bearing deposits                                                                                                                                |  | $                   | 18,862  |   |                    | $ | 18,663  |  
|Interest-bearing deposits                                                                                                                                    |  |                     | 397,483 |   |                    |   | 422,826 |  
|                                                                                                                                                             |  |                     |         |   |                    |   |         |  
|Total deposits                                                                                                                                               |  |                     | 416,345 |   |                    |   | 441,489 |  
|                                                                                                                                                             |  |                     |         |   |                    |   |         |  
|Federal funds purchased and securities sold under agreements to repurchase                                                                                   |  |                     | 38,349  |   |                    |   | 21,635  |  
|Short-term borrowings                                                                                                                                        |  |                     | 33,000  |   |                    |   | 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                                                                                                                                     |  |                     | 3,672   |   |                    |   | 3,133   |  
|Other liabilities                                                                                                                                            |  |                     | 2,730   |   |                    |   | 2,782   |  
|                                                                                                                                                             |  |                     |         |   |                    |   |         |  
|Total liabilities                                                                                                                                            |  |                     | 550,592 |   |                    |   | 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 4,181,117 at June 30, 2007 and 4,112,074 at
December 31, 2006, respectively |  |                     | 17,606  |   |                    |   | 17,212  |  
|Retained earnings                                                                                                                                            |  |                     | 17,588  |   |                    |   | 16,488  |  
|Accumulated other comprehensive income (loss)                                                                                                                |  |                     | (870    | ) |                    |   | (299    | )
|                                                                                                                                                             |  |                     |         |   |                    |   |         |  
|Total shareholders equity                                                                                                                                   |  |                     | 34,324  |   |                    |   | 33,401  |  
|                                                                                                                                                             |  |                     |         |   |                    |   |         |  
|Total liabilities and shareholders equity                                                                                                                   |  | $                   | 584,916 |   |                    | $ | 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 |           | 6 Months Ended |        
|                                                                                                      |  | 6/30/07        |           |                | 6/30/06 |   | 6/30/07   |  |   | 6/30/06   |  
|Interest Income:                                                                                      |  |                |           |                |         |   |           |  |   |           |   |  |   |           |  
|Interest and fees on loans                                                                            |  | $              | 8,743     |                |         |   | 7,779     |  | $ | 17,317    |   |  | $ | 14,983    |  
|Interest on securities - taxable                                                                      |  |                | 793       |                |         |   | 518       |  |   | 1,555     |   |  |   | 1,002     |  
|Interest on securities - nontaxable                                                                   |  |                | 118       |                |         |   | 137       |  |   | 253       |   |  |   | 275       |  
|Interest on deposits in banks                                                                         |  |                | 1         |                |         |   | 2         |  |   | 109       |   |  |   | 7         |  
|                                                                                                      |  |                |           |                |         |   |           |  |   |           |   |  |   |           |  
|Total interest income                                                                                 |  |                | 9,655     |                |         |   | 8,436     |  |   | 19,234    |   |  |   | 16,267    |  
|                                                                                                      |  |                |           |                |         |   |           |  |   |           |   |  |   |           |  
|Interest Expense:                                                                                     |  |                |           |                |         |   |           |  |   |           |   |  |   |           |  
|Interest on deposits                                                                                  |  |                | 4,248     |                |         |   | 3,270     |  |   | 8,598     |   |  |   | 6,193     |  
|Interest on short-term borrowings                                                                     |  |                | 316       |                |         |   | 333       |  |   | 593       |   |  |   | 632       |  
|Interest on long-term borrowings                                                                      |  |                | 551       |                |         |   | 402       |  |   | 1,132     |   |  |   | 790       |  
|Interest on guaranteed preferred beneficial interests in the Companys junior subordinated debentures |  |                | 297       |                |         |   | 196       |  |   | 590       |   |  |   | 379       |  
|Interest on federal funds purchased and securities sold under agreements to repurchase                |  |                | 400       |                |         |   | 304       |  |   | 636       |   |  |   | 545       |  
|                                                                                                      |  |                |           |                |         |   |           |  |   |           |   |  |   |           |  
|Total interest expense                                                                                |  |                | 5,812     |                |         |   | 4,505     |  |   | 11,549    |   |  |   | 8,539     |  
|                                                                                                      |  |                |           |                |         |   |           |  |   |           |   |  |   |           |  
|Net interest income                                                                                   |  |                | 3,843     |                |         |   | 3,931     |  |   | 7,685     |   |  |   | 7,728     |  
|Provision for loan losses                                                                             |  |                | 122       |                |         |   | 119       |  |   | 842       |   |  |   | 706       |  
|                                                                                                      |  |                |           |                |         |   |           |  |   |           |   |  |   |           |  
|Net interest income after provision for loan losses                                                   |  |                | 3,721     |                |         |   | 3,812     |  |   | 6,843     |   |  |   | 7,022     |  
|                                                                                                      |  |                |           |                |         |   |           |  |   |           |   |  |   |           |  
|Noninterest Income:                                                                                   |  |                |           |                |         |   |           |  |   |           |   |  |   |           |  
|Service charges on deposit accounts                                                                   |  |                | 314       |                |         |   | 234       |  |   | 605       |   |  |   | 447       |  
|Income earned on bank owned life insurance                                                            |  |                | 130       |                |         |   | 129       |  |   | 257       |   |  |   | 244       |  
|Other income on real estate loans                                                                     |  |                | 20        |                |         |   | 29        |  |   | 33        |   |  |   | 58        |  
|Realized losses on sale of securities                                                                 |  |                | (50       | )              |         |   |          |  |   | (50       | ) |  |   | (1        | )
|Realized gains on disposal of derivative instruments                                                  |  |                |          |                |         |   |          |  |   | 51        |   |  |   |          |  
|Other income                                                                                          |  |                | 155       |                |         |   | 134       |  |   | 304       |   |  |   | 234       |  
|                                                                                                      |  |                |           |                |         |   |           |  |   |           |   |  |   |           |  
|Total noninterest income                                                                              |  |                | 569       |                |         |   | 526       |  |   | 1,200     |   |  |   | 982       |  
|                                                                                                      |  |                |           |                |         |   |           |  |   |           |   |  |   |           |  
|Noninterest Expense:                                                                                  |  |                |           |                |         |   |           |  |   |           |   |  |   |           |  
|Compensation expense                                                                                  |  |                | 1,591     |                |         |   | 1,531     |  |   | 3,283     |   |  |   | 3,016     |  
|Occupancy expense                                                                                     |  |                | 182       |                |         |   | 170       |  |   | 380       |   |  |   | 327       |  
|Equipment expense                                                                                     |  |                | 136       |                |         |   | 129       |  |   | 278       |   |  |   | 264       |  
|Data processing expense                                                                               |  |                | 147       |                |         |   | 155       |  |   | 311       |   |  |   | 307       |  
|Advertising and marketing expense                                                                     |  |                | 113       |                |         |   | 71        |  |   | 156       |   |  |   | 155       |  
|Audit fees                                                                                            |  |                | 85        |                |         |   | 73        |  |   | 188       |   |  |   | 146       |  
|Franchise and purchased tax credit expense                                                            |  |                | 519       |                |         |   | 67        |  |   | 604       |   |  |   | 134       |  
|Business manager expense                                                                              |  |                | 68        |                |         |   | 67        |  |   | 151       |   |  |   | 128       |  
|Deposit expense                                                                                       |  |                | 63        |                |         |   | 62        |  |   | 128       |   |  |   | 161       |  
|Loan expenses                                                                                         |  |                | 44        |                |         |   | 56        |  |   | 76        |   |  |   | 111       |  
|Computer software expense                                                                             |  |                | 90        |                |         |   | 105       |  |   | 166       |   |  |   | 188       |  
|Other expense                                                                                         |  |                | 502       |                |         |   | 366       |  |   | 961       |   |  |   | 636       |  
|                                                                                                      |  |                |           |                |         |   |           |  |   |           |   |  |   |           |  
|Total noninterest expense                                                                             |  |                | 3,540     |                |         |   | 2,852     |  |   | 6,682     |   |  |   | 5,573     |  
|                                                                                                      |  |                |           |                |         |   |           |  |   |           |   |  |   |           |  
|Income before income taxes                                                                            |  |                | 750       |                |         |   | 1,486     |  |   | 1,361     |   |  |   | 2,431     |  
|Income tax expense                                                                                    |  |                | (168      | )              |         |   | 446       |  |   | (32       | ) |  |   | 691       |  
|                                                                                                      |  |                |           |                |         |   |           |  |   |           |   |  |   |           |  
|Net income                                                                                            |  | $              | 918       |                |         | $ | 1,040     |  | $ | 1,393     |   |  |   | 1,740     |  
|                                                                                                      |  |                |           |                |         |   |           |  |   |           |   |  |   |           |  
|Earnings per share                                                                                    |  |                |           |                |         |   |           |  |   |           |   |  |   |           |  
|Basic earnings per share                                                                              |  | $              | 0.22      |                |         | $ | 0.25      |  | $ | 0.34      |   |  | $ | 0.43      |  
|                                                                                                      |  |                |           |                |         |   |           |  |   |           |   |  |   |           |  
|Diluted earnings per share                                                                            |  | $              | 0.22      |                |         | $ | 0.25      |  | $ | 0.33      |   |  |   | 0.41      |  
|                                                                                                      |  |                |           |                |         |   |           |  |   |           |   |  |   |           |  
|Weighted average shares                                                                               |  |                | 4,161,546 |                |         |   | 4,107,593 |  |   | 4,143,326 |   |  |   | 4,093,413 |  
|                                                                                                      |  |                |           |                |         |   |           |  |   |           |   |  |   |           |  
|Diluted average shares                                                                                |  |                | 4,226,650 |                |         |   | 4,216,423 |  |   | 4,216,031 |   |  |   | 4,199,448 |  
|                                                                                                      |  |                |           |                |         |   |           |  |   |           |   |  |   |           |  
|Dividends declared per share                                                                          |  | $              | 0.07      |                |         | $ | 0.07      |  | $ | 0.07      |   |  | $ | 0.07      |  
|                                                                                                      |  |                |           |                |         |   |           |  |   |           |   |  |   |           |  

