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UNITED STATESSECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM
10-QSB

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

For the Quarterly Period Ended March 31, 2003

Commission File Number: 33-77568

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VALLEY FINANCIAL CORPORATION

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| | VIRGINIA(State of Incorporation) |  | 54-1702380(I.R.S. EmployerIdentification Number) | 
| | -------------------------------- |  | ------------------------------------------------ | 

36 Church Avenue, S.W.Roanoke, Virginia 24011(Address of
principal executive offices)

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

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

At April 30, 2003, 1,831,476 shares of the issuers common stock, no par value, were outstanding.

Transitional small business disclosure
format: Yes o No x.

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##### Table of Contents



VALLEY FINANCIAL CORPORATIONFORM 10-QSBMarch 31, 2003

INDEX



|         |  |                       |  |                                                     | Page
|-------- |  | --------------------- |  | --------------------------------------------------- | ----
|         |  |                       |  |                                                     |     
|PART I.  |  | FINANCIAL INFORMATION | 
|         |  |                       |  |                                                     |     
|         |  | Item 1.               |  | Financial Statements                                |     
|         |  |                       |  |                                                     |     
|         |  |                       |  | Consolidated Balance Sheets                         | 3   
|         |  |                       |  | Consolidated Statements of Income                   | 4   
|         |  |                       |  | Consolidated Statements of Cash Flows               | 5   
|         |  |                       |  | Notes to Consolidated Financial Statements          | 6   
|         |  |                       |  |                                                     |     
|         |  | Item 2.               |  | Managements Discussion and Analysis                | 11  
|         |  |                       |  |                                                     |     
|         |  | Item 3.               |  | Controls and Procedures                             | 25  
|         |  |                       |  |                                                     |     
|PART II. |  | OTHER INFORMATION     | 
|         |  |                       |  |                                                     |     
|         |  | Item 4.               |  | Submission of Matters to a Vote of Security Holders | 26  
|         |  |                       |  |                                                     |     
|         |  | Item 5.               |  | Other Information                                   | 26  
|         |  |                       |  |                                                     |     
|         |  | Item 6.               |  | Exhibits and Reports on Form 8-K                    | 26  

|                              |   
|----------------------------- | --
|SIGNATURES AND CERTIFICATIONS | 28
|                              |   
|EXHIBIT INDEX                 | 31

2



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##### Table of Contents

PART 1  FINANCIAL INFORMATION

Item 1. Financial Statements.

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



|                                                                                                                                                |  | (Unaudited)March 312003 |         | December 312002 |  
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | --------------- | -
|                                                                                                                                                |  |                         |         |                 |  
|                                                                                                                                                |  |                         |         |                 |  
|Assets                                                                                                                                          |  |                         |         |                 |  
|Cash and due from banks                                                                                                                         |  | $                       | 10,913  |                 | $
|Money market investments:                                                                                                                       |  |                         |         |                 |  
|Federal funds sold                                                                                                                              |  |                         | 2,411   |                 |  
|Interest-bearing deposits in other banks                                                                                                        |  |                         | 5,601   |                 |  
|                                                                                                                                                |  |                         |         |                 |  
|Total money market investments                                                                                                                  |  |                         | 8,012   |                 |  
|Securities held to maturity (approximate market values of $19,963 at March 31, 2003 and $20,120 at December 31, 2002)                           |  |                         | 20,023  |                 |  
|Securities available for sale                                                                                                                   |  |                         | 20,120  |                 |  
|Restricted equity securities                                                                                                                    |  |                         | 2,777   |                 |  
|Loans:                                                                                                                                          |  |                         |         |                 |  
|Commercial and industrial loans                                                                                                                 |  |                         | 45,130  |                 |  
|Commercial real estate loans                                                                                                                    |  |                         | 79,463  |                 |  
|Real estate construction                                                                                                                        |  |                         | 18,306  |                 |  
|Residential real estate loans                                                                                                                   |  |                         | 24,905  |                 |  
|Loans to individuals                                                                                                                            |  |                         | 27,324  |                 |  
|                                                                                                                                                |  |                         |         |                 |  
|Total loans                                                                                                                                     |  |                         | 195,128 |                 |  
|Less unearned income                                                                                                                            |  |                         | (12     | )               |  
|Less allowance for loan losses                                                                                                                  |  |                         | (2,262) |                 |  
|                                                                                                                                                |  |                         |         |                 |  
|Net loans                                                                                                                                       |  |                         | 192,854 |                 |  
|Premises and equipment                                                                                                                          |  |                         | 4,860   |                 |  
|Accrued interest receivable                                                                                                                     |  |                         | 1,042   |                 |  
|Other assets                                                                                                                                    |  |                         | 6,005   |                 |  
|                                                                                                                                                |  |                         |         |                 |  
|Total assets                                                                                                                                    |  | $                       | 266,606 |                 | $
|                                                                                                                                                |  |                         |         |                 |  
|                                                                                                                                                |  |                         |         |                 |  
|Liabilities and Shareholders Equity                                                                                                            |  |                         |         |                 |  
|Deposits:                                                                                                                                       |  |                         |         |                 |  
|Non-interest bearing demand deposits                                                                                                            |  | $                       | 35,918  |                 | $
|Interest bearing demand deposits                                                                                                                |  |                         | 12,235  |                 |  
|Money market deposits                                                                                                                           |  |                         | 21,370  |                 |  
|Other savings deposits                                                                                                                          |  |                         | 3,779   |                 |  
|Certificates of deposits >100,000                                                                                                               |  |                         | 35,046  |                 |  
|Other time deposits                                                                                                                             |  |                         | 84,471  |                 |  
|                                                                                                                                                |  |                         |         |                 |  
|Total deposits                                                                                                                                  |  |                         | 192,819 |                 |  
|                                                                                                                                                |  |                         |         |                 |  
|Short-term borrowings                                                                                                                           |  |                         |        |                 |  
|Securities sold under agreements to repurchase                                                                                                  |  |                         | 5,850   |                 |  
|Accrued interest payable                                                                                                                        |  |                         | 643     |                 |  
|Other liabilities                                                                                                                               |  |                         | 693     |                 |  
|Federal Home Loan Bank advances                                                                                                                 |  |                         | 47,000  |                 |  
|                                                                                                                                                |  |                         |         |                 |  
|Total liabilities                                                                                                                               |  |                         | 247,005 |                 |  
|                                                                                                                                                |  |                         |         |                 |  
|Commitments and other contingencies                                                                                                             |  |                         |         |                 |  
|Preferred stock, no par value. Authorized 10,000,000 shares; none issued and outstanding.                                                       |  |                         |         |                 |  
|Common stock, no par value. Authorized 10,000,000 shares; issued and outstanding 1,831,476 at March 31,
2003 and 1,828,737 at December 31, 2002 |  |                         | 12,382  |                 |  
|Accumulated retained earnings                                                                                                                   |  |                         | 6,951   |                 |  
|Accumulated other comprehensive income                                                                                                          |  |                         | 268     |                 |  
|                                                                                                                                                |  |                         |         |                 |  
|Total shareholders equity                                                                                                                      |  |                         | 19,601  |                 |  
|                                                                                                                                                |  |                         |         |                 |  
|Total liabilities and shareholders equity                                                                                                      |  | $                       | 266,606 |                 | $
|                                                                                                                                                |  |                         |         |                 |  

See accompanying notes to consolidated financial statements.



