##### Table of Contents

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UNITED STATES

SECURITIES 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, 2004



Commission File Number: 000-28342



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VALLEY FINANCIAL CORPORATION



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



36 Church Avenue,
S.W.

Roanoke, Virginia 24011

(Address of principal executive offices)



(540) 342-2265

(Issuers telephone number, including area code)



---



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



At April 30, 2004, 1,833,266 shares of the issuers common stock, no par value, were outstanding.



Transitional small business disclosure
format:    Yes ̈No  x.



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##### Table of Contents

VALLEY FINANCIAL CORPORATION

FORM 10-QSB

March 31, 2004



INDEX



|                                                            |  |   
|----------------------------------------------------------- |  | --
|Part I. FINANCIAL INFORMATION                               |  |   
|                                                            | 
|Item 1.
Financial Statements                                |  |   
|                                                            | 
|Consolidated Balance Sheets                                 |  | 3 
|Consolidated Statements of Income                           |  | 4 
|Consolidated Statements of Cash Flows                       |  | 5 
|Notes to Consolidated Financial Statements                  |  | 6 
|                                                            | 
|Item 2.
Managements Discussion and Analysis                |  | 11
|                                                            | 
|Item 3.
Controls and Procedures                             |  | 24
|                                                            | 
|Part II. OTHER INFORMATION                                  |  |   
|                                                            | 
|Item 4.
Submission of Matters to a Vote of Security Holders |  | 24
|                                                            | 
|Item 5.
Other Information                                   |  | 25
|                                                            | 
|Item 6.
Exhibits and Reports on Form 8-K                    |  | 25
|                                                            | 
|SIGNATURES                                                  |  | 28
|                                                            | 
|EXHIBIT INDEX                                               |  | 29
|                                                            | 
|CERTIFICATIONS                                              |  | 32



2



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##### Table of Contents

PART 1  FINANCIAL INFORMATION



Item 1. Financial Statements.



VALLEY FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)







|                                                                                                                                                |  |                          |         |   |                  |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                |  | (Unaudited)March 31 2004 |         |   | December 31 2003 |  
|Assets                                                                                                                                          |  |                          |         |   |                  |   |         |  
|Cash and due from banks                                                                                                                         |  | $                        | 5,809   |   |                  | $ | 7,511   |  
|Money market investments:                                                                                                                       |  |                          |         |   |                  |   |         |  
|Federal funds sold                                                                                                                              |  |                          | 12,455  |   |                  |   |        |  
|Interest-bearing deposits in other banks                                                                                                        |  |                          | 125     |   |                  |   | 713     |  
|                                                                                                                                                |  |                          |         |   |                  |   |         |  
|Total money market investments                                                                                                                  |  |                          | 12,580  |   |                  |   | 713     |  
|Securities held to maturity (approximate market values of $23,370 at March 31, 2004 and $22,828 at December 31, 2003)                           |  |                          | 23,124  |   |                  |   | 22,986  |  
|Securities available for sale                                                                                                                   |  |                          | 43,314  |   |                  |   | 40,066  |  
|Restricted equity securities                                                                                                                    |  |                          | 3,143   |   |                  |   | 3,143   |  
|Loans:                                                                                                                                          |  |                          |         |   |                  |   |         |  
|Commercial and industrial loans                                                                                                                 |  |                          | 54,161  |   |                  |   | 53,141  |  
|Commercial real estate loans                                                                                                                    |  |                          | 97,701  |   |                  |   | 92,563  |  
|Real estate construction loans                                                                                                                  |  |                          | 18,342  |   |                  |   | 17,622  |  
|Residential real estate loans                                                                                                                   |  |                          | 31,201  |   |                  |   | 29,959  |  
|Loans to individuals                                                                                                                            |  |                          | 30,155  |   |                  |   | 29,318  |  
|                                                                                                                                                |  |                          |         |   |                  |   |         |  
|Total loans                                                                                                                                     |  |                          | 231,560 |   |                  |   | 222,603 |  
|Less unearned income                                                                                                                            |  |                          | (4      | ) |                  |   | (5      | )
|Less allowance for loan losses                                                                                                                  |  |                          | (2,663  | ) |                  |   | (2,566  | )
|                                                                                                                                                |  |                          |         |   |                  |   |         |  
|Net loans                                                                                                                                       |  |                          | 228,893 |   |                  |   | 220,032 |  
|Premises and equipment                                                                                                                          |  |                          | 6,108   |   |                  |   | 6,067   |  
|Bank owned life insurance                                                                                                                       |  |                          | 5,907   |   |                  |   | 5,835   |  
|Accrued interest receivable                                                                                                                     |  |                          | 1,289   |   |                  |   | 1,204   |  
|Other assets                                                                                                                                    |  |                          | 1,509   |   |                  |   | 1,452   |  
|                                                                                                                                                |  |                          |         |   |                  |   |         |  
|Total assets                                                                                                                                    |  | $                        | 331,676 |   |                  | $ | 309,009 |  
|                                                                                                                                                |  |                          |         |   |                  |   |         |  
|Liabilities and Shareholders Equity                                                                                                            |  |                          |         |   |                  |   |         |  
|Deposits:                                                                                                                                       |  |                          |         |   |                  |   |         |  
|Non-interest bearing demand deposits                                                                                                            |  | $                        | 41,784  |   |                  | $ | 36,668  |  
|Interest bearing demand deposits                                                                                                                |  |                          | 15,883  |   |                  |   | 16,602  |  
|Money market deposits                                                                                                                           |  |                          | 31,652  |   |                  |   | 29,217  |  
|Savings deposits                                                                                                                                |  |                          | 4,175   |   |                  |   | 4,593   |  
|Certificates of deposits > $100,000                                                                                                             |  |                          | 39,753  |   |                  |   | 39,464  |  
|Other time deposits                                                                                                                             |  |                          | 113,209 |   |                  |   | 96,478  |  
|                                                                                                                                                |  |                          |         |   |                  |   |         |  
|Total deposits                                                                                                                                  |  |                          | 246,456 |   |                  |   | 223,022 |  
|                                                                                                                                                |  |                          |         |   |                  |   |         |  
|Short-term borrowings                                                                                                                           |  |                          | 15,000  |   |                  |   | 17,556  |  
|Securities sold under agreements to repurchase                                                                                                  |  |                          | 5,342   |   |                  |   | 4,727   |  
|Accrued interest payable                                                                                                                        |  |                          | 726     |   |                  |   | 736     |  
|Other liabilities                                                                                                                               |  |                          | 733     |   |                  |   | 406     |  
|Guaranteed preferred beneficial interests in the Companys junior subordinated debentures                                                       |  |                          | 4,000   |   |                  |   | 4,000   |  
|Long-term borrowings                                                                                                                            |  |                          | 37,000  |   |                  |   | 37,000  |  
|                                                                                                                                                |  |                          |         |   |                  |   |         |  
|Total liabilities                                                                                                                               |  |                          | 309,257 |   |                  |   | 287,447 |  
|                                                                                                                                                |  |                          |         |   |                  |   |         |  
|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 1,833,266 at March 31, 2004 and 1,832,751 at December 31,
2003 |  |                          | 12,401  |   |                  |   | 12,396  |  
|Retained earnings                                                                                                                               |  |                          | 9,599   |   |                  |   | 8,969   |  
|Accumulated other comprehensive income                                                                                                          |  |                          | 419     |   |                  |   | 197     |  
|                                                                                                                                                |  |                          |         |   |                  |   |         |  
|Total shareholders equity                                                                                                                      |  |                          | 22,419  |   |                  |   | 21,562  |  
|                                                                                                                                                |  |                          |         |   |                  |   |         |  
|Total liabilities and shareholders equity                                                                                                      |  | $                        | 331,676 |   |                  | $ | 309,009 |  
|                                                                                                                                                |  |                          |         |   |                  |   |         |  