See accompanying notes to consolidated financial statements.



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VALLEY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands, except
share and per share data)



|                                                                                                  |  |                |         |   |         |   |         |  
|------------------------------------------------------------------------------------------------- |  | -------------- | ------- | - | ------- | - | ------- | -
|                                                                                                  |  | 6 Months Ended |        
|                                                                                                  |  | 6/30/07        |         |   | 6/30/06 |  
|Cash flows from operating activities                                                              |  |                |         |   |         |   |         |  
|Net income                                                                                        |  | $              | 1,393   |   |         | $ | 1,740   |  
|Adjustments to reconcile net income to net cash provided by operating activities:                 |  |                |         |   |         |   |         |  
|Provision for loan losses                                                                         |  |                | 842     |   |         |   | 706     |  
|Depreciation and amortization                                                                     |  |                | 406     |   |         |   | 369     |  
|Stock option expense                                                                              |  |                | 85      |   |         |   | 80      |  
|(Increase) in deferred income tax                                                                 |  |                | (2      | ) |         |   | (449    | )
|Net losses on sale of securities                                                                  |  |                | 50      |   |         |   | 1       |  
|Net gains on disposal of derivative instruments                                                   |  |                | (51     | ) |         |   |        |  
|Net amortization (accretion) of bond premiums/discounts                                           |  |                | 77      |   |         |   | 88      |  
|Decrease in unearned fees                                                                         |  |                | 28      |   |         |   |        |  
|(Increase) in interest receivable                                                                 |  |                | (162    | ) |         |   | (360    | )
|(Increase) in other assets                                                                        |  |                | (126    | ) |         |   | (234    | )
|(Increase) in value of life insurance contracts                                                   |  |                | (257    | ) |         |   | (244    | )
|Increase in accrued interest payable                                                              |  |                | 539     |   |         |   | 904     |  
|(Decrease) in other liabilities                                                                   |  |                | (127    | ) |         |   | (67     | )
|                                                                                                  |  |                |         |   |         |   |         |  
|Net cash provided by operating activities                                                         |  |                | 2,695   |   |         |   | 2,534   |  
|                                                                                                  |  |                |         |   |         |   |         |  
|Cash flows from investing activities                                                              |  |                |         |   |         |   |         |  
|(Increase) decrease in interest- bearing deposits in banks                                        |  |                | (2      | ) |         |   | 213     |  
|Decrease in federal funds sold                                                                    |  |                | 16,630  |   |         |   |        |  
|Purchases of premises and equipment                                                               |  |                | (130    | ) |         |   | (733    | )
|Purchases of securities available-for-sale                                                        |  |                | (8,331  | ) |         |   | (5,694  | )
|Purchases of securities held-to-maturity                                                          |  |                |        |   |         |   |        |  
|Purchases of restricted equity securities                                                         |  |                | (109    | ) |         |   | (1,284  | )
|Proceeds from sales/calls/paydowns/maturities of securities available-for-sale                    |  |                | 5,846   |   |         |   | 3,191   |  
|Proceeds from paydowns on securities held-to-maturity                                             |  |                | 2,248   |   |         |   | 308     |  
|Principal repayments of restricted equity securities                                              |  |                |        |   |         |   | 225     |  
|Purchase of bank owned life insurance                                                             |  |                |        |   |         |   | (1,700  | )
|Increase in loans, net                                                                            |  |                | (11,589 | ) |         |   | (34,960 | )
|                                                                                                  |  |                |         |   |         |   |         |  
|Net cash used in investing activities                                                             |  |                | 4,563   |   |         |   | (40,434 | )
|                                                                                                  |  |                |         |   |         |   |         |  
|Cash flows from financing activities                                                              |  |                |         |   |         |   |         |  
|Increase in noninterest-bearing deposits                                                          |  |                | 199     |   |         |   | 3,009   |  
|Increase (decrease) in interest-bearing deposits                                                  |  |                | (25,343 | ) |         |   | 26,385  |  
|Increase (decrease) in short-term borrowings                                                      |  |                | 8,000   |   |         |   | (8,000  | )
|Increase (decrease) in federal funds purchased and securities sold under agreements to repurchase |  |                | 16,714  |   |         |   | (4,131  | )
|Increase (decrease) in long-term borrowings                                                       |  |                | (8,000  | ) |         |   | 21,000  |  
|Cash dividends paid                                                                               |  |                | (288    | ) |         |   | (285    | )
|Proceeds from issuance of common stock                                                            |  |                | 309     |   |         |   | 132     |  
|                                                                                                  |  |                |         |   |         |   |         |  
|Net cash provided by financing activities                                                         |  |                | (8,409  | ) |         |   | 38,110  |  
|                                                                                                  |  |                |         |   |         |   |         |  
|Net Increase (decrease) in cash and due from banks                                                |  |                | (1,151  | ) |         |   | 210     |  
|                                                                                                  |  |                |         |   |         |   |         |  
|Cash and due from banks at beginning of year                                                      |  |                | 9,778   |   |         |   | 9,746   |  
|                                                                                                  |  |                |         |   |         |   |         |  
|Cash and due from banks at end of year                                                            |  | $              | 8,627   |   |         |   | 9,956   |  
|Supplemental disclosure of cash flow information:                                                 |  |                |         |   |         |   |         |  
|Cash paid during the period for interest                                                          |  | $              | 11,010  |   |         | $ | 7,635   |  
|                                                                                                  |  |                |         |   |         |   |         |  
|Cash paid during the period for taxes                                                             |  | $              |        |   |         | $ | 948     |  
|                                                                                                  |  |                |         |   |         |   |         |  
|Noncash financing and investing activities:                                                       |  |                |         |   |         |   |         |  
|Transfer of loans to foreclosed property                                                          |  | $              |        |   |         | $ |        |  
|                                                                                                  |  |                |         |   |         |   |         |  

See accompanying notes to consolidated financial statements.