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



|                                                    |  | For the PeriodJanuary 1, 2003ThroughMarch 31, 2003 |       | For the PeriodJanuary 1, 2002ThroughMarch 31, 2002 |  
|--------------------------------------------------- |  | -------------------------------------------------- | ----- | -------------------------------------------------- | -
|                                                    |  |                                                    |       |                                                    |  
|Interest Income:                                    |  |                                                    |       |                                                    |  
|Interest and fees on loans                          |  | $                                                  | 3,167 |                                                    | $
|Interest on money market investments                |  |                                                    | 10    |                                                    |  
|Interest on securities  taxable                    |  |                                                    | 308   |                                                    |  
|Interest on securities  nontaxable                 |  |                                                    | 149   |                                                    |  
|                                                    |  |                                                    |       |                                                    |  
|Total interest income                               |  |                                                    | 3,634 |                                                    |  
|                                                    |  |                                                    |       |                                                    |  
|Interest Expense:                                   |  |                                                    |       |                                                    |  
|Interest on certificates of deposit > 100,000       |  |                                                    | 232   |                                                    |  
|Interest on other deposits                          |  |                                                    | 690   |                                                    |  
|Interest on Federal Home Loan Bank advances         |  |                                                    | 385   |                                                    |  
|Interest on repurchase agreements                   |  |                                                    | 14    |                                                    |  
|Interest on borrowed funds                          |  |                                                    | 9     |                                                    |  
|                                                    |  |                                                    |       |                                                    |  
|Total interest expense                              |  |                                                    | 1,330 |                                                    |  
|                                                    |  |                                                    |       |                                                    |  
|Net interest income                                 |  |                                                    | 2,304 |                                                    |  
|Provision for loan losses                           |  |                                                    | 258   |                                                    |  
|                                                    |  |                                                    |       |                                                    |  
|Net interest income after provision for loan losses |  |                                                    | 2,046 |                                                    |  
|                                                    |  |                                                    |       |                                                    |  
|Noninterest income:                                 |  |                                                    |       |                                                    |  
|Service charges on deposit accounts                 |  |                                                    | 154   |                                                    |  
|Income earned on life insurance contracts           |  |                                                    | 63    |                                                    |  
|Other income on real estate loans                   |  |                                                    | 53    |                                                    |  
|Other fee income                                    |  |                                                    | 26    |                                                    |  
|Securities gains                                    |  |                                                    | 7     |                                                    |  
|                                                    |  |                                                    |       |                                                    |  
|Total noninterest income                            |  |                                                    | 303   |                                                    |  
|                                                    |  |                                                    |       |                                                    |  
|Noninterest expense:                                |  |                                                    |       |                                                    |  
|Compensation expense                                |  |                                                    | 880   |                                                    |  
|Occupancy                                           |  |                                                    | 95    |                                                    |  
|Data processing and equipment                       |  |                                                    | 171   |                                                    |  
|Franchise tax expense                               |  |                                                    |      |                                                    |  
|Purchased tax credit expense                        |  |                                                    | 179   |                                                    |  
|Deposit expenses                                    |  |                                                    | 35    |                                                    |  
|Loan expenses                                       |  |                                                    | 81    |                                                    |  
|Other expense                                       |  |                                                    | 238   |                                                    |  
|                                                    |  |                                                    |       |                                                    |  
|Total noninterest expense                           |  |                                                    | 1,679 |                                                    |  
|                                                    |  |                                                    |       |                                                    |  
|Net income before taxes                             |  |                                                    | 670   |                                                    |  
|Provision for income taxes                          |  |                                                    | 88    |                                                    |  
|                                                    |  |                                                    |       |                                                    |  
|Net income                                          |  | $                                                  | 582   |                                                    | $
|                                                    |  |                                                    |       |                                                    |  
|Basic earnings per share                            |  | $                                                  | 0.32  |                                                    | $
|                                                    |  |                                                    |       |                                                    |  
|Diluted earnings per share                          |  | $                                                  | 0.30  |                                                    | $
|                                                    |  |                                                    |       |                                                    |  

See accompanying notes to consolidated financial statements.

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VALLEY FINANCIAL CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)(In thousands, except per share data)



|                                                                                 |  | For the PeriodJanuary 1, 2003ThroughMarch 31, 2003 |         | For the PeriodJanuary 1, 2002ThroughMarch 31, 2002 |  
|-------------------------------------------------------------------------------- |  | -------------------------------------------------- | ------- | -------------------------------------------------- | -
|                                                                                 |  |                                                    |         |                                                    |  
|Cash Flows From Operating Activities:                                            |  |                                                    |         |                                                    |  
|Net income                                                                       |  | $                                                  | 582     |                                                    | $
|Adjustments to reconcile net income to netcash provided by operating activities: |  |                                                    |         |                                                    |  
|Provision for loan losses                                                        |  |                                                    | 258     |                                                    |  
|Depreciation and amortization                                                    |  |                                                    | 106     |                                                    |  
|Net gains on sale of securities                                                  |  |                                                    | (7      | )                                                  |  
|Amortization (accretion) of premiums/discounts                                   |  |                                                    | 40      |                                                    |  
|Decrease in unearned fees                                                        |  |                                                    | (2      | )                                                  |  
|Decrease in interest receivable                                                  |  |                                                    | 70      |                                                    |  
|(Increase) decrease in other assets                                              |  |                                                    | (521    | )                                                  |  
|Increase in value of life insurance contracts                                    |  |                                                    | (63     | )                                                  |  
|Decrease in accrued interest payable                                             |  |                                                    | (401    | )                                                  |  
|Increase in other liabilities                                                    |  |                                                    | 22      |                                                    |  
|                                                                                 |  |                                                    |         |                                                    |  
|Net cash provided by operating activities                                        |  |                                                    | 84      |                                                    |  
|                                                                                 |  |                                                    |         |                                                    |  
|                                                                                 |  |                                                    |         |                                                    |  
|Cash Flows From Investing Activities:                                            |  |                                                    |         |                                                    |  
|Increase in money market investments                                             |  |                                                    | (3,573  | )                                                  |  
|Purchases of premises and equipment                                              |  |                                                    | (77     | )                                                  |  
|Purchases of securities available-for-sale                                       |  |                                                    | (4,266  | )                                                  |  
|Purchases of securities held to maturity                                         |  |                                                    | (2,482  | )                                                  |  
|Purchases of restricted equity securities                                        |  |                                                    | (350    | )                                                  |  
|Principal repayments/sales/calls of securities available-for-sale                |  |                                                    | 3,866   |                                                    |  
|Principal repayments of securities held to maturity                              |  |                                                    | 2,634   |                                                    |  
|Investment in life insurance contracts                                           |  |                                                    | (1,200  | )                                                  |  
|Increase in loans                                                                |  |                                                    | (9,477  | )                                                  |  
|                                                                                 |  |                                                    |         |                                                    |  
|Net cash used in investing activities                                            |  |                                                    | (14,925 | )                                                  |  
|                                                                                 |  |                                                    |         |                                                    |  
|                                                                                 |  |                                                    |         |                                                    |  
|Cash Flows From Financing Activities:                                            |  |                                                    |         |                                                    |  
|Increase in time deposits greater than $100,000                                  |  |                                                    | 1,064   |                                                    |  
|Increase in other time deposits                                                  |  |                                                    | 2,737   |                                                    |  
|Increase (decrease) in other deposits                                            |  |                                                    | 6,775   |                                                    |  
|Increase in short-term borrowings                                                |  |                                                    |        |                                                    |  
|Increase (decrease) in securities sold under agreements to repurchase            |  |                                                    | (14     | )                                                  |  
|Proceeds from issuance of common stock                                           |  |                                                    | 29      |                                                    |  
|Proceeds from Federal Home Loan Bank advances                                    |  |                                                    | 7,000   |                                                    |  
|                                                                                 |  |                                                    |         |                                                    |  
|Net cash provided by financing activities                                        |  |                                                    | 17,591  |                                                    |  
|                                                                                 |  |                                                    |         |                                                    |  
|                                                                                 |  |                                                    |         |                                                    |  
|Net Increase (decrease) in Cash and Due from Banks                               |  |                                                    | 2,750   |                                                    |  
|                                                                                 |  |                                                    |         |                                                    |  
|Cash and Due From Banks at Beginning of Period                                   |  |                                                    | 8,163   |                                                    |  
|                                                                                 |  |                                                    |         |                                                    |  
|Cash and Due From Banks at End of Period                                         |  | $                                                  | 10,913  |                                                    | $
|                                                                                 |  |                                                    |         |                                                    |  
|                                                                                 |  |                                                    |         |                                                    |  
|Supplemental disclosure of cash flow information:                                |  |                                                    |         |                                                    |  
|Cash paid during the period for interest                                         |  | $                                                  | 1,731   |                                                    | $
|                                                                                 |  |                                                    |         |                                                    |  
|Cash paid during the period for taxes                                            |  | $                                                  |        |                                                    | $
|                                                                                 |  |                                                    |         |                                                    |  
|Noncash financing and investing activities                                       |  |                                                    |         |                                                    |  
|Transfer of loans to foreclosed property                                         |  | $                                                  | 264     |                                                    | $
|                                                                                 |  |                                                    |         |                                                    |  