See
accompanying notes to consolidated financial statements.



3



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##### Table of Contents

VALLEY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except
per share data)



|                                                             |  |                                                     |       |                                                    |   |      
|------------------------------------------------------------ |  | --------------------------------------------------- | ----- | -------------------------------------------------- | - | -----
|                                                             |  | For the Period January 1, 2004ThroughMarch 31, 2004 |       | For the PeriodJanuary 1, 2003ThroughMarch 31, 2003
|Interest Income:                                             |  |                                                     |       |                                                    |   |      
|Interest and fees on loans                                   |  | $                                                   | 3,320 |                                                    | $ | 3,167
|Interest on money market investments                         |  |                                                     | 10    |                                                    |   | 10   
|Interest on securities - taxable                             |  |                                                     | 526   |                                                    |   | 308  
|Interest on securities - nontaxable                          |  |                                                     | 168   |                                                    |   | 149  
|                                                             |  |                                                     |       |                                                    |   |      
|Total interest income                                        |  |                                                     | 4,024 |                                                    |   | 3,634
|                                                             |  |                                                    
|Interest Expense:                                            |  |                                                     |       |                                                    |   |      
|Interest on certificates of deposit > 100,000                |  |                                                     | 251   |                                                    |   | 232  
|Interest on other deposits                                   |  |                                                     | 806   |                                                    |   | 690  
|Interest on long-term borrowings                             |  |                                                     | 393   |                                                    |   | 350  
|Interest on repurchase agreements                            |  |                                                     | 10    |                                                    |   | 14   
|Interest on guaranteed preferred beneficial interests in the |  |                                                     | 43    |                                                    |   |     
|Companys junior subordinated debentures                     |  |                                                     |       |                                                    |   |      
|Interest on short-term borrowings                            |  |                                                     | 53    |                                                    |   | 44   
|                                                             |  |                                                     |       |                                                    |   |      
|Total interest expense                                       |  |                                                     | 1,556 |                                                    |   | 1,330
|                                                             |  |                                                     |       |                                                    |   |      
|Net interest income                                          |  |                                                     | 2,468 |                                                    |   | 2,304
|                                                             |  |                                                    
|Provision for loan losses                                    |  |                                                     | 98    |                                                    |   | 258  
|                                                             |  |                                                     |       |                                                    |   |      
|Net interest income after provision for loan losses          |  |                                                     | 2,370 |                                                    |   | 2,046
|                                                             |  |                                                     |       |                                                    |   |      
|Noninterest Income:                                          |  |                                                     |       |                                                    |   |      
|Service charges on deposit accounts                          |  |                                                     | 183   |                                                    |   | 154  
|Income earned on bank owned life insurance                   |  |                                                     | 72    |                                                    |   | 63   
|Other income on real estate loans                            |  |                                                     | 24    |                                                    |   | 53   
|Other fee income                                             |  |                                                     | 37    |                                                    |   | 26   
|Gains on sales of securities                                 |  |                                                     | 4     |                                                    |   | 7    
|                                                             |  |                                                     |       |                                                    |   |      
|Total noninterest income                                     |  |                                                     | 320   |                                                    |   | 303  
|                                                             |  |                                                     |       |                                                    |   |      
|Noninterest Expense:                                         |  |                                                     |       |                                                    |   |      
|Compensation expense                                         |  |                                                     | 988   |                                                    |   | 880  
|Occupancy expense                                            |  |                                                     | 116   |                                                    |   | 95   
|Data processing and equipment expense                        |  |                                                     | 225   |                                                    |   | 171  
|Franchise and purchased tax credit expense                   |  |                                                     | 56    |                                                    |   | 179  
|Deposit operation expenses                                   |  |                                                     | 46    |                                                    |   | 35   
|Loan operation expenses                                      |  |                                                     | 112   |                                                    |   | 81   
|Other expense                                                |  |                                                     | 295   |                                                    |   | 238  
|                                                             |  |                                                     |       |                                                    |   |      
|Total noninterest expense                                    |  |                                                     | 1,838 |                                                    |   | 1,679
|                                                             |  |                                                     |       |                                                    |   |      
|Net income before taxes                                      |  |                                                     | 852   |                                                    |   | 670  
|                                                             |  |                                                    
|Provision for income taxes                                   |  |                                                     | 222   |                                                    |   | 88   
|                                                             |  |                                                     |       |                                                    |   |      
|Net income                                                   |  | $                                                   | 630   |                                                    | $ | 582  
|                                                             |  |                                                     |       |                                                    |   |      
|Basic earnings per share                                     |  | $                                                   | 0.34  |                                                    | $ | 0.32 
|                                                             |  |                                                     |       |                                                    |   |      
|Diluted earnings per share                                   |  | $                                                   | 0.32  |                                                    | $ | 0.30 
|                                                             |  |                                                     |       |                                                    |   |      



See
accompanying notes to consolidated financial statements.



4



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##### Table of Contents

VALLEY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands, except
per share data)