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##### Table of Contents

VALLEY FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

June 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
June 30, 2007 was $96, less cash on hand in the amount of $1,109, 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 June 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 June 30, 2007 are shown in the tables below. As of June 30, 2007, investments (including both available-for-sale and
held-to-maturity) and restricted equity securities with amortized costs and fair values of $59,064 and $58,669, 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 June 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 June 30, 2007. Securities available for sale are carried at approximate market value.



7



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##### Table of Contents

Available-for-Sale Investment Portfolio  Category Distribution

(dollars in thousands)



|                                    |  |                |        |                 |   |                  |  |                        |       |  |   |       
|----------------------------------- |  | -------------- | ------ | --------------- | - | ---------------- |  | ---------------------- | ----- |  | - | ------
|                                    |  | AmortizedCosts |        | UnrealizedGains |   | UnrealizedLosses |  | ApproximateFair Values
|U. S. Government and federal agency |  | $              | 864    |                 | $ |                 |  | $                      | 2     |  | $ | 862   
|Government-sponsored enterprises    |  |                | 22,504 |                 |   |                 |  |                        | 510   |  |   | 21,994
|Mortgage-backed securities          |  |                | 11,655 |                 |   | 6                |  |                        | 301   |  |   | 11,360
|Collateralized mortgage obligations |  |                | 12,339 |                 |   |                 |  |                        | 512   |  |   | 11,827
|States and political subdivisions   |  |                | 4,163  |                 |   | 31               |  |                        | 29    |  |   | 4,165 
|Corporate debt securities           |  |                | 100    |                 |   |                 |  |                        | 1     |  |   | 99    
|                                    |  |                |        |                 |   |                  |  |                        |       |  |   |       
|Total securities available for sale |  |                | 51,625 |                 | $ | 37               |  |                        | 1,355 |  | $ | 50,307
|                                    |  |                |        |                 |   |                  |  |                        |       |  |   |       

The following table sets forth the composition of securities held to maturity at June 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 |  | $              | 7,951  |                 | $ |                 |  | $                      | 224 |  | $ | 7,727 
|Mortgage-backed securities          |  |                | 2,121  |                 |   |                 |  |                        | 85  |  |   | 2,036 
|Collateralized mortgage obligations |  |                | 534    |                 |   |                 |  |                        | 41  |  |   | 493   
|States and political subdivisions   |  |                | 7,234  |                 |   | 33               |  |                        | 64  |  |   | 7,203 
|                                    |  |                |        |                 |   |                  |  |                        |     |  |   |       
|Total securities held to maturity   |  | $              | 17,840 |                 | $ | 33               |  | $                      | 414 |  | $ | 17,459
|                                    |  |                |        |                 |   |                  |  |                        |     |  |   |       



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

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

Allowance for Loan Losses

(dollars in thousands)



|                          |  |         |       |   |         |   |       |  
|------------------------- |  | ------- | ----- | - | ------- | - | ----- | -
|                          |  | 6/30/07 |       |   | 6/30/06 |  
|Balance at January 1      |  | $       | 5,658 |   |         | $ | 4,124 |  
|Provision for loan losses |  |         | 842   |   |         |   | 706   |  
|Recoveries:               |  |         |       |   |         |   |       |  
|Commercial                |  |         |      |   |         |   | 4     |  
|Loans to individuals      |  |         | 6     |   |         |   |      |  
|Charged off loans:        |  |         |       |   |         |   |       |  
|Commercial                |  |         | (429  | ) |         |   | (2    | )
|Credit Cards              |  |         |      |   |         |   |       |  
|Loans to individuals      |  |         | (2    | ) |         |   |      |  
|                          |  |         |       |   |         |   |       |  
|Balance at June 30        |  | $       | 6,075 |   |         | $ | 4,832 |  
|                          |  |         |       |   |         |   |       |  



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##### Table of Contents

|(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                 
|        |  | 6 Months Ending                     |           | 3 Months Ending
|        |  | 6/30/07                             |           | 6/30/06         |   | 6/30/07   |  | 6/30/06
|Basic   |  | $                                   | 0.34      |                 | $ | 0.43      |  | $       | 0.22      |  | $ | 0.25     
|Diluted |  | $                                   | 0.33      |                 | $ | 0.41      |  | $       | 0.22      |  | $ | 0.25     
|        | 
|        |  | Weighted Average Shares Outstanding
|        |  | 6 Months Ending                     |           | 3 Months Ending
|        |  | 06/30/07                            |           | 6/30/06         |   | 6/30/07   |  | 6/30/06
|Basic   |  |                                     | 4,143,326 |                 |   | 4,093,413 |  |         | 4,161,546 |  |   | 4,107,593
|Diluted |  |                                     | 4,216,031 |                 |   | 4,199,448 |  |         | 4,226,650 |  |   | 4,216,423



|(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 six months ended June 30, 2007 and 2006, total comprehensive income (loss) was $823 and $1,106 respectively.



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##### Table of Contents

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 six- and three-month periods
ended June 30, 2007 and 2006.



|                                                                                                       |  |                                      |      |   |                                      |   |      |         |  |   |         |   |  |   |      |  
|------------------------------------------------------------------------------------------------------ |  | ------------------------------------ | ---- | - | ------------------------------------ | - | ---- | ------- |  | - | ------- | - |  | - | ---- | -
|                                                                                                       |  | 6 Months Ended(dollars in thousands) |      |   | 3 Months Ended(dollars in thousands) |  
|                                                                                                       |  | 6/30/07                              |      |   | 6/30/06                              |   |      | 6/30/07 |  |   | 6/30/06 |  
|Net unrealized gains (losses) on securities available for sale:                                        |  |                                      |      |   |                                      |   |      |         |  |   |         |   |  |   |      |  
|Net unrealized holding gains (losses) during the year                                                  |  | $                                    | (808 | ) |                                      | $ | (707 | )       |  | $ | (915    | ) |  | $ | (406 | )
|Less reclassification adjustments for realized gains included in net income, net of tax                |  |                                      | 33   |   |                                      |   |     |         |  |   | 33      |   |  |   |     |  
|Net unrealized gains (losses) on derivatives not held for trading                                      |  |                                      | (55  | ) |                                      |   | (256 | )       |  |   |        |   |  |   | (256 | )
|Less reclassification adjustments for realized gains on derivatives included in net income, net of tax |  |                                      | (34  | ) |                                      |   |      |         |  |   |         |   |  |   |      |  
|Income tax benefit (expense)                                                                           |  |                                      | 293  |   |                                      |   | 328  |         |  |   | 310     |   |  |   | 225  |  
|                                                                                                       |  |                                      |      |   |                                      |   |      |         |  |   |         |   |  |   |      |  
|Other comprehensive income (loss), net of income taxes                                                 |  | $                                    | (571 | ) |                                      | $ | (635 | )       |  | $ | (572    | ) |  | $ | (437 | )
|                                                                                                       |  |                                      |      |   |                                      |   |      |         |  |   |         |   |  |   |      |  



|(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 June 30, 2007 outstanding commitments to extend credit were $151,632 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.