See accompanying notes to consolidated financial statements.

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VALLEY FINANCIAL CORPORATION

Notes to Consolidated Financial StatementsMarch 31, 2003(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 2002 Annual Report on Form
10-KSB.

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

(2)

Cash and Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks. To Comply with Federal Reserve regulations, the Bank will be
required to maintain certain average reserve balances. The daily cash reserve requirement for the week including March 31, 2003 was $3,300.

(3)

Securities

The carrying
values, unrealized gains, unrealized losses and approximate fair values of available for sale and held to maturity investment securities at March 31, 2003 are shown in the tables below. As of March 31, 2003, investments (including both available for
sale and held to maturity) and restricted equity securities with amortized costs and fair values of $29,633 and $29,894, 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.

The following table sets forth the composition of
securities available for sale at March 31, 2003. Securities available for sale are carried at approximate market value.

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Available for Sale Investment Portfolio  Category Distribution(dollars in thousands)



|                                    |  | AmortizedCosts |        | UnrealizedGains |   | UnrealizedLosses |  | ApproximateFair Values |     
|----------------------------------- |  | -------------- | ------ | --------------- | - | ---------------- |  | ---------------------- | ----
|                                    |  |                |        |                 |   |                  |  |                        |     
|U.S. Treasury                       |  | $              | 199    |                 | $ | 5                |  | $                      |    
|U.S. Government agencies            |  |                | 2,488  |                 |   | 30               |  |                        |    
|Mortgage-backed securities          |  |                | 5,682  |                 |   | 146              |  |                        | (18 
|Collateralized mortgage obligations |  |                | 2,040  |                 |   |                 |  |                        |    
|States and political subdivisions   |  |                | 9,104  |                 |   | 258              |  |                        | (13 
|Corporate debt securities           |  |                | 200    |                 |   |                 |  |                        | (1  
|                                    |  |                |        |                 |   |                  |  |                        |     
|Total securities available for sale |  | $              | 19,713 |                 | $ | 439              |  |                        | ($32
|                                    |  |                |        |                 |   |                  |  |                        |     

The following table sets forth the composition of securities
held to maturity at March 31, 2003. 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 Agencies           |  |                | 2,000  |                 |   |                 |  |                        | (4   
|Mortgage-backed securities          |  |                | 10,983 |                 |   | 70               |  |                        | (4   
|Collateralized mortgage obligations |  |                | 1,983  |                 |   | 6                |  |                        |      
|States and political subdivisions   |  |                | 5,057  |                 |   |                 |  |                        | (128 
|                                    |  |                |        |                 |   |                  |  |                        |      
|Total securities held to maturity   |  | $              | 20,023 |                 | $ | 76               |  |                        | ($136
|                                    |  |                |        |                 |   |                  |  |                        |      

(4)

Allowance for Loan Losses

The
following table summarizes the loan loss experience for the three-month periods ended March 31, 2003 and 2002.

Allowance for Loan Losses(dollars in thousands)



|                                  |  | 2003 |       | 2002 |  
|--------------------------------- |  | ---- | ----- | ---- | -
|                                  |  |      |       |      |  
|Balance at January 1              |  | $    | 2,014 |      | $
|Provision for loan losses         |  |      | 258   |      |  
|Recoveries  Loans to individuals |  |      | 1     |      |  
|Charged off loans                 |  |      |       |      |  
|Loans to Individuals              |  |      | (11   | )    |  
|                                  |  |      |       |      |  
|Balance at March 31               |  | $    | 2,262 |      | $
|                                  |  |      |       |      |  

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(5)

Earnings Per
Share

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

Weighted Average Shares
Outstanding



|Three months ending March 31: |  | Basic     |  | Diluted   | 
|----------------------------- |  | --------- |  | --------- | 
|                              |  |           |  |           | 
|2003                          |  | 1,828,970 |  | 1,923,354 | 
|                              |  |           |  |           | 
|2002                          |  | 1,819,811 |  | 1,880,294 | 
|                              |  |           |  |           | 

(6)

Comprehensive Income

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

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

The adoption of Statement 130 on January 1, 1998 did not have any effect on the consolidated
financial position, results of operations or liquidity of the Company. However, Statement 130 does have an effect on financial statement displays presented by the Company since the Company has net unrealized gains (losses) on available-for-sale
securities, an item of other comprehensive income (loss). For the three months ended March 31, 2003 and 2002, total comprehensive income was $548 and $250, respectively.

The information that follows discloses the reclassification adjustments and the income taxes related to securities available-for-sale that are included in other comprehensive loss, net of income
taxes for the three month periods ended March 31, 2003 and 2002.

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|                                                                   |  | For the ThreeMonths EndedMarch 31, 2003 |     | For the ThreeMonths EndedMarch 31, 2002 |  
|------------------------------------------------------------------ |  | --------------------------------------- | --- | --------------------------------------- | -
|                                                                   |  |                                         |     |                                         |  
|Net unrealized losses on securities available for sale:            |  |                                         |     |                                         |  
|Net unrealized holding losses during the quarter                   |  | $                                       | (45 | )                                       | $
|Less reclassification adjustments for gains included in net income |  |                                         | (5  | )                                       |  
|Income tax benefit                                                 |  |                                         | 16  |                                         |  
|                                                                   |  |                                         |     |                                         |  
|Other comprehensive loss, net of income taxes                      |  | $                                       | (34 | )                                       | $
|                                                                   |  |                                         |     |                                         |  

(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 March 31, 2003, outstanding commitments to extend credit were $57,449 as compared to $62,076 at December 31, 2002.