|                                                                                  |  |                                                    |         |   |                                                    |   |         |  
|--------------------------------------------------------------------------------- |  | -------------------------------------------------- | ------- | - | -------------------------------------------------- | - | ------- | -
|                                                                                  |  | For the PeriodJanuary 1, 2004ThroughMarch 31, 2004 |         |   | For the PeriodJanuary 1, 2003ThroughMarch 31, 2003 |  
|Cash Flows From Operating Activities:                                             |  |                                                    |         |   |                                                    |   |         |  
|Net income                                                                        |  | $                                                  | 630     |   |                                                    | $ | 582     |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                                    |         |   |                                                    |   |         |  
|Provision for loan losses                                                         |  |                                                    | 98      |   |                                                    |   | 258     |  
|Depreciation and amortization                                                     |  |                                                    | 154     |   |                                                    |   | 106     |  
|Net gains on sale of securities                                                   |  |                                                    | (4      | ) |                                                    |   | (7      | )
|Net losses on foreclosed properties                                               |  |                                                    |        |   |                                                    |   | 12      |  
|Amortization (accretion) of premiums/discounts                                    |  |                                                    | 59      |   |                                                    |   | 40      |  
|Decrease in unearned fees                                                         |  |                                                    | (1      | ) |                                                    |   | (2      | )
|(Increase) decrease in interest receivable                                        |  |                                                    | (85     | ) |                                                    |   | 70      |  
|Increase in other assets                                                          |  |                                                    | (25     | ) |                                                    |   | (259    | )
|Increase in value of life insurance contracts                                     |  |                                                    | (72     | ) |                                                    |   | (63     | )
|Decrease in accrued interest payable                                              |  |                                                    | (10     | ) |                                                    |   | (401    | )
|Increase in other liabilities                                                     |  |                                                    | 327     |   |                                                    |   | 22      |  
|                                                                                  |  |                                                    |         |   |                                                    |   |         |  
|Net cash provided by operating activities                                         |  |                                                    | 1,071   |   |                                                    |   | 358     |  
|                                                                                  |  |                                                    |         |   |                                                    |   |         |  
|Cash Flows From Investing Activities:                                             |  |                                                    |         |   |                                                    |   |         |  
|Increase in money market investments                                              |  |                                                    | (11,867 | ) |                                                    |   | (3,573  | )
|Purchases of premises and equipment                                               |  |                                                    | (173    | ) |                                                    |   | (77     | )
|Purchases of securities available for sale                                        |  |                                                    | (7,851  | ) |                                                    |   | (4,266  | )
|Purchases of securities held to maturity                                          |  |                                                    | (1,000  | ) |                                                    |   | (2,482  | )
|Purchases of restricted equity securities                                         |  |                                                    |        |   |                                                    |   | (350    | )
|Principal repayments/sales/calls of securities available for sale                 |  |                                                    | 4,921   |   |                                                    |   | 3,866   |  
|Principal repayments of securities held to maturity                               |  |                                                    | 826     |   |                                                    |   | 2,634   |  
|Investment in life insurance contracts                                            |  |                                                    |        |   |                                                    |   | (1,200  | )
|Proceeds from sale of fixed assets                                                |  |                                                    | 2       |   |                                                    |   |        |  
|Proceeds from sale of foreclosed properties                                       |  |                                                    | 112     |   |                                                    |   | 5       |  
|Capitalized expenditures on foreclosed property                                   |  |                                                    |        |   |                                                    |   | (15     | )
|Increase in loans                                                                 |  |                                                    | (9,241  | ) |                                                    |   | (9,741  | )
|                                                                                  |  |                                                    |         |   |                                                    |   |         |  
|Net cash used in investing activities                                             |  |                                                    | (24,271 | ) |                                                    |   | (15,199 | )
|                                                                                  |  |                                                    |         |   |                                                    |   |         |  
|Cash Flows From Financing Activities:                                             |  |                                                    |         |   |                                                    |   |         |  