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##### Table of Contents

|(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 June 30, 2007 aggregate loans to
directors, executive officers, and principal shareholders totaled $19,032. 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) |  |   |       |  
|Advances                            |  |   | 1,507  |  
|Repayments                          |  |   | (2,730 | )
|                                    |  |   |        |  
|Balances as of June 30, 2007        |  | $ | 19,032 |  
|                                    |  |   |        |  



|(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 June 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 June 30, 2007:

LONG-TERM FEDERAL HOME LOAN BANK
ADVANCES

(dollars in thousands)



|                 |  |                  |  |                   |  |              |   |  |                 |       
|---------------- |  | ---------------- |  | ----------------- |  | ------------ | - |  | --------------- | ------
|Advance Date     |  | Maturity Date    |  | Conversion Date   |  | Current Rate |   |  | 6/30/07 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     |  | 4.85         | % |  | $               | 13,000
|November 9, 2006 |  | November 9, 2016 |  | November 10, 2008 |  | 4.28         | % |  | $               | 5,000 
|                 |  |                  |  |                   |  |              |   |  |                 |       
|                 |  |                  |  |                   |  | TOTAL        |   |  | $               | 40,000
|                 |  |                  |  |                   |  |              |   |  |                 |       

We reclassified one $8 million FHLB advance from long-term to short-term as of June 30, 2007.
It is a variable rate advance priced at the Prime Rate minus 2.855% per annum with a maturity date of June 28, 2008.



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



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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 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.



12



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##### Table of Contents

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 $85 and $80 for the six-month periods ended June 30, 2007 and 2006, respectively. The Company currently has 66,733 nonqualified stock options outstanding at June 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 six-month period ended June 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 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. Accordingly, 311,850 shares of authorized but unissued common stock are reserved for use in the Plan.

Under the 2005 Plan, there are options for 75,050 shares granted to officers and key employees currently outstanding as of June 30, 2007. Under the
1995 Plan, there are options for 147,812 shares granted to officers and key employees currently outstanding as of June 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
12,225 restricted stock grants (RSGs) that have been granted to officers and key employees currently outstanding as of June 30, 2007. These 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 probably of being met, therefore no
compensation expense has been recognized in relation to these grants for the six-month period ended June 30, 2007.

As of
June 30, 2007, there are 11,441 shares available for grant under the 1995 Plan and 160,954 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.



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##### Table of Contents

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 six month periods ended June 30, 2007 and 2006.



|                        |  |                               |   |  |                               |  
|----------------------- |  | ----------------------------- | - |  | ----------------------------- | -
|                        |  | Six Months EndedJune 30, 2007 |   |  | Six Months EndedJune 30, 2006 |  
|Dividend yield          |  | 1.00                          | % |  | 0.03                          | %
|Risk-free interest rate |  | 4.47                          | % |  | 4.45                          | %
|Volatility              |  | 20.9                          | % |  | 20.71                         | %
|Expected life           |  | 7.3 years                     |   |  | 10 years                      |  

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



|                           |  |                                      |    |                                      |   |         |  |         |    |  |   |   
|-------------------------- |  | ------------------------------------ | -- | ------------------------------------ | - | ------- |  | ------- | -- |  | - | --
|                           |  | 6 Months Ended(dollars in thousands) |    | 3 Months Ended(dollars in thousands)
|                           |  | 6/30/07                              |    | 6/30/06                              |   | 6/30/07 |  | 6/30/06
|Option Grants              |  | $                                    | 63 |                                      | $ | 41      |  | $       | 42 |  | $ | 22
|Restricted Stock Grants    |  |                                      | 22 |                                      |   | 39      |  |         |   |  |   | 20
|                           |  |                                      |    |                                      |   |         |  |         |    |  |   |   
|Total Compensation Expense |  | $                                    | 85 |                                      | $ | 80      |  | $       | 42 |  | $ | 42
|                           |  |                                      |    |                                      |   |         |  |         |    |  |   |   

The restricted stock grant expense for the six months ended June 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 June 30, 2007, there was $291 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 June 30, 2007 is as follows:



|                  |  |                |    |      |   |      |  |      |    |      |   |      |  |       |    |  |   |   |  |   |    
|----------------- |  | -------------- | -- | ---- | - | ---- |  | ---- | -- | ---- | - | ---- |  | ----- | -- |  | - | - |  | - | ---
|                  |  | Remaining 2007 |    | 2008 |   | 2009 |  | 2010 |    | 2011 |   | 2012 |  | Total
|Compensation Cost |  | $              | 45 |      | $ | 87   |  | $    | 81 |      | $ | 51   |  | $     | 24 |  | $ | 3 |  | $ | 291

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

General Stock Option Information



14



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##### Table of Contents

A summary of option activity under the stock option plans during the six month period ended June 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              |  | 67,272              |  | $                                  | 4.60  |                                   |           
|Authorized             |  |                    |  |                                    |      |                                   |           
|Forfeited              |  | 11,120              |  | $                                  | 11.72 |                                   |           
|Granted                |  | 31,850              |  | $                                  | 12.20 |                                   |           
|Expired                |  | 2,363               |  | $                                  | 3.25  |                                   |           
|                       |  |                     |  |                                    |       |                                   |           
|Outstanding at 6/30/07 |  | 289,595             |  | $                                  | 7.61  |                                   | 4.38 years
|                       |  |                     |  |                                    |       |                                   |           
|Exercisable at 6/30/07 |  | 203,845             |  | $                                  | 5.56  |                                   | 2.65 years
|                       |  |                     |  |                                    |       |                                   |           

There were no options granted during the three month period ended June 30, 2007. There were
54,279 options exercised during the three-month period ended June 30, 2007 with a weighted average exercise price of $4.92 per option. There were 7,120 options forfeited during the three-month period ended June 30, 2007 with a weighted
average exercise price of $11.28.

The total intrinsic value of options exercised during the three and six month periods ended
June 30, 2007 was $340 and $463, respectively. The total intrinsic value of options exercised during the three- and six-month periods ended June 30, 2006 was $68 and $287, respectively.

Cash received from option exercises under all share-based payment arrangements for the three- and six-month periods ended June 30, 2007 was $267 and
$309, respectively Cash received from option exercises under all share-based payment arrangements for the three- and six-month periods ended June 30, 2006 was $18 and $132, respectively.

Information regarding the stock options outstanding at June 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             |  | 1.03 years                                  |  | $                               | 3.18  |                    | 66,733  |                                | $ | 3.18 
|$5.08 - $5.94            |  | 104,232            |  | 2.35 years                                  |  | $                               | 5.23  |                    | 104,232 |                                | $ | 5.23 
|$7.14 - $12.85           |  | 88,080             |  | 8.10 years                                  |  | $                               | 11.65 |                    | 24,050  |                                | $ | 10.50
|$13.00 - $14.23          |  | 30,550             |  | 7.91 years                                  |  | $                               | 13.76 |                    | 8,830   |                                | $ | 14.00
|                         |  |                    |  |                                             |  |                                 |       |                    |         |                                |   |      
|Totals                   |  | 289,595            |  | 4.38 years                                  |  | $                               | 7.61  |                    | 203,845 |                                | $ | 5.56 
|                         |  |                    |  |                                             |  |                                 |       |                    |         |                                |   |      



15



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The aggregate intrinsic value of options outstanding and options exercisable as of June 30, 2007 was
$1,095 and $1,091, respectively. The aggregate intrinsic value of options outstanding and options exercisable as of June 30, 2006 was $2,311 and $2,135, respectively.

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



|                       |  |                                        |  |                                  |  |                                       |      
|---------------------- |  | -------------------------------------- |  | -------------------------------- |  | ------------------------------------- | -----
|                       |  | Non-Vested RestrictedStock Outstanding |  | VestedRestrictedStockOutstanding |  | WeightedAverage Grant Date Fair
Value
|Balance, 12/31/06      |  | 15,075                                 |  | 1,771                            |  | $                                     | 12.51
|Authorized             |  |                                       |  |                                 |  |                                       |     
|Forfeited              |  | 2,850                                  |  |                                 |  | $                                     | 12.50
|Granted Vested         |  |                                      |  |                                |  |                                       |    
|                       |  |                                        |  |                                  |  |                                       |      
|Outstanding at 6/30/07 |  | 12,225                                 |  | 1,771                            |  | $                                     | 12.46
|                       |  |                                        |  |                                  |  |                                       |      

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. Total compensation cost is recognized on a pro-rata basis over the remaining vesting period, through July 31, 2008. If such performance goals are not met, any previously recognized compensation
cost will be reversed. 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 six-month period ended June 30, 2007.