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

(8)

Related Party Transactions

The Bank has entered into transactions with its directors, significant shareholders and their affiliates (related parties). Such transactions were made in the
ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers, and did not, in the opinion of management,
involve more than normal credit risk or present other unfavorable features. As of March 31, 2003 aggregate loans to directors, executive officers, and principal shareholders total $8,243. An analysis of loan activity to directors, executive officers
and principal shareholders for the year ended December 31, 2002 is as follows:

Loans to Related Parties



|Balances as of January 1, 2002   |  | $ | 5,115  |  
|-------------------------------- |  | - | ------ | -
|Advances                         |  |   | 4,186  |  
|Repayments                       |  |   | (1,843 | )
|                                 |  |   |        |  
|Balances as of December 31, 2002 |  | $ | 7,458  |  
|                                 |  |   |        |  

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(9)

Other
Debt

The Company has outstanding debt with the Federal Home Loan Bank of Atlanta in the amount of $47.0 million as of March 31, 2003.
There are four convertible advances in the amount of $5.0 million each and one convertible advance in the amount of $7.0 million currently drawn. There is one $10.0 million convertible advance and one adjustable rate advance in the amount of $10.0
million currently drawn. The Federal Home Loan Bank of Atlanta has the option to convert the $37.0 million in convertible advances on the conversion dates below and any 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 LIBOR-based adjustable rate credit (ARC) at 3-month LIBOR flat. The $10.0 million convertible advance may be converted
into a 3-month LIBOR-based floating rate advance (ARC) at 3-month LIBOR flat only if 3-month LIBOR is greater than or equal to 7.0%. The $10.0 million adjustable rate advance is an ARC with a current rate of 1.28875%, subject to change on each
quarterly interest payment date. The following table provides more information on the outstanding advances as of March 31, 2003.



|FEDERAL HOME LOAN BANK ADVANCES | 
|------------------------------- | 
|                                | 
|AdvanceBalance                  | 
|                                | 
|$  5,000,000                    | 
|$  5,000,000                    | 
|$  5,000,000                    | 
|$  5,000,000                    | 
|$10,000,000                     | 
|$10,000,000                     | 
|$  7,000,000                    | 

(10)

Stock Based Compensation

The
Company accounts for its stock-based compensation plan using the accounting prescribed by Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees.The Company is not
required to adopt the fair value based recognition provisions prescribed under SFAS No. 123,Accountingfor Stock Based Compensation, but complies with the
disclosure requirements set forth in the Statement (as amended by SFAS No. 148), which include disclosing pro forma net income as if the fair value based method of accounting had been applied.

Stock Option Plans

The Company has an Incentive Stock Plan (the 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 Plan authorizes grants of options to purchase up to 155,925 shares (adjusted for stock splits) of the
Companys authorized, but unissued common stock. Accordingly, 155,925 shares of authorized, but unissued common stock are reserved for use in the Plan. All stock options have been granted with an exercise price equal to the stocks fair
market value at the date of the grant. Stock options 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. In addition, certain options for 91,098 shares (adjusted
for stock splits) based on meeting certain performance criteria have been granted to executive officers. Information related to pro forma net income and per share amounts for the periods presented is as follows:

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|                                                                               |  | March 31, |    
|------------------------------------------------------------------------------ |  | --------- | ---
|                                                                               |  |           |    
|                                                                               |  | 2003      |    
|                                                                               |  |           |    
|Compensation cost recognized in income for all stock-based compensation awards |  | $         |   
|Pro forma net income, based on SFAS No. 123                                    |  | $         | 562
|Pro forma basic net income per share, based on SFAS No. 123                    |  | $         | .31
|Pro forma diluted net income per share, based on SFAS No. 123                  |  | $         | .29

Item 2.

Managements Discussion and Analysis.

The following is managements discussion and analysis of the financial condition and
results of operations of the Company as of and for the three months ended March 31, 2003 and 2002. The discussion should be read in conjunction with the Companys Consolidated Financial Statements and Notes thereto.

Forward-Looking Statements

This report contains forward-looking statements that are subject to risks
and uncertainties that could cause actual results to differ materially from those reflected in such forward-looking statements, which are representative only on the date hereof. Readers of this report should not rely solely on the forward-looking
statements and should consider all uncertainties and risks discussed throughout this report. The Corporation takes no obligation to update any forward-looking statements contained herein. Factors that may cause actual results to differ materially
from those contemplated by such forward-looking statements include, among others, the following possibilities: (1) competitive pressures among depository and other financial institutions may increase significantly; (2) changes in the interest rate
environment may reduce margins; (3) general economic conditions, either nationally or regionally, may be less favorable than expected that could result in a deterioration of credit quality or a reduced demand for credit; and (4) legislative or
regulatory changes including changes in accounting standards, may adversely affect the business.

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 six
full-service branch locations, operating in various locations throughout the Cities of Roanoke and Salem and the County of Roanoke. The Bank plans to open its seventh full-service branch in the Lewis-Gale Hospital area in the summer of 2003.

Total assets at March 31, 2003 were $266.6 million, up 7.2% from $248.8 million at December 31, 2002. The principal components of the Companys assets
at the end of the period were $22.9 million in securities available-for-sale, including restricted equity securities, $20.0 million in securities held to maturity, and $195.1 million in gross loans.

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Total liabilities at March 31, 2003 were $247.0 million, up 7.5% from $229.8 million at December 31, 2002 with the increase primarily
represented by a $10.6 million growth in deposits and a $7.0 million increase in Federal Home Loan Bank advances.

Total shareholders equity at March
31, 2003 was $19.6 million consisting of $9.1 million in net proceeds from the Companys initial public offering, $3.2 million in net proceeds from the Companys secondary offering, $97,000 in proceeds from the exercise of stock options,
increased by accumulated retained earnings of $7.0 million and $268,000 of net unrealized gains on securities available-for-sale, net of related deferred tax liability. Total shareholders equity was $19.6 million at March 31, 2003 compared
with $19.0 million at December 31, 2002, an increase of $600,000 or 3.2%. Exclusive of unrealized gains (losses) on investment securities, shareholders equity was $19.3 million at March 31, 2003 and $18.7 million at December 31, 2002.

The Company had net income of $582,000 for the three months ended March 31, 2003 compared with $474,000 recorded for the three months ended March 31, 2002,
an increase of $108,000 or 22.8%. An improved net interest income, despite an 11 basis point decrease in net interest margin for the first quarter of 2003 as compared to the same period last year, combined with increased noninterest income, offset
by increases in noninterest expense in virtually all categories, contributed to the 22.8% increase for the three months ended March 31, 2003 as compared to the three months ended March 31, 2002.

Profitability as measured by the Companys return on average assets (ROA) was .94% for the three months ended March 31, 2003 compared to .96% for the same period in 2002. Return on
average equity (ROE) was 12.34% for the three months ended March 31, 2003 compared to 11.51% for the same period in 2002. The calculation of ROE excludes the effect of any unrealized gains or losses on investment securities.

Net Interest Income

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

Net interest income was $2.3 million for the three months ended March 31, 2003 and is attributable to interest income from loans and securities exceeding the cost of interest paid
on deposits and borrowed funds. Net interest income for the first three months of 2003 increased 21.1% from $1.9 million for the same period in 2002. The net interest margin on a fully taxable equivalent (FTE ) basis was 4.11% for the
first three months of 2003, a decrease of 11 basis points from the 4.22% reported for the same period in 2002. Yields on earning assets are decreasing faster than funding costs may be reduced. The Banks cost of funds ratio was 2.33% for the
three months ended March 31, 2003, down 51 basis points from the 2.84% reported for the first three months of 2002. The Banks yield on earning assets was 6.41% for the three months ended March 31, 2003, down 56 basis points from the 6.97%
reported for the three months ended March 31, 2002. Management is diligently working to maintain the net interest margin by reducing the cost of funds ratio.