|Increase in time deposits > than $100,000                                         |  |                                                    | 289     |   |                                                    |   | 1,064   |  
|Increase in other time deposits                                                   |  |                                                    | 16,731  |   |                                                    |   | 2,737   |  
|Increase in other deposits                                                        |  |                                                    | 6,414   |   |                                                    |   | 6,775   |  
|Decrease in short-term borrowings                                                 |  |                                                    | (2,556  | ) |                                                    |   |        |  
|Increase (decrease) in securities sold under agreements to repurchase             |  |                                                    | 615     |   |                                                    |   | (14     | )
|Proceeds from issuance of common stock                                            |  |                                                    | 5       |   |                                                    |   | 29      |  
|Proceeds from long-term borrowings                                                |  |                                                    |        |   |                                                    |   | 7,000   |  
|                                                                                  |  |                                                    |         |   |                                                    |   |         |  
|Net cash provided by financing activities                                         |  |                                                    | 21,498  |   |                                                    |   | 17,591  |  
|                                                                                  |  |                                                    |         |   |                                                    |   |         |  
|Net Increase (Decrease) in Cash and Due from Banks                                |  |                                                    | (1,702  | ) |                                                    |   | 2,750   |  
|                                                                                  |  |                                                   
|Cash and Due From Banks at Beginning of Period                                    |  |                                                    | 7,511   |   |                                                    |   | 8,163   |  
|                                                                                  |  |                                                    |         |   |                                                    |   |         |  
|Cash and Due From Banks at End of Period                                          |  | $                                                  | 5,809   |   |                                                    | $ | 10,913  |  
|                                                                                  |  |                                                    |         |   |                                                    |   |         |  
|Supplemental disclosure of cash flow information:                                 |  |                                                    |         |   |                                                    |   |         |  
|Cash paid during the period for interest                                          |  | $                                                  | 1,566   |   |                                                    | $ | 1,731   |  
|                                                                                  |  |                                                    |         |   |                                                    |   |         |  
|Cash paid during the period for taxes                                             |  | $                                                  |        |   |                                                    | $ |        |  
|                                                                                  |  |                                                    |         |   |                                                    |   |         |  
|Noncash financing and investing activities:                                       |  |                                                    |         |   |                                                    |   |         |  
|Transfer of loans to foreclosed property                                          |  | $                                                  | 283     |   |                                                    | $ | 264     |  
|                                                                                  |  |                                                    |         |   |                                                    |   |         |  



See
accompanying notes to consolidated financial statements.



5



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##### Table of Contents

VALLEY FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

March 31, 2004 (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 2003 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 is required to maintain certain average reserve balances. The daily cash reserve requirement for the week including March 31, 2004 was $153. As a condition of our correspondent bank agreement, the Bank is also required to
maintain a target balance. The target balance as of March 31, 2004 was $250.



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



The carrying values, unrealized gains, unrealized losses and approximate fair values of available for sale and held to maturity investment
securities at March 31, 2004 are shown in the tables below. As of March 31, 2004, investments (including both available for sale and held to maturity) and restricted equity securities with amortized costs and fair values of $37,963 and $38,379,
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, 2004. Securities available for sale are carried at approximate market value.



6



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##### Table of Contents

Available for Sale Investment Portfolio  Category Distribution

(dollars in thousands)



|                                    |  |                |        |                 |   |                  |  |   |                        |   |  |   |       
|----------------------------------- |  | -------------- | ------ | --------------- | - | ---------------- |  | - | ---------------------- | - |  | - | ------
|                                    |  | AmortizedCosts |        | UnrealizedGains |   | UnrealizedLosses |  |   | ApproximateFair Values
|U.S. Government agencies            |  | $              | 7,491  |                 | $ | 96               |  | $ |                       |   |  | $ | 7,587 
|Mortgage-backed securities          |  |                | 5,045  |                 |   | 21               |  |   | (1                     | ) |  |   | 5,065 
|Collateralized mortgage obligations |  |                | 19,115 |                 |   | 122              |  |   | (100                   | ) |  |   | 19,137
|States and political subdivisions   |  |                | 10,827 |                 |   | 505              |  |   | (12                    | ) |  |   | 11,320
|Corporate debt securities           |  |                | 200    |                 |   | 5                |  |   |                       |   |  |   | 205   
|                                    |  |                |        |                 |   |                  |  |   |                        |   |  |   |       
|Total securities available for sale |  | $              | 42,678 |                 | $ | 749              |  | $ | (113                   | ) |  | $ | 43,314
|                                    |  |                |        |                 |   |                  |  |   |                        |   |  |   |       