Modifications

Effective March 30, 2007 the Human Resources Committee of the Board of Directors (HR Committee) voted to accelerate the vesting of 3,000
stock options granted and outstanding to J. Randall Woodson so that the options outstanding would be fully vested as of March 31, 2007 as a part of his severance agreement. All other outstanding and non-vested options were forfeited upon
Mr. Woodsons resignation. In accordance with the severance agreement, Mr. Woodson has until June 30, 2007 to exercise all outstanding and vested options. In accordance with FAS 123R, a change in the vesting terms of a stock
option award falls under the definition of a modification to the award, and as such, the compensation cost must be re-measured. The compensation cost resulting from the acceleration of Mr. Woodsons vesting schedule is $18. On
April 27, 2007, Mr. Woodson exercised 24,863 of his outstanding and vested options.

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



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##### Table of Contents

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.



|(13) | Subsequent Events
|---- | -----------------

On July 26, 2007, the
Companys wholly-owned subsidiary, Valley Bank (Bank) entered into a ground lease agreement (Lease) with the Maury Lee Strauss Revocable Trust (Trust). Maury Strauss, a Director Emeritus of the Bank and
Company, is the trustee of the Trust. Pursuant to the Lease, the Bank will lease the property at 2101 and 2105 Crystal Spring Avenue, Roanoke, Virginia from the Trust for an initial term of twenty-five (25) years, with options to renew. The
Bank intends to construct a new branch office on the leased land at the corner of Crystal Spring Avenue and McClanahan Street in the South Roanoke neighborhood in Roanoke Virginia with a planned opening sometime during the first quarter of 2008.



|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 six months ended June 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.



17



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##### Table of Contents

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 discounted cash flows (or collateral value 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 bad-debt expense 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 special 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 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.



18



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##### Table of Contents

Performance Summary

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

Key Performance Ratios



|                               |  |                      |      |   |                        |   |      |                      |  |   |       |  
|------------------------------ |  | -------------------- | ---- | - | ---------------------- | - | ---- | -------------------- |  | - | ----- | -
|                               |  | 6 monthsEnded6/30/07 |      |   | 12 monthsEnded12/31/06 |   |      | 6 monthsEnded6/30/06 | 
|Return on average assets       |  |                      | 0.48 | % |                        |   | 0.54 | %                    |  |   | 0.68  | %
|Return on average equity (1)   |  |                      | 8.10 | % |                        |   | 8.67 | %                    |  |   | 10.85 | %
|Net interest margin (2)        |  |                      | 2.86 | % |                        |   | 3.14 | %                    |  |   | 3.26  | %
|Cost of funds                  |  |                      | 4.32 | % |                        |   | 3.85 | %                    |  |   | 3.59  | %
|Yield on earning assets        |  |                      | 7.08 | % |                        |   | 6.93 | %                    |  |   | 6.79  | %
|Basic net earnings per share   |  | $                    | 0.34 |   |                        | $ | 0.70 |                      |  | $ | 0.43  |  
|Diluted net earnings per share |  | $                    | 0.33 |   |                        | $ | 0.68 |                      |  | $ | 0.41  |  



|(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)
|--- | ------------------------------------------------------

The Companys performance for the six-month period ended June 30, 2007 was adversely impacted by the increase in our special reserves on two of our impaired loan relationships during the first quarter of 2007. However, for the
three months ended June 30, 2007, we reported net income of $918,000 compared with $475,000 for the first quarter of 2007, a 93% increase. Diluted earnings per share were $0.22 in the second quarter of 2007 compared to $0.11 in the first
quarter, an increase of 100%. Our second quarter net income produced returns on average assets and average shareholders equity of 0.64% and 10.55%, respectively, compared to returns of 0.33% and 5.58% for the first quarter of 2007. The net
interest margin for the second quarter of 2007 was 2.85%, down just 1 basis point compared to the 2.86% for the first quarter of 2007, providing very hopeful encouragement that we have reached a bottoming out on the net interest margin. The new
money market product we introduced in the second quarter of 2006 that has an interest rate tied directly to the Wall Street Journal Prime Rate has continued to experience a strong reception by both individuals and businesses in our market place. As
of June 30, 2007, this new product offering had amassed over $67 million in deposit balances, providing not only substantial deposit growth to fund our asset growth, but expense savings, as well.

Additionally, our credit quality ratios as of June 30, 2007 did show improvement as the non-performing asset ratio declined to 1.48% from 1.56% at
December 31, 2006. We believe that substantial progress has been made to resolve the Companys previously disclosed problem loan issues, however, problem loan workouts often take considerable time to resolve. The provision for loan losses
in the second quarter of 2007 amounted to $122,000 compared to $720,000 reserved in the first quarter of this year. 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 which we are constantly monitoring. As of June 30, 2007, the Company 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.

We remain committed to return to our decade-long, pristine credit quality standards, and in that effort have made
significant changes to our credit processes and have instilled a much more disciplined credit



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##### Table of Contents

environment. These changes, however, will not effect or alter the superior levels of customer service our customers have come to expect from the Bank. During
the past 12 years, we have extended loans to businesses and individuals in the Roanoke Valley amounting to nearly $1 billion and we consider it our mission to be one of the leading catalysts for the growth and vitality of this region.

Growth

The following table shows our key growth
indicators:

Key Growth Indicators

(dollars in thousands)



|                      |  |         |         |          |   |         |  |   |        
|--------------------- |  | ------- | ------- | -------- | - | ------- |  | - | -------
|                      |  | 6/30/07 |         | 12/31/06 |   | 6/30/06
|Investment securities |  | $       | 73,335  |          | $ | 73,617  |  | $ | 60,689 
|Loans, net            |  | $       | 476,113 |          | $ | 465,394 |  | $ | 444,507
|Deposits              |  | $       | 416,345 |          | $ | 441,489 |  | $ | 394,710
|Total assets          |  | $       | 584,916 |          | $ | 591,936 |  | $ | 539,250

In comparison to the same period last year, our total assets grew by $45.7 million or 8%, net
loans grew by $31.6 million or 7% and total deposits grew by $21.6 million or 5%. 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 June 30, 2007 were $550.6 million, down 1% from $558.5 million at December 31, 2006 with the decrease primarily
represented by a $25.1 million decrease in deposits, offset by an $18.5 million increase in federal funds purchased.

Shareholders Equity

Total shareholders equity at June 30, 2007 was $34.3 million compared to $33.4 million at December 31, 2006, an increase of
$900,000 or 3%. Total shareholders equity (exclusive of unrealized gains (losses) on investment securities and derivatives) was $35.2 million at June 30, 2007 compared with $33.7 million at December 31, 2006, an increase of $1.5
million or 4%.

Net Income

We earned
net income of $1,393,000 for the six months ended June 30, 2007, a decrease of $347,000 or 20% over the $1,740,000 reported for the same period in 2006. We earned net income of $918,000 for the three month period ended June 30, 2007, a
decrease of $122,000 or 12% over the $1,040,000 reported for the same period in 2006. As discussed above, our performance for the first half of 2007 was adversely impacted by the increase in our special reserves on two of our impaired loan
relationships during the first quarter of 2007. 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.



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##### Table of Contents

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 $19,234,000 for the six months ended June 20, 2007, an increase of 18% over the $16,267,000 reported for the same period
in 2006. Total interest income was $9,655,000 for the three months ended June 30, 2007, an increase of 14% over the $8,436,000 reported for the three months ended June 30, 2006.