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Noninterest Income

Noninterest income for the three months
ended March 31, 2003 was $303,000, an increase of $133,000 or 78.2% over the $170,000 reported for the same period one year earlier. The largest single component of the increase is attributable to service charges on deposit accounts in the amount of
$48,000. Other substantial contributors to the increase are tax-exempt income earned on life insurance contracts in the amount of $27,000 and fee income earned on real estate loans in the amount of $36,000. Securities gains and losses totaled $7,000
during the first three months of 2003 as compared to $0 for the first three months of 2002. Future levels of noninterest income are expected to increase as a direct result of business growth and expansion.

Noninterest Expense

Noninterest expense for the first three months of 2003 was $1.7 million, an increase of $500,000 or
41.7% over the $1.2 million reported for the same period in 2002. Compensation expense was the largest contributor to the increase in the amount of $208,000. The other major contributor to the increase was purchased tax credit expense in the amount
of $179,000, which is offset by a reduction in franchise tax expense in the amount of $35,000. Expenses associated with the opening of the Banks sixth full-service branch on May 20, 2002 are included in the three months ended March 31, 2002.
Expenses associated with the introduction of online banking in May 2002 are also included in the three months ended March 31, 2002. Substantially all major categories of noninterest expense increased due to growth and expansion. Noninterest expenses
are expected to increase in future years as a direct result of business growth and expansion.

Income Taxes

To reflect the Companys anticipated federal income tax liability, an expense of $88,000 and $193,000 at an effective tax rate of 13.1% and 28.9% was recognized for the three months ended March 31, 2003 and March
31, 2002, respectively. During the first quarter of 2003, the Bank purchased federal and state tax credits in the amounts of $174,000 and $217,000, respectively. The federal and state tax credits were purchased at a total cost of $156,000 and
$151,000, respectively. The credits were expensed in the amount of $179,000 during the first quarter of 2003, comprised of $156,000 federal and $23,000 state, as purchased tax credit expense (a noninterest expense). The federal tax credits will
offset income tax expense in 2003 while the state tax credits will offset franchise tax expense in 2003 and a partial amount of 2004. The effective tax rate differs from the statutory rate of 34 percent primarily due to tax-exempt interest income on
municipal securities, net of disallowance and tax-exempt income earned on life insurance contracts.

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Investment Securities

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

Investment securities (available
for sale and held to maturity), including restricted equity securities, at March 31, 2003 were $42.9 million, an increase of $500,000 or 1.2% from their level of $42.4 million on December 31, 2002. The increase of $500,000 is primarily due to
purchases in the amount of $7.1 million, offset by principal repayments and sale proceeds in the amounts of $5.9 million and $564,000, respectively. See Note 3 to the Consolidated Financial Statements.

Loan Portfolio

The Companys total loans were $195.1 million at March 31, 2003, an increase of $9.4 million or 5.1%
from the $185.7 million reported at December 31, 2002. The Companys ratio of total loans to total funding sources (customer deposits, securities sold under agreements to repurchase, federal funds purchased and Federal Home Loan Bank advances)
stood at 79.4% at March 31, 2003 and 81.4% at December 31, 2002. Management seeks to maintain the ratio of loans to funding sources at a maximum of 85%.

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

The following table summarizes the loan portfolio by category as of the three-month periods ended
March 31, 2003 and 2002 and the year ended December 31, 2002.

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Loan Portfolio Summary(dollars in thousands)



|                          |  | March 31,2003 |         | December 31,2002 |   | March 31,2002 | 
|------------------------- |  | ------------- | ------- | ---------------- | - | ------------- | 
|                          |  |               |         |                  |   |               | 
|Commercial and industrial |  | $             | 45,130  |                  | $ | 44,668        | 
|Commercial real estate    |  |               | 79,463  |                  |   | 75,378        | 
|Real estate construction  |  |               | 18,306  |                  |   | 15,727        | 
|Residential real estate   |  |               | 24,905  |                  |   | 23,966        | 
|Loans to individuals      |  |               | 27,324  |                  |   | 25,922        | 
|                          |  |               |         |                  |   |               | 
|Total loans               |  | $             | 195,128 |                  | $ | 185,661       | 
|                          |  |               |         |                  |   |               | 

Loan Category Analysis

Commercial Loans.Commercial and industrial loans accounted for 23.1% of the loan portfolio as of March 31, 2003 and stood at $45.1 million versus $44.7 million three months earlier. Such
loans generally are made to provide operating lines of credit, to finance the purchase of inventory or equipment, and for other business purposes. The credit worthiness of the borrower is analyzed and re-evaluated on a periodic basis. Most
commercial loans are collateralized with business assets such as accounts receivable, inventory and equipment. Even with substantial collateral such as all the assets of the business and personal guarantees, commercial lending involves considerable
risk of loss in the event of a business downturn or failure of the business.

Commercial Real Estate Loans.Commercial real estate
construction and commercial real estate mortgages represent interim and permanent financing of commercial properties that are secured by real estate, and were 40.7% of total loans at March 31, 2003. Outstanding loans in this category equaled $79.5
million and $75.4 million at March 31, 2003 and December 31, 2002, respectively. The Company prefers to make commercial real estate loans secured by owner-occupied properties. These borrowers are engaged in business activities other than real
estate, and the primary source of repayment is not solely dependent on conditions in the real estate market.

Real Estate Construction Loans. Real estate construction loans represent interim financing on residential and commercial properties under construction, and are secured by real estate. Once construction is completed and the loan becomes permanent, the loans are
reclassified as commercial real estate loans, which are secured by commercial property or residential real estate loans, which are secured by first deeds of trust. Outstanding loans in this category totaled $18.3 million (9.4% of total loans) at
March 31, 2003 as compared to $15.7 million at December 31, 2002.

Residential Real Estate Loans.Residential real estate loans are
secured by first deeds of trust on 1-4 family residential properties. This category had $24.9 million in loans (12.8% of total loans) at March 31, 2003 and $24.0 million in such loans at December 31, 2002. To mitigate interest rate risk, the Company
usually limits the final maturity of residential real estate loans held for its own portfolio to 15-20 years and offers a bi-weekly payment option to encourage faster repayment. Residential real estate lending involves risk elements when there is
lack of timely payment and/or a decline in the value of the collateral.

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Loans to Individuals.Loans to individuals include installment loans and home equity lines of credit/loans
secured by junior liens on residential real estate. The loan proceeds typically are used to purchase vehicles, finance home remodeling or higher education, or for other consumer purposes. Loans to individualstotaled $27.3 million (14.0% of total loans) at March 31, 2003 compared to $25.9 million at December 31, 2002.