The
following table sets forth the composition of securities held to maturity at March 31, 2004. 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. Treasury                       |  | $              | 199    |                 | $ | 2                |  | $ |                       |   |  | $ | 201   
|U.S. Government agencies            |  |                | 8,935  |                 |   | 135              |  |   | (16                    | ) |  |   | 9,054 
|Mortgage-backed securities          |  |                | 5,796  |                 |   | 43               |  |   |                       |   |  |   | 5,839 
|Collateralized mortgage obligations |  |                | 1,292  |                 |   | 2                |  |   | (24                    | ) |  |   | 1,270 
|States and political subdivisions   |  |                | 6,902  |                 |   | 153              |  |   | (49                    | ) |  |   | 7,006 
|                                    |  |                |        |                 |   |                  |  |   |                        |   |  |   |       
|Total securities held to maturity   |  | $              | 23,124 |                 | $ | 335              |  | $ | (89                    | ) |  | $ | 23,370
|                                    |  |                |        |                 |   |                  |  |   |                        |   |  |   |       



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



The following table summarizes the loan loss experience for the three-month periods ended March 31, 2004 and 2003.



Allowance for Loan Losses

(dollars in thousands)



|                                  |  |      |       |   |      |   |       |  
|--------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                                  |  | 2004 |       |   | 2003 |  
|Balance at January 1              |  | $    | 2,566 |   |      | $ | 2,014 |  
|Provision for loan losses         |  |      | 98    |   |      |   | 258   |  
|Recoveries  Loans to individuals |  |      | 0     |   |      |   | 1     |  
|Charged off loans                 |  |      |       |   |      |   |       |  
|Commercial                        |  |      | 0     |   |      |   | 0     |  
|Credit Cards                      |  |      | 0     |   |      |   | 0     |  
|Loans to individuals              |  |      | (1    | ) |      |   | (11   | )
|                                  |  |      |       |   |      |   |       |  
|Balance at March 31               |  | $    | 2,663 |   |      | $ | 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 in the computations:



Weighted Average Shares Outstanding





|                              |  |           |  |          
|----------------------------- |  | --------- |  | ---------
|Three months ending March 31: |  | Basic     |  | Diluted  
|2004                          |  | 1,833,074 |  | 1,975,417
|                              |  |           |  |          
|2003                          |  | 1,828,970 |  | 1,923,354
|                              |  |           |  |          



|(6) | Comprehensive Income
|--- | --------------------



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, 2004 and 2003, total comprehensive income was $852 and $548, respectively.



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##### Table of Contents

The information that follows discloses the reclassification adjustments and the income
taxes related to securities available for sale that are included in other comprehensive income (loss), net of income taxes for the three month periods ended March 31, 2004 and 2003.



|                                                                            |  |                                         |      |   |                                         |   |     |  
|--------------------------------------------------------------------------- |  | --------------------------------------- | ---- | - | --------------------------------------- | - | --- | -
|                                                                            |  | For the ThreeMonths EndedMarch 31, 2004 |      |   | For the ThreeMonths EndedMarch 31, 2003 |  
|Net unrealized gains (losses) on securities available for sale:             |  |                                         |      |   |                                         |   |     |  
|Net unrealized holding gains (losses) during the year                       |  | $                                       | 341  |   |                                         | $ | (45 | )
|Less reclassification adjustments for realized gains included in net income |  |                                         | (3   | ) |                                         |   | (5  | )
|Income tax benefit (expense)                                                |  |                                         | (116 | ) |                                         |   | 16  |  
|                                                                            |  |                                         |      |   |                                         |   |     |  
|Other comprehensive income (loss), net of income taxes                      |  | $                                       | 222  |   |                                         | $ | (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, 2004, outstanding commitments to extend credit were $73,799 as compared to $65,517 at December 31, 2003.



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, 2004 aggregate loans to



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directors, executive officers, and principal shareholders totalled $8,915. An analysis of loan activity to directors, executive officers and principal
shareholders for the year ended December 31, 2003 is as follows:



Loans to Related Parties



|                                 |  |   |       |  
|-------------------------------- |  | - | ----- | -
|Balances as of January 1, 2003   |  | $ | 4,391 |  
|Advances                         |  |   | 2,410 |  
|Repayments                       |  |   | (477  | )
|                                 |  |   |       |  
|Balances as of December 31, 2003 |  | $ | 6,324 |  
|                                 |  |   |       |  



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



The Company has outstanding long-term debt with the Federal Home Loan Bank of Atlanta in the amount of $37.0 million as of March 31, 2004.
There are four convertible advances in the amount of $5.0 million each, one convertible advance in the amount of $7.0 million, and one convertible 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 on any quarterly interest payment date thereafter, with at least two business days notice. If called, the four $5.0 million convertible advances and the
one $7.0 million convertible advance will be converted into a 3-month London Interbank Offered Rate (LIBOR) based adjustable rate credit (ARC) at 3-month LIBOR 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 following table provides more information on the outstanding advances as of March 31, 2004.