Total interest expense was $11,549,000 for the six months ended June 20, 2007, an increase of 35% over the $8,539,000 reported for the same period
in 2006. Total interest expense was $5,812,000 for the three months ended June 30, 2007, an increase of 29% over the $4,505,000 reported for the three months ended June 30, 2006.

As a result of the above, net interest income was $7,685,000 for the six months ended June 30, 2007, a decrease of 1% from the $7,728,000 reported
for the same period in 2006. Net interest income was $3,843,000 for the three months ended June 30, 2007, a decrease of 2% from the $3,931,000 reported for the same period in 2006. Our net interest margin was 2.86% for the six months ended
June 30, 2007, down 40 basis points compared to the 3.26% reported for the same period last year. Our net interest margin was 2.85% for the three months ended June 30, 2007, down 39 basis points compared to the 3.24% 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 six months ended June 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 improvement as soon as we are able to
resolve the credit quality issues related to our 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.



21



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##### Table of Contents

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 March 31, 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.

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. The Company recorded a realized gain on the
termination of the Agreement of $50,629.



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Noninterest Income

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

Noninterest Income

(dollars in thousands)



|                                           |  |                      |     |   |                      |   |                      |  |     |  
|------------------------------------------ |  | -------------------- | --- | - | -------------------- | - | -------------------- |  | --- | -
|                                           |  | 3 monthsEnded6/30/07 |     |   | 3 monthsEnded6/30/06 |   | %Increase/(Decrease) | 
|Service charges on deposits                |  | $                    | 314 |   |                      | $ | 234                  |  | 34  | %
|Income earned on bank owned life insurance |  |                      | 130 |   |                      |   | 129                  |  | 1   | %
|Other income                               |  |                      | 175 |   |                      |   | 163                  |  | 7   | %
|Realized derivatives gains/losses          |  |                      |    |   |                      |   |                     |  | N/M |  
|Realized securities gains/losses           |  |                      | (50 | ) |                      |   |                     |  | N/M |  
|                                           |  |                      |     |   |                      |   |                      |  |     |  
|Total noninterest income                   |  | $                    | 569 |   |                      | $ | 526                  |  | 8   | %
|                                           |  |                      |     |   |                      |   |                      |  |     |  

Noninterest income for the six months ended June 30, 2007 and 2006 is as follows:

Noninterest Income

(dollars in
thousands)



|                                           |  |                      |       |   |                      |   |     |                       |  |     |  
|------------------------------------------ |  | -------------------- | ----- | - | -------------------- | - | --- | --------------------- |  | --- | -
|                                           |  | 6 monthsEnded6/30/07 |       |   | 6 monthsEnded6/30/06 |   |     | % Increase/(Decrease) | 
|Service charges on deposits                |  | $                    | 605   |   |                      | $ | 447 |                       |  | 35  | %
|Income earned on bank owned life insurance |  |                      | 257   |   |                      |   | 244 |                       |  | 5   | %
|Other income                               |  |                      | 337   |   |                      |   | 292 |                       |  | 15  | %
|Realized derivatives gains/losses          |  |                      | 51    |   |                      |   |    |                       |  | N/M |  
|Realized securities gains/losses           |  |                      | (50   | ) |                      |   | (1  | )                     |  | N/M |  
|                                           |  |                      |       |   |                      |   |     |                       |  |     |  
|Total noninterest income                   |  | $                    | 1,200 |   |                      | $ | 982 |                       |  | 22  | %
|                                           |  |                      |       |   |                      |   |     |                       |  |     |  

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.



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##### Table of Contents

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 increase in
other income is primarily attributable to increase in income earned on letter of credit fees, and the 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.

Noninterest Expense

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

Noninterest Expense

(dollars in
thousands)



|                                           |  |                      |       |                      |       |                       |     |   
|------------------------------------------ |  | -------------------- | ----- | -------------------- | ----- | --------------------- | --- | --
|                                           |  | 3 monthsEnded6/30/07 |       | 3 monthsEnded6/30/06 |       | % Increase/(Decrease) |    
|Compensation expense                       |  | $                    | 1,591 |                      | 1,531 |                       | 4   | % 
|Occupancy expense                          |  |                      | 182   |                      | 170   |                       | 7   | % 
|Equipment expense                          |  |                      | 136   |                      | 129   |                       | 5   | % 
|Data processing expense                    |  |                      | 147   |                      | 155   |                       | (5  | %)
|Advertising and marketing expense          |  |                      | 113   |                      | 71    |                       | 59  | % 
|Audit fees                                 |  |                      | 85    |                      | 73    |                       | 16  | % 
|Franchise and purchased tax credit expense |  |                      | 519   |                      | 67    |                       | 675 | % 
|Business manager expense                   |  |                      | 68    |                      | 67    |                       | 1   | % 
|Deposit expense                            |  |                      | 63    |                      | 62    |                       | 2   | % 
|Loan expense                               |  |                      | 44    |                      | 56    |                       | (21 | %)
|Computer software expense                  |  |                      | 90    |                      | 105   |                       | (14 | %)
|Other expense                              |  |                      | 502   |                      | 366   |                       | 37  | % 
|                                           |  |                      |       |                      |       |                       |     |   
|Total noninterest expense                  |  | $                    | 3,540 |                      | 2,852 |                       | 24  | % 
|                                           |  |                      |       |                      |       |                       |     |   



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##### Table of Contents

Noninterest expense for the six months ended June 30, 2007 and 2006 is as follows:

Noninterest Expense

(dollars in
thousands)



|                                           |  |                      |       |                      |   |                      |  |     |   
|------------------------------------------ |  | -------------------- | ----- | -------------------- | - | -------------------- |  | --- | --
|                                           |  | 6 monthsEnded6/30/07 |       | 6 monthsEnded6/30/06 |   | %Increase/(Decrease) | 
|Compensation expense                       |  | $                    | 3,283 |                      | $ | 3,016                |  | 9   | % 
|Occupancy expense                          |  |                      | 380   |                      |   | 327                  |  | 16  | % 
|Equipment expense                          |  |                      | 278   |                      |   | 264                  |  | 5   | % 
|Data processing expense                    |  |                      | 311   |                      |   | 307                  |  | 1   | % 
|Advertising and marketing expense          |  |                      | 156   |                      |   | 155                  |  | 1   | % 
|Audit fees                                 |  |                      | 189   |                      |   | 146                  |  | 29  | % 
|Franchise and purchased tax credit expense |  |                      | 604   |                      |   | 134                  |  | 351 | % 
|Business manager expense                   |  |                      | 151   |                      |   | 128                  |  | 18  | % 
|Deposit expense                            |  |                      | 128   |                      |   | 161                  |  | (20 | %)
|Loan expense                               |  |                      | 76    |                      |   | 111                  |  | (32 | %)
|Computer software expense                  |  |                      | 166   |                      |   | 188                  |  | (12 | %)
|Other expense                              |  |                      | 960   |                      |   | 636                  |  | 51  | % 
|                                           |  |                      |       |                      |   |                      |  |     |   
|Total noninterest expense                  |  | $                    | 6,682 |                      | $ | 5,573                |  | 20  | % 
|                                           |  |                      |       |                      |   |                      |  |     |   

Compensation expense has increased over the
prior year due to officer merit increases effective January 1, 2007 as well as the net post-employment obligation related to Mr. Woodsons resignation as Chief Operating Officer. Additionally, our expense for salary deferral was
reduced from the same period last year as a result of lower loan growth. The expense we have to take for this deferral correlates to the growth in our loan portfolio. 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. Our advertising/marketing expenses year to date are on target with the same period last year, however, there is a
sizable increase when comparing quarter over quarter. This is due to the fact that we purposely slowed our spending in this area during the first quarter of 2007, and increased our advertising spending substantially in the second quarter due to
intensified market competition. Audit fees have increased due to anticipated additional regulatory costs associated with compliance as well as the movement of internal loan review to an external party. The increase in franchise and purchased tax
credit expense is primarily related to the fact that we recognized the benefit of a $509,829 federal tax credit and, as a result, wrote off the corresponding tax credit asset of $434,000, in the second quarter 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. Finally, 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. Also included in the other expense category for the first quarter of 2007 is consulting expense associated with our imaging initiative for 2007.
Noninterest expenses are expected to continue to increase as a direct result of business growth, expansion and complexity of banking operations.