Summary of Allowance for Loan Losses

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

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

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

A provision for loan losses of $258,000 was provided during the three months ended
March 31, 2003, an increase of $71,000 or 38.0% over the same period in 2002, in recognition of managements estimate of inherent risks associated with lending activities. The allowance for loan losses was $2.3 million as of March 31, 2003 and
represented approximately 1.2% of net loans outstanding versus 1.1% of net loans at December 31, 2002 (see Note 4 to the Consolidated Financial Statements). A total of $125,000 in specific reserves, on one consumer customer placed on nonaccrual
status in the first quarter of 2003, is included in the balance of the allowance for loan losses as of March 31, 2003. The $125,000 specific reserve was accrued during the first quarter of 2003. A total of $60, 000 in specific reserves, on one
commercial loan placed on nonaccrual status in April 1999, is included in the balance of the allowance for loan losses as of March 31, 2002. Of the $60,000 specific reserve, $30,000 was accrued during the first quarter of 2002. Additional factors
contributing to the increase in provision expense are strong year-over-year growth in average loans outstanding and managements concern about perceived continuing economic weakness.

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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.



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

The total recorded investment in impaired loans was $214,000, $390,000 and $828,000, respectively for the three month period ended
March 31, 2003, the year ended December 31, 2002 and the three-month period ended March 31, 2002. The loan loss allowance related to impaired loans was $125,000, $0 and $60,000, respectively for the above-referenced time periods. Management believes
that the above allocated reserves are adequate for the impaired loans in the Companys portfolio based upon a detailed review of the quality and pledged collateral of each individual loan considered impaired at each of the above-referenced
periods.

Nonperforming assets at March 31, 2003, December 31, 2002 and March 31, 2002 are presented in the following table.

Nonperforming Assets(dollars in thousands)



|                                             |  | March 31,2003 |     | December 31,2002 |   | March 31,2002 | 
|-------------------------------------------- |  | ------------- | --- | ---------------- | - | ------------- | 
|                                             |  |               |     |                  |   |               | 
|Nonaccrual loans                             |  | $             | 213 |                  | $ |              | 
|Loans past due 90 days or more               |  |               | 1   |                  |   | 390           | 
|Restructured loans                           |  |               | 0   |                  |   | 0             | 
|                                             |  |               |     |                  |   |               | 
|Total nonperforming loans                    |  |               | 214 |                  |   | 390           | 
|                                             |  |               |     |                  |   |               | 
|Foreclosed, repossessed and idled properties |  |               | 449 |                  |   | 196           | 
|                                             |  |               |     |                  |   |               | 
|Total nonperforming assets                   |  | $             | 663 |                  | $ | 586           | 
|                                             |  |               |     |                  |   |               | 

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If nonaccrual loans had performed in accordance with their original terms, additional interest income in the amount of $4,000, $15,000,
and $9,000, respectively would have been recorded for the three month period ended March 31, 2003, the year ended December 31, 2002 and the three month period ended March 31, 2002.

Other Assets

The Companys other assets were $6.0 million at March 31, 2003, an increase of $1.8 million over the $4.2 million reported as of
December 31, 2002. The purchase of split dollar life insurance contracts on key employees contributed $1.2 million of the total increase during the first three months of 2003. Life insurance contracts comprise a total of $4.4 million of the $6.0
million other assets balance as of March 31, 2003. An increase in foreclosed properties contributed $253,000 to the increase during the first quarter of 2003.

Deposits

As of March 31, 2003 total deposits were $192.8 million, an increase of $10.6 million or 5.8% from their level of $182.2 million at
December 31, 2002. Certificates of deposit increased by $3.8 million to a total of $119.5 million at March 31, 2003, up from $115.7 million at December 31, 2002. Non-interest bearing demand deposits, savings, and money market accounts increased by
$5.2 million, $500,000, and $900,000, respectively.

At March 31, 2003 noninterest-bearing demand deposits were $35.9 million or 18.6% of total deposits. On
December 31, 2002 noninterest-bearing demand deposits were $30.7 million or 16.8% of total deposits. Nonmaturity deposits (noninterest bearing demand deposits, interest bearing demand deposits, money market accounts and savings accounts) were $73.3
million or 38.0% of total deposits at March 31, 2003, compared with $66.5 million or 36.5% of total deposits at December 31, 2002. Total interest bearing deposits stood at $156.9 million at March 31, 2003, an increase of $5.4 million or 3.6% over
their level of $151.5 million at December 31, 2002.

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

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Short-Term Borrowings

The Company placed in service a
commercial sweep account program in third quarter 1999. The balance in the program decreased by $14,000 from its level of $5.9 million at December 31, 2002 during the first quarter of 2003. The program consists of establishing a demand deposit
account in which the Bank invests available balances daily in securities on an overnight basis subject to repurchase. On the following business day, the Bank will repurchase from the customer the securities for an amount equal to the amount of
available balances invested in the securities. Interest is calculated daily at the rate applicable for each overnight period; however, it is posted to the customer accounts only once per month. The contractual agreement states that a repurchase
agreement is not a deposit and therefore is not insured by the Federal Deposit Insurance Corporation. Therefore, these repurchase balances are not reported as deposits but as short-term borrowings.

Exclusive of the commercial sweep accounts, the Company had no other short-term borrowings. See the liquidity section for further information on the preceding borrowings.

Other Debt

Other debt consists of Federal Home Loan Bank advances. These advances are relatively
cost-effective funding sources and provide the Company with the flexibility to structure borrowings in a manner that aids in the management of interest rate risk and liquidity. Federal Home Loan Bank advances totaled $47.0 million, an increase of
$7.0 million over the $40.0 million as of December 31, 2002. The increase in advances during the year reflects the funding to support loan and investment growth.

Interest
Rate Risk

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

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

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At least quarterly, the Company measures the ALM position using earnings simulation modeling to estimate what assets and liabilities
would reprice, and to what extent, within a one-year period in response to an immediate 200 basis point change in the Prime Rate, as well as in response to more gradual interest rate change. The Companys objective is to keep the change in net
interest income over twelve months at or below 5%, 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 the earnings of the Company. Modeling the sensitivity of earnings to interest rate risk is highly dependent on numerous assumptions embedded in the simulation model. While the earnings
sensitivity analysis incorporates Managements best estimate of interest rate and balance sheet dynamics under various market rate movements, the actual behavior and resulting earnings impact likely will differ from that projected.

Capital Adequacy

The Companys financial position at March 31, 2003 reflects
liquidity and capital levels currently adequate to fund anticipated near-term business expansion. Capital ratios are in excess of required regulatory minimums for a well-capitalized institution. The adequacy of the Companys capital is reviewed
by management on an ongoing basis. Management seeks to maintain a capital structure adequate to support anticipated asset growth and serve as a cushion to absorb potential losses.

Major capital expenditures planned during 2003 include the construction of the Banks seventh full-service branch in the Lewis-Gale Hospital area. The branch is planned to open in the summer of 2003, which will be
funded by current operations. Also planned for 2003 are extensive leasehold improvements to the Banks headquarters facility.

Total shareholders
equity increased by $600,000 during the first three months of 2003. The increase is primarily attributable to net income for the first three months of $582,000 and $29,000 in proceeds from the exercise of stock options in March of 2003. Exclusive of
unrealized gains (losses) on investment securities, shareholders equity was $19.3 million at March 31, 2003 and $18.7 million at December 31, 2002.