LONG-TERM FEDERAL HOME LOAN BANK ADVANCES



|               |  |                   |  |                   |  |            |  |                      |  |                             
|-------------- |  | ----------------- |  | ----------------- |  | ---------- |  | -------------------- |  | ----------------------------
|AdvanceBalance |  | AdvanceDate       |  | MaturityDate      |  | Fixed Rate |  | InterestPaymentDates |  | First OptionalConversionDate
|$  5,000       |  | December 2, 1999  |  | December 2, 2009  |  | 5.46%      |  | Quarterly            |  | December 4, 2000            
|$  5,000       |  | May 24, 2000      |  | May 24, 2010      |  | 6.49%      |  | Quarterly            |  | May 24, 2001                
|$  5,000       |  | February 9, 2001  |  | February 9, 2011  |  | 4.97%      |  | Quarterly            |  | February 9, 2004            
|$  5,000       |  | November 7, 2001  |  | November 7, 2011  |  | 3.91%      |  | Quarterly            |  | November 7, 2006            
|$10,000        |  | September 4, 2002 |  | September 4, 2007 |  | 3.09%      |  | Quarterly            |  | September 4, 2003           
|$  7,000       |  | March 11, 2003    |  | March 11, 2013    |  | 2.91%      |  | Quarterly            |  | March 11, 2008              



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



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



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The Trusts preferred securities and common securities may be included in the
Companys Tier 1 capital for regulatory capital adequacy purposes to the extent that they do not exceed 25% of the Companys total Tier I capital excluding the securities. Amounts in excess of this ratio will not be considered Tier 1
capital but may be included in the calculation of the Companys total risk-based capital ratio. The Companys obligations with respect to the issuance of the Trusts preferred securities and common securities constitute a full and
unconditional guarantee by the Company of the Trusts obligations with respect to the preferred securities and common securities. Subject to certain exceptions and limitations, the Company may elect from time to time to defer interest payments
on its junior subordinated debentures, which would result in a deferral of distribution payments on the Trusts preferred trust securities and common securities.



|(11) | 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. There are options for 143,750 shares granted to officers and key employees currently outstanding as of March 31, 2004. 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 under the Plan generally have 10-year terms, vest at the rate of 20 percent per year, and become fully exercisable five years from the date of the
grant. In addition to the Plan, certain other options for 91,098 shares (adjusted for stock splits), of which 81,998 are outstanding as of March 31, 2004, based on meeting certain past performance criteria have been granted to executive officers.



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Information related to pro forma net income and per share amounts for the periods presented is as follows:



|                                                                               |  |                              |      |      |   |     
|------------------------------------------------------------------------------ |  | ---------------------------- | ---- | ---- | - | ----
|                                                                               |  | Three Months Ended March 31,
|                                                                               |  | 2004                         |      | 2003
|Compensation cost recognized in income for all stock-based compensation awards |  | $                            |     |      | $ |    
|Pro forma net income, based on SFAS No. 123                                    |  | $                            | 615  |      | $ | 562 
|Pro forma basic net income per share, based on SFAS No. 123                    |  | $                            | 0.34 |      | $ | 0.31
|Pro forma diluted net income per share, based on SFAS No. 123                  |  | $                            | 0.31 |      | $ | 0.29



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, 2004 and 2003. The discussion should be
read in conjunction with the Companys Consolidated Financial Statements and Notes on the December 31, 2003 Form 10-KSB.



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; (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 seven full-service branch locations, operating in various locations throughout the Cities of Roanoke and
Salem, Town of Vinton, and the County of Roanoke.



Total assets
at March 31, 2004 were $331.7 million, up 7.3% from $309.0 million at December 31, 2003. The principal components of the Companys assets at the end of the period were $46.5 million in securities available for sale, including restricted equity
securities, $23.1 million in securities held to maturity, and $231.6 million in gross loans.



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Total liabilities at March 31, 2004 were $309.3 million, up 7.6% from $287.4 million at December 31, 2003
with the increase represented by a $23.5 million growth in deposits and a $600,000 increase in securities sold under agreements to purchase, partially offset by a $2.6 million decrease in federal funds purchased.



Total shareholders equity at March 31, 2004 was $22.4 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, $117,000 in proceeds from the exercise of stock options, increased by accumulated
retained earnings of $9.6 million and $419,000 of net unrealized gains on securities available for sale, net of related deferred tax liability. Total shareholders equity was $22.4 million at March 31, 2004 compared with $21.6 million at
December 31, 2003, an increase of $800,000 or 3.7%. Exclusive of unrealized gains (losses) on investment securities, shareholders equity was $22.0 million at March 31, 2004 and $21.4 million at December 31, 2003.