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##### Table of Contents

Income Taxes

To reflect our anticipated federal income tax liability, an expense of ($32,000) effective tax rate of (2.4%) was recognized for the six months ended June 30, 2007, compared to an expense of $691,000 at an effective tax rate of
28.4% recognized for the six months ended June 30, 2006. The provision for income taxes for the second quarter of 2007 was ($168,000) at an effective tax rate of (22.4%), as compared to $446,000 at an effective tax rate of 30.0% for the second
quarter of 2006. As noted above, during the second quarter of 2007, we recognized a federal tax credit of $509,829 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. Therefore, no balance remained at June 30, 2007 for book purposes. However, this substantially reduced our federal
income tax expense over the same period in 2006 (see discussion, Noninterest Expense, above).

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.

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 June 30, 2007 were $73.3 million, a decrease of $300,000 million or 0.4% from their level of $73.6 million on December 31,
2006. See Note 3 to the Consolidated Financial Statements.



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##### Table of Contents

Loan Portfolio

Our total loans were $482.2 million at June 30, 2007, an increase of $11.1 million or 2.4% from the $471.1 million 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 88.6% at June 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
six-month periods ended June 30, 2007 and 2006 and the year ended December 31, 2006:

Loan Portfolio Summary

(dollars in thousands)



|                                                           |  |         |  |          |  |         |  |       |  |         |  |      
|---------------------------------------------------------- |  | ------- |  | -------- |  | ------- |  | ----- |  | ------- |  | -----
|                                                           |  | 6/30/07 |  | 12/31/06 |  | 6/30/06
|                                                           |  | $       |  | %        |  | $       |  | %     |  | $       |  | %    
|Commercial                                                 |  | 86,477  |  | 17.9     |  | 93,400  |  | 19.8  |  | 97,705  |  | 21.8 
|Commercial real estate                                     |  | 177,461 |  | 36.8     |  | 174,882 |  | 37.2  |  | 167,352 |  | 37.2 
|Real estate construction                                   |  | 92,990  |  | 19.3     |  | 82,537  |  | 17.5  |  | 71,121  |  | 15.8 
|Residential real estate                                    |  | 118,005 |  | 24.5     |  | 112,022 |  | 23.8  |  | 105,011 |  | 23.4 
|Loans to individuals (except those secured by real estate) |  | 7,255   |  | 1.5      |  | 8,211   |  | 1.7   |  | 8,150   |  | 1.8  
|                                                           |  |         |  |          |  |         |  |       |  |         |  |      
|Total loans                                                |  | 482,188 |  | 100.0    |  | 471,052 |  | 100.0 |  | 449,339 |  | 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.



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##### Table of Contents

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 allowance.

In
recognition of our estimate of inherent risks associated with lending activities, a provision for loan losses of $842,000 was provided during the six months ended June 30, 2007, an increase of $136,000 or 19.3% over the $706,000 reported during
the same period in 2006. The increase is primarily due to the increase in our special reserves during the first quarter of 2007 on two of our impaired loan relationships due to additional credit quality concerns. During the second quarter of 2007,
we charged off $428,000 of the special reserves that were set aside during the first quarter of 2007 for one commercially-oriented relationship. We believe that substantial progress has been made to resolve our previously disclosed problem loan
issues, however, problem loan workouts often take considerable time to resolve and are uncertain as to the ultimate result. Our provision for loan losses for the quarter ended June 30, 2007 was $122,000, an increase of $3,000 or 3% compared to
the $119,000 reported during the same period of 2006.

The ratio of the allowance for loan losses to total loans outstanding was
approximately 1.3% at June 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.)



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##### Table of Contents

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 six months ended June 30, 2007, our non-performing assets to total assets ratio decreased from 1.56% at
December 31, 2006 to 1.48%. 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 June 30, 2007. A total of $1,811,000 in special reserves is included
in the balance of the allowance for loan losses as of June 30, 2007 for impaired loans, which compares to a total of $1,050,000 as of December 31, 2006 and $1,420,000 as of June 30, 2006. The $1,811,000 in special 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.

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

Nonperforming Assets

(dollars in thousands)



|                                             |  |         |       |          |   |         |  |   |      
|-------------------------------------------- |  | ------- | ----- | -------- | - | ------- |  | - | -----
|                                             |  | 6/30/07 |       | 12/31/06 |   | 6/30/06
|Nonaccrual loans                             |  | $       | 8,649 |          | $ | 6,343   |  | $ | 4,982
|Loans past due 90 days or more               |  |         | 4     |          |   | 616     |  |   | 193  
|Restructured loans                           |  |         |      |          |   |        |  |   |     
|Other nonperforming loans (1)                |  |         |      |          |   | 2,265   |  |   | 2,666
|                                             |  |         |       |          |   |         |  |   |      
|Total nonperforming loans                    |  | $       | 8,653 |          | $ | 9,224   |  | $ | 7,841
|                                             |  |         |       |          |   |         |  |   |      
|Foreclosed, repossessed and idled properties |  |         |      |          |   |        |  |   |     
|                                             |  |         |       |          |   |         |  |   |      
|Total nonperforming assets                   |  | $       | 8,653 |          | $ | 9,224   |  | $ | 7,841
|                                             |  |         |       |          |   |         |  |   |      



|(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.)



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##### Table of Contents

If nonaccrual loans had performed in accordance with their original terms, additional interest income in
the amount of $466,636 for the six-month period ended June 30, 2007; $300,727 for the year ended December 31, 2006; and $109,000 for the six-month period ended June 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 June 30,
2007, December 31, 2006, and June 30, 2006:

Watch List Credits

(dollars in thousands)



|                   |  |         |        |   |          |   |        |         |  |   |        |  
|------------------ |  | ------- | ------ | - | -------- | - | ------ | ------- |  | - | ------ | -
|                   |  | 6/30/07 |        |   | 12/31/06 |   |        | 6/30/06 | 
|Watch List Credits |  | $       | 20,677 |   |          | $ | 19,562 |         |  | $ | 20,898 |  
|% of Total Loans   |  |         | 4.29   | % |          |   | 4.15   | %       |  |   | 4.65   | %

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 $11.4 million at June 30, 2007, an increase of $300,000 over the $11.1 million reported as of December 31,
2006. The increase is due to the $300,000 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.