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

Capital Ratios



|Ratio    |  | 3/31/03 |   | 12/31/02 |   | 3/31/02 |   | Minimum |  
|-------- |  | ------- | - | -------- | - | ------- | - | ------- | -
|         |  |         |   |          |   |         |   |         |  
|Tier 1   |  | 9.1     | % | 9.3      | % | 9.9     | % | 4       | %
|Total    |  | 10.1    | % | 10.3     | % | 10.9    | % | 8       | %
|Leverage |  | 7.7     | % | 7.7      | % | 8.5     | % | 4       | %

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##### Table of Contents

Liquidity

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

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

The Companys asset liquidity is provided by cash and due from banks, money market
investments, investments available for sale including restricted equity securities, and through management of investment maturities/prepayments and loan repayments. The Companys ratio of liquid assets to deposits and short-term borrowings was
21.1% at March 31, 2003 and 18.5% at December 31, 2002. The Company sells excess funds as overnight federal funds sold to provide an immediate source of liquidity. The Company had federal funds sold of $2.4 million and $4.1 million at March 31, 2003
and December 31, 2002, respectively. During the first three months of 2003, deposit growth in the amount of $10.6 million surpassed loan growth in the amount of $9.4 million. The excess $1.2 million coupled with Federal Home Loan Bank advances in
the amount of $7.0 million and returned federal funds sold in the amount of $1.7 million, was used to fund investment purchases in excess of principal paydowns and sales proceeds of approximately $600,000 and purchases split dollar life insurance
policies on key executives in the amount of $1.2 million. Of the remaining $8.1 million in liquidity, $5.3 million was invested in interest bearing deposits and $2.7 remains in cash and due from banks.

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

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

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##### Table of Contents

Impact of Inflation

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

Recent and Future Accounting Considerations

In April 2003 the Financial Accounting Standards Board
(FASB) issued Statement No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, which amends FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities to amend and
clarify financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts. This Statement improves financial reporting by requiring that contracts with comparable characteristics be
accounted for in a similar manner. This Statement more clearly defines under what circumstances a contract meets the characteristic of a derivative and clarifies when a derivative contains a financing component. The changes in this Statement will
result in more consistent reporting of contracts as either derivatives or hybrid instruments. The provisions of this Statement are effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after
June 30, 2003. The provisions of this Statement that relate to Statement 133 Implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003, should continue to be applied in accordance with their respective
effective dates.

In December 2002 the Financial Accounting Standards Board (FASB) issued Statement No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123, which amends FASB Statement No. 123, Accounting for Stock-Based Compensation to provide alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the method used on reported results. The provisions of this Statement are effective for interim periods beginning after December 15, 2002 and for fiscal years ending after
December 15, 2002.

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##### Table of Contents

In October 2002, the Financial Accounting Standards Board (FASB) issued Statement No. 147, Acquisitions of Certain Financial
Institutions-an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9, which removes acquisitions of financial institutions from the scope of both Statement 72 and Interpretation 9. The Statement requires that acquisitions
of financial institutions be accounted for under the purchase method of accounting in accordance with Statement 141, Business Combinations and Statement 142, Goodwill and Other Intangible Assets. Thus, the requirement in
paragraph 5 of Statement 72 to recognize (and subsequently amortize) any excess of the fair market value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired as an unidentifiable intangible asset no
longer applies to acquisitions within the scope of this Statement. The provisions of this Statement relating to the application of the purchase method of accounting are effective for acquisitions initiated on or after October 1, 2002. The provisions
of this Statement relating to accounting for intangible assets are effective on October 1, 2002.

In June 2002, the Financial Accounting Standards Board (FASB)
issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). The Statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, not at the date of
an entitys commitment to an exit plan. This Statement also establishes that fair value is the objective for initial measurement of the liability. The provisions of this Statement are effective for exit or disposal activities that are initiated
after December 31, 2002.

In October 2001, the Financial Accounting Standards Board (FASB) issued Statement No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which supercedes Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. Statement 144 also supercedes the accounting and reporting
provisions of APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a
segment of a business. However, it retains the requirement in Opinion No. 30 to report separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of either by sale, abandonment, or
distribution to owners or is classified as held for sale. Statement 144 carries over many of the fundamental provisions of Statement No. 121. Statement No. 144 is effective for fiscal years beginning after December 15, 2001. The Company adopted the
provisions of this Statement effective January 1, 2002, as required. The adoption of the Statement did not have any effect on the Companys financial position, results of operations, or liquidity.

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##### Table of Contents

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

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

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

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

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##### Table of Contents

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

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

Item 3.

Controls and Procedures.

Within 90 days prior to the date of this report, we carried out an evaluation of the effectiveness of the design and operation
of our disclosure controls and procedures, including internal controls and procedures for financial reporting. Our principal executive officer and principal financial officer supervised this evaluation and concluded that our disclosure controls and
procedures are effective. Subsequent to this evaluation, (i) there have not been any significant changes to our internal controls or other factors that could significantly affect our disclosure controls or procedures and (ii) we have not taken any
corrective actions with respect to our disclosure controls and procedures to correct any significant deficiencies or weaknesses.

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.

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##### Table of Contents

PART II. OTHER INFORMATION

Item 4.

Submission of Matters to a Vote of Security Holders.

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

Item 5.

Other Information.

None.

Item 6.

Exhibits and Reports on Form 8-K.

(a)

The Company filed the following exhibits for the quarter ended March 31, 2003:

Exhibits:



|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).                                                                                                                                                      
|      |                                                                                                                                                                                                                                                                                    
|*10.2 | Employment Agreement dated April 8, 1994, by and between the Company and A. Wayne Lewis (incorporated herein by reference to Exhibit No. 10.2
of Registration Statement No. 33-77568, on Form S-1, as amended).                                                                    
|      |                                                                                                                                                                                                                                                                                    
|*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 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).                                                                    
|      |                                                                                                                                                                                                                                                                                    
|10.5  | Office Lease dated February 28, 1994, by and between First Federal Building, L.C. and Valley Financial Enterprises, L.C. (incorporated herein
by reference to Exhibit No. 10.5 of Registration Statement No. 33-77568, on Form S-1, as amended).                                   
|      |                                                                                                                                                                                                                                                                                    
|10.10 | First amendment dated August 5, 1994, to the Office Lease dated February 28, 1994, by and between First Federal Building, L.C. and Valley
Financial Enterprises, L.C. (incorporated herein by reference to Exhibit No. 10.10 of Form 10-K filed March 30, 1995, File No. 33-77568).

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##### Table of Contents

|10.12  | Second amendment dated December 14, 1994, to the Office Lease dated February 28, 1994, by and between First Federal Building, L.C. and Valley
Financial Enterprises, L.C. (incorporated herein by reference to Exhibit No. 10.12 of Form 10-K filed March 30, 1995, File No. 33-77568).
|------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       |                                                                                                                                                                                                                                                                                        
|10.13  | Lease agreement for office space dated September 20, 1996, by and between Valley Bank, N.A. and Betty J. Burrows (incorporated herein by
reference to Exhibit No. 10.13 of Form 10-KSB filed March 27, 1997, File No. 33-77568).                                                       
|       |                                                                                                                                                                                                                                                                                        
|*10.6  | Severance agreement dated February 9, 1998, by and between the Company and J. Randall Woodson ( incorporated herein by reference to Exhibit
No. 10.6 of Form 10-KSB filed March 30, 2000, File No. 33-77568).                                                                          
|       |                                                                                                                                                                                                                                                                                        
|*10.7  | 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).                                                     
|       |                                                                                                                                                                                                                                                                                        
|*10.14 | Valley Bank Supplemental Retirement Plan effective January 1, 2002 (incorporated herein by reference to Exhibit 10.14 of Form 10-QSB filed
May 15, 2002, File No. 33-77568).                                                                                                           
|       |                                                                                                                                                                                                                                                                                        
|*10.15 | Employment agreement dated August 26, 2002, by and between the Company and J. Randall Woodson (incorporated herein by reference to Exhibit
10.15 of Form 10-QSB filed November 14, 2002, File No. 33-77568).                                                                           
|       |                                                                                                                                                                                                                                                                                        
|11.    | Statement re Computation of Earnings per Share (filed herewith as Note 5).                                                                                                                                                                                                             
|       |                                                                                                                                                                                                                                                                                        
|99.1   | 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).                                                                                                                       
|       |                                                                                                                                                                                                                                                                                        
|99.2   | 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-QSB pursuant to Item
13(a).