The Company had net income of $630,000 for the three months ended March 31,
2004, an increase of $48,000 or 8.2% over the $582,000 reported for the same period in 2003. An improved net interest income combined with increased noninterest income, offset by increases in noninterest expense in virtually all categories,
contributed to the 8.2% increase for the three months ended March 31, 2004 as compared to the three months ended March 31, 2003.



Profitability as measured by the Companys annualized return on average assets (ROA) was 0.79% for the three months ended March 31, 2004
compared to 0.94% for the same period in 2003. Annualized return on average equity (ROE) was 11.65% for the three months ended March 31, 2004 compared to 12.34% for the same period in 2003. 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 $2.5 million for the three months
ended March 31, 2004 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 2004 increased 8.7% from $2.3 million for the
same period in 2003. The net interest margin on a fully taxable equivalent (FTE ) basis was 3.42% for the first three months of 2004, a decrease of 69 basis points from the 4.11% reported for the same period in 2003. Yields on earning
assets are decreasing faster than funding costs may be reduced. The Banks cost of funds ratio was 2.11% for the three months ended March 31, 2004, down 22 basis points from the 2.33% reported for the first three months of 2003. The Banks
yield on earning assets was 5.49% for the three months ended March 31, 2004, down 92 basis points from the 6.41% reported for the three months ended March 31, 2003. 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, 2004 was $320,000, an increase of $17,000 or 5.6% over the $303,000 reported for the same period
one year earlier. The largest components of the increase are service charges on deposit accounts in the amount of $29,000, tax-exempt income earned on bank owned life insurance in the amount of $9,000, and other fee income in the amount of $11,000,
offset by a $29,000 decrease in income earned on real estate loans. Securities gains totaled $4,000 during the first three months of 2004 as compared to $7,000 for the first three months of 2003. 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 2004 was $1.8 million, an increase of $100,000 or 5.9% over the $1.7 million reported for the same period in 2003. Compensation expense was the largest contributor to the increase in the amount of $108,000. Noninterest expense in the first
quarter of 2004 includes residual expenses associated with the opening of the Banks Lewis-Gale office on December 8, 2003. Franchise and purchased tax credit expense decreased by $123,000, as federal and state tax credits were recognized in
the amount of $179,000 during the first quarter of 2003. Franchise expense was recognized in the amount of $31,000 in the first quarter of 2004 as compared to $0 in the first quarter of 2003. Substantially all other 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 $222,000 and $88,000 at an effective tax rate of 26.1% and
13.1% was recognized for the three months ended March 31, 2004 and 2003, respectively. During the first quarter of 2003, the Bank purchased federal and state tax credits valued at $174,000 and $217,000, for a total cost of $156,000 and $151,000,
respectively. The credits were expensed in the amount of $179,000 during the first three months of 2003, comprised of $156,000 federal and $23,000 state, as purchased tax credit expense (a noninterest expense). The federal tax credits offset income
tax expense in 2003, while the state tax credits offset franchise tax expense in 2003. Other factors contributing to the difference between the effective tax rate and the statutory rate of 34 percent include tax-exempt interest income on municipal
securities, net of disallowance, and tax-exempt income earned on bank owned life insurance.



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 and corporate mortgage pools. Municipal bonds include taxable and tax-exempt general obligation and revenue issues. Corporate bonds are investment grade issue. Restricted 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.



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Investment securities (available for sale and held to maturity), including restricted equity securities,
at March 31, 2004 were $69.6 million, an increase of $3.4 million or 5.1% from their level of $66.2 million on December 31, 2003. The increase of $3.4 million is primarily due to purchases in the amount of $8.9 million, offset by principal
repayments, sale proceeds, and call proceeds in the amounts of $2.1 million, $2.6 million, $1.0 million, respectively. See Note 3 to the Consolidated Financial Statements.



Loan Portfolio



The Companys total loans were $231.6 million at March 31, 2004, an increase of $9.0 million or 4.0% from the $222.6 million reported at December 31,
2003. The Companys ratio of total loans to total funding sources (customer deposits, securities sold under agreements to repurchase, federal funds purchased, Federal Home Loan Bank advances, and guaranteed preferred beneficial interests in the
Companys junior subordinated debentures) stood at 75.2% at March 31, 2004 and 77.8% at December 31, 2003. 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 in excess
of 1% of total assets to foreign entities, including governments, banks, businesses or individuals.



The following table summarizes the loan portfolio by category as of the three-month periods ended March 31, 2004 and 2003 and the year ended December 31,
2003.



Loan Portfolio Summary

(dollars in thousands)



|                          |  |               |         |                  |   |               |  |   |        
|------------------------- |  | ------------- | ------- | ---------------- | - | ------------- |  | - | -------
|                          |  | March 31,2004 |         | December 31,2003 |   | March 31,2003
|Commercial and industrial |  | $             | 54,161  |                  | $ | 53,141        |  | $ | 45,130 
|Commercial real estate    |  |               | 97,701  |                  |   | 92,563        |  |   | 79,463 
|Real estate construction  |  |               | 18,342  |                  |   | 17,622        |  |   | 18,306 
|Residential real estate   |  |               | 31,201  |                  |   | 29,959        |  |   | 24,905 
|Loans to individuals      |  |               | 30,155  |                  |   | 29,318        |  |   | 27,324 
|                          |  |               |         |                  |   |               |  |   |        
|Total loans               |  | $             | 231,560 |                  | $ | 222,603       |  | $ | 195,128
|                          |  |               |         |                  |   |               |  |   |        