30



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##### Table of Contents

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

Deposit Summary

(dollars in thousands)



|                                       |  |         |  |          |  |                     |  |       |  |         |   |  |       |  
|-------------------------------------- |  | ------- |  | -------- |  | ------------------- |  | ----- |  | ------- | - |  | ----- | -
|                                       |  | 6/30/07 |  | 12/31/06 |  | Increase/(Decrease) | 
|                                       |  | $       |  | %        |  | $                   |  | %     |  | $       |   |  | %     |  
|Time deposits                          |  | 246,267 |  | 59.1     |  | 263,123             |  | 59.6  |  | (16,856 | ) |  | (6.4  | )
|Interest bearing demand & money market |  | 98,158  |  | 23.6     |  | 93,444              |  | 21.2  |  | 4,714   |   |  | 5.0   |  
|Savings                                |  | 53,058  |  | 12.8     |  | 66,259              |  | 15.0  |  | (13,201 | ) |  | (19.9 | )
|                                       |  |         |  |          |  |                     |  |       |  |         |   |  |       |  
|Total interest bearing deposits        |  | 397,483 |  | 95.5     |  | 422,826             |  | 95.8  |  | (25,343 | ) |  | (6.0  | )
|Noninterest demand & official checks   |  | 18,862  |  | 4.5      |  | 18,663              |  | 4.2   |  | 199     |   |  | 1.1   |  
|                                       |  |         |  |          |  |                     |  |       |  |         |   |  |       |  
|Total deposits                         |  | 416,345 |  | 100.0    |  | 441,489             |  | 100.0 |  | (25,144 | ) |  | (5.7  | )
|                                       |  |         |  |          |  |                     |  |       |  |         |   |  |       |  

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. However, during the first quarter of 2007, we purposely allowed our higher-cost certificates of deposit to run off at maturity due to our unusually large
federal funds sold position as well as a softening in loan demand. 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 June 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
June 30, 2007.

Short-Term Borrowings

Total short-term borrowings (including federal funds purchased and securities sold under agreements to repurchase) increased by $24.7 million from their level of $46.6 million at December 31, 2006 to a total of $71.3 million as of
June 30, 2007. The increase is due to our federal funds purchased position of $18.5 million, a reclassification of an existing Federal Home Loan Bank of Atlanta (FHLB) borrowing of $8.0 million to short-term and a decrease in our
commercial sweep account program of $1.8 million. Short-term borrowings at June 30, 2007 include Federal Home Loan Bank of Atlanta (FHLB) borrowings in the amount of $33.0 million, a federal funds purchased position of $18.5 million
and a commercial sweep account program in the amount of $19.8 million.

The FHLB borrowings include two adjustable rate credits. 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 5.34% on June 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 5.31% on June 30, 2007). The third FHLB borrowing is a $10 million fixed rate credit at 3.09% that matures on
September 4, 2007. The fourth advance is a variable rate advance in the amount of $8.0 million, priced at the Prime Rate minus 2.855% per annum (rate of 5.395% on June 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.



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##### Table of Contents

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 $19.8 million at June 30, 2007, a decrease of $1.8 million 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 June 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 (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 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 and Trust II 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 $10,944,000 (of the $11,000,000 outstanding) at June 30, 2006. The remaining $56,000 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 and Trust IIs preferred securities and common securities constitute a full and unconditional guarantee of Trust I and Trust II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 and Trust IIs preferred trust securities and common securities.



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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 June 30, 2007 reflects liquidity and capital
levels currently adequate to fund anticipated near-term business expansion. 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    |  | 6/30/07 |   |  | 12/31/06 |   |  | 6/30/06 |  
|Tier 1   |  | 9.4     | % |  | 9.1      | % |  | 9.4     | %
|Total    |  | 11.5    | % |  | 11.2     | % |  | 10.4    | %
|Leverage |  | 8.1     | % |  | 7.9      | % |  | 8.4     | %

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

Valley Bank



|         |  |         |   |  |          |   |  |         |  
|-------- |  | ------- | - |  | -------- | - |  | ------- | -
|Ratio    |  | 6/30/07 |   |  | 12/31/06 |   |  | 6/30/06 |  
|Tier 1   |  | 9.3     | % |  | 9.1      | % |  | 9.0     | %
|Total    |  | 10.6    | % |  | 10.2     | % |  | 10.0    | %
|Leverage |  | 8.1     | % |  | 7.9      | % |  | 8.1     | %

Total shareholders equity grew by $923,000 from December 31, 2006 to June 30,
2007. Earnings, proceeds from the exercise of incentive stock options, 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. The Company paid its 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.



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Liquid assets, which include cash and due from banks, interest-bearing deposits at other banks and non-
pledged securities available-for-sale, at June 30, 2007, totaled $16.7 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 and resulting increase in federal funds purchased. Our funding sources consist of an established federal funds line with a regional correspondent bank totaling $12.0 million that had a $7.5 million balance as of June 30,
2007, three established federal funds lines with third party banks totaling $21.0 million that had outstanding balances totaling $11.0 million as of June 30, 2007, and an established line with the FHLB that had $73.0 million
outstanding under a total line of $82.0 million as of June 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 June 30, 2007 and $16.6 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.

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 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.



34



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##### Table of Contents

|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 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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##### Table of Contents

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

There were no unregistered sales of equity securities during the quarter.



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

There were no
defaults upon Senior Securities in the quarter.



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

We held our 2007 Annual Meeting of Shareholders on April 27, 2007, at which meeting five Class A directors were reelected to new three-year terms. The following table indicates the total votes in favor of, and withheld from voting
on, the re-election of each nominee, and provides certain information with respect to those directors not standing for re-election whose term of office continued past the 2007 Annual Meeting of Shareholders:



|                          |  |                |  |                   |  |                |  |               
|------------------------- |  | -------------- |  | ----------------- |  | -------------- |  | --------------
|DIRECTOR NAME             |  | TERM OF OFFICE |  | AFFIRMATIVE VOTES |  | VOTES WITHHELD |  | VOTES AGAINST 
|Class A Directors         |  |                |  |                   |  |                |  |               
|James S. Frantz, Jr.      |  | 2007-2010      |  | 3,383,902         |  | 9,154          |  | 0             
|Eddie F. Hearp            |  | 2007-2010      |  | 3,383,588         |  | 9,468          |  | 0             
|Anna L. Lawson            |  | 2007-2010      |  | 3,383,588         |  | 9,468          |  | 0             
|John W. Starr, M.D.       |  | 2007-2010      |  | 3,383,902         |  | 9,154          |  | 0             
|Michael E. Warner         |  | 2007-2010      |  | 3,383,902         |  | 9,154          |  | 0             
|Class B Directors         |  |                |  |                   |  |                |  |               
|Abney S. Boxley, III      |  | 2005-2008      |  | Not applicable    |  | Not applicable |  | Not applicable
|William D. Elliot         |  | 2005-2008      |  | Not applicable    |  | Not applicable |  | Not applicable
|Barbara B. Lemon          |  | 2005-2008      |  | Not applicable    |  | Not applicable |  | Not applicable
|Samuel L. Lionberger, Jr. |  | 2005-2008      |  | Not applicable    |  | Not applicable |  | Not applicable
|Ward W. Stevens, M.D.     |  | 2005-2008      |  | Not applicable    |  | Not applicable |  | Not applicable
|Class C Directors         |  |                |  |                   |  |                |  |               
|Ellis L. Gutshall         |  | 2006-2009      |  | Not applicable    |  | Not applicable |  | Not applicable
|Mason Haynesworth         |  | 2006-2009      |  | Not applicable    |  | Not applicable |  | Not applicable
|A. Wayne Lewis            |  | 2006-2009      |  | Not applicable    |  | Not applicable |  | Not applicable
|George W. Logan           |  | 2006-2009      |  | Not applicable    |  | Not applicable |  | Not applicable
|Geoffrey M. Ottaway       |  | 2006-2009      |  | Not applicable    |  | Not applicable |  | Not applicable



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

None.



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##### Table of Contents

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



|(a) | We filed the following exhibits for the quarter ended June 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).
|               | 
|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).                                                      



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##### Table of Contents

|       |  |                                                                                                                                                                                                                                                
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       | 
|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).                                  
|       | 
|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).                                                                                                                              



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|     |  |                                                                                                                                                                 
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|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                                           
|                |  | 
|August 10, 2007 |  |  |  | /s/ Ellis L. Gutshall                                                  
|Date            |  |  |  | Ellis L. Gutshall, President and Chief Executive Officer               
|                |  | 
|August 10, 2007 |  |  |  | /s/ Kimberly B. Snyder                                                 
|Date            |  |  |  | Kimberly B. Snyder, Executive Vice President andChief Financial Officer



40