(b)

Reports on Form 8-K filed during the
last quarter of the period covered by this report:

The Company filed two reports on Form 8-K during the quarter ended March 31, 2003. The first report, dated
January 21, 2003, reported the Companys consolidated financial results for the period ended December 31, 2002. The second report, dated March 31, 2003, reported that Valley Financial Corporation furnished to the Securities and Exchange
Commission the certification of its Chief Executive Officer and its Chief Financial Officer with respect to Form 10-KSB for the period ended December 31, 2002 as required by the Sarbanes-Oxley Act of 2002.

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##### Table of Contents

SIGNATURES

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



| |              |  |  | VALLEY FINANCIAL CORPORATION                           
| | ------------ |  |  | -------------------------------------------------------
| | May 15, 2003 |  |  | /s/ ELLISL. GUTSHALL                                   
| |              |  |  |                                                        
| | Date         |  |  | Ellis L. Gutshall, Presidentand Chief Executive Officer



| |              |  |  |                                                                   
| | ------------ |  |  | ------------------------------------------------------------------
| | May 15, 2003 |  |  | /s/ A. WAYNELEWIS                                                 
| |              |  |  |                                                                   
| | Date         |  |  | A. Wayne Lewis,Executive Vice President andChief Financial Officer



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CERTIFICATIONS

I, Ellis L. Gutshall, certify
that:

1.

I have reviewed this quarterly report on Form 10-QSB of Valley
Financial Corporation;

2.

Based on my knowledge, this quarterly report
does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered
by this quarterly report;

3.

Based on my knowledge, the financial
statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this
quarterly report;

4.

The registrants other certifying officers and I
are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

(a)

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b)

evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and

(c)

presented in
this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrants other certifying officers and I have disclosed based on our most recent evaluation, to the registrants auditors and the
audit committee of registrants board of directors:

(a)

all
significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report financial data and have identified for the registrants auditors any
material weaknesses in internal controls; and

(b)

any fraud, whether or
not material, that involves management or other employees who have a significant role in the registrants internal controls; and

6.

The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.



|      |              |  |    |                                      
|----- | ------------ |  | -- | -------------------------------------
|Date: | May 15, 2003 |  | By | /s/ ELLISL. GUTSHALL                 
|      |              |  |    |                                      
|      |              |  |    | President and Chief Executive Officer



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##### Table of Contents

CERTIFICATIONS

I, A. Wayne Lewis, certify that:

1.

I have reviewed this quarterly report on Form 10-QSB of Valley Financial
Corporation;

2.

Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
quarterly report;

3.

Based on my knowledge, the financial statements, and
other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly
report;

4.

The registrants other certifying officers and I are
responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

(a)

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b)

evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and

(c)

presented in
this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrants other certifying officers and I have disclosed based on our most recent evaluation, to the registrants auditors and the
audit committee of registrants board of directors:

(a)

all
significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report financial data and have identified for the registrants auditors any
material weaknesses in internal controls; and

(b)

any fraud, whether or
not material, that involves management or other employees who have a significant role in the registrants internal controls; and

6.

The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.



|      |              |  |    |                                                    
|----- | ------------ |  | -- | ---------------------------------------------------
|Date: | May 15, 2003 |  | By | /s/ A. WAYNELEWIS                                  
|      |              |  |    |                                                    
|      |              |  |    | Executive Vice President andChief Financial Officer



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##### Table of Contents

INDEX TO EXHIBITS



|ExhibitNumber | Description                                                                                                                                                                                                                                                                         | PageNumber
|------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------
|              |                                                                                                                                                                                                                                                                                     |           
|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).                                                                                                                                                       |           
|              |                                                                                                                                                                                                                                                                                     |           
|10.2          | Employment Agreement dated April 8, 1994, by and between the Company and A. Wayne Lewis (incorporated herein by reference to Exhibit No. 10.2 of Registration Statement
No. 33-77568, on Form S-1, as amended).                                                                     |           
|              |                                                                                                                                                                                                                                                                                     |           
|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 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).                                                                     |           
|              |                                                                                                                                                                                                                                                                                     |           
|10.5          | Office Lease dated February 28, 1994, by and between First Federal Building, L.C. and Valley Financial Enterprises, L.C. (incorporated herein by reference to Exhibit No.
10.5 of Registration Statement No. 33-77568, on Form S-1, as amended).                                    |           
|              |                                                                                                                                                                                                                                                                                     |           
|10.10         | First amendment dated August 5, 1994, to the Office Lease dated February 28, 1994, by and between First Federal Building, L.C. and Valley Financial Enterprises, L.C.
(incorporated herein by reference to Exhibit No. 10.10 of Form 10-K filed March 30, 1995, File No. 33-77568). |           

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##### Table of Contents



|10.12 | Second amendment dated December 14, 1994, to the Office Lease dated February 28, 1994, by and between First Federal Building, L.C. and Valley Financial Enterprises, L.C.
(incorporated herein by reference to Exhibit No. 10.12 of Form 10-K filed March 30, 1995, File No. 33-77568). |   
|----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --
|      |                                                                                                                                                                                                                                                                                         |   
|10.13 | Lease agreement for office space dated September 20, 1996, by and between Valley Bank, N.A. and Betty J. Burrows (incorporated herin by reference to Exhibit No. 10.13 of
Form 10-KSB filed March 27, 1997, File No. 33-77568).                                                         |   
|      |                                                                                                                                                                                                                                                                                         |   
|10.6  | Severance agreement dated February 9, 1998, by and between the Company and J. Randall Woodson (incorporated herein by reference to Exhibit 10.6 of Form 10-KSB filed March
30, 2000, File No. 33-77568).                                                                                |   
|      |                                                                                                                                                                                                                                                                                         |   
|10.7  | 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).                                                      |   
|      |                                                                                                                                                                                                                                                                                         |   
|10.14 | Valley Bank Supplemental Retirement Plan effective January 1, 2002 (incorporated herein by reference to Exhibit 10.14 of Form 10-QSB filed May 15, 2002, File No.
33-77568).                                                                                                            |   
|      |                                                                                                                                                                                                                                                                                         |   
|10.15 | Employment agreement dated August 26, 2002, by and between the Company and J. Randall Woodson (incorporated herein by reference to Exhibit 10.15 of Form 10-QSB filed
November 14, 2002, File No. 33-77568).                                                                            |   
|      |                                                                                                                                                                                                                                                                                         |   
|11    | Statement re Computation of Earnings per Share (filed herewith as Note 5).                                                                                                                                                                                                              |   
|      |                                                                                                                                                                                                                                                                                         |   
|99.1  | 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).                                                                                                                        | 29
|      |                                                                                                                                                                                                                                                                                         |   
|99.2  | 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).                                                                                                                        | 30

32