15



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Loan Category Analysis



Commercial Loans. Commercial and industrial loans accounted for 23.4% of the loan portfolio as of March 31, 2004 and stood at $54.2 million
versus $53.1 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 42.2% of total loans at March 31, 2004. Outstanding loans in this category equaled $97.7 million and $92.6 million at March 31, 2004 and December 31, 2003, 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 either as
commercial real estate loans or residential real estate loans. Outstanding loans in this category totaled $18.3 million (7.9% of total loans) at March 31, 2004 as compared to $17.6 million at December 31, 2003.



Residential Real Estate Loans. Residential real estate loans are
secured by first deeds of trust on 1-4 family residential properties. This category had $31.2 million in loans (13.5% of total loans) at March 31, 2004 and $30.0 million in such loans at December 31, 2003. 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. Residential real estate lending involves risk elements when there is lack of timely payment and/or a decline in the value of the
collateral.



Loans to Individuals.Loans to individuals
include installment loans, home equity lines of credit, and loans secured by junior liens on residential real estate. The loan proceeds typically are used to purchase vehicles, finance home remodeling, higher education, or for other consumer
purposes. Loans to individuals totaled $30.2 million (13.0% of total loans) at March 31, 2004 compared to $29.3 million at December 31, 2003.



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.
Adhering to our internal credit policies and procedures reduces repayment risks. These policies and procedures include officer and customer limits, periodic loan documentation review, and follow-up on exceptions to credit policies.



16



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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 $98,000 was provided during the three months ended March 31, 2004, a decrease of $160,000 or 62.0% over the same period in 2003, in recognition of managements estimate of inherent risks associated with lending
activities. The allowance for loan losses was $2.7 million as of March 31, 2004 and represented approximately 1.2% of net loans outstanding versus 1.2% of net loans at December 31, 2003 (see Note 4 to the Consolidated Financial Statements). A total
of $114,000 in special reserves was included in the balance of the allowance for loan losses as of March 31, 2004. Special reserves actually decreased by $13,000 during the three months ended March 31, 2004. A total of $125,000 in special reserves,
on one consumer customer placed on nonaccrual status in the first quarter of 2003, was included in the allowance for loan losses as of March 31, 2003. A decline in the growth rate in average loans outstanding also contributed to the decrease in
provision expense.



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.



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Each 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 $527,000, $1.2 million and $214,000, respectively for the three-month period ended March 31, 2004, the
year ended December 31, 2003 and the three-month period ended March 31, 2003. The special loan loss allowance related to impaired loans was $114,000, $127,000 and $125,000, 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 loans considered impaired at each of the above-referenced periods.



Nonperforming assets at March 31, 2004, December 31, 2003 and
March 31, 2003 are presented in the following table.



Nonperforming Assets

(dollars in thousands)



|                                             |  |               |     |                  |   |               |  |   |    
|-------------------------------------------- |  | ------------- | --- | ---------------- | - | ------------- |  | - | ---
|                                             |  | March 31,2004 |     | December 31,2003 |   | March 31,2003
|Nonaccrual loans                             |  | $             | 485 |                  | $ | 1,094         |  | $ | 213
|Loans past due 90 days or more               |  |               | 42  |                  |   |              |  |   | 1  
|Restructured loans                           |  |               |    |                  |   | 152           |  |   |   
|                                             |  |               |     |                  |   |               |  |   |    
|Total nonperforming loans                    |  |               | 527 |                  |   | 1,246         |  |   | 214
|                                             |  |               |     |                  |   |               |  |   |    
|Foreclosed, repossessed and idled properties |  |               | 172 |                  |   |              |  |   | 449
|                                             |  |               |     |                  |   |               |  |   |    
|Total nonperforming assets                   |  | $             | 699 |                  | $ | 1,246         |  | $ | 663
|                                             |  |               |     |                  |   |               |  |   |    



If nonaccrual loans
had performed in accordance with their original terms, additional interest income in the amount of $7,000, $18,000, and $4,000, respectively would have been recorded for the three-month period ended March 31, 2004, the year ended December 31, 2003
and the three-month period ended March 31, 2003.



Other Assets



The Company has purchased life insurance contracts
on key employees, the tax-exempt income from which is the funding vehicle for the Companys Supplemental Executive Retirement Plan (SERP). Bank owned life insurance was $5.9 million at March 31, 2004, an increase of $100,000 over
the $5.8 million reported as of December 31, 2003. The increase in entirely due to the increase in the cash surrender value of the life insurance contracts.



Other assets were $1.5 million at March 31, 2004 and December 31, 2003.



Deposits



As of March 31, 2004 total deposits were $246.5 million, an increase of $23.5 million or 10.5% from their level of $223.0 million at December 31, 2003.
Certificates of deposit increased by $17.1 million to a total of $153.0 million (62.0% of total deposits) at March 31, 2004, up from $135.9 million (61.0% of total deposits) at December 31, 2003. Non-interest bearing demand deposits and money market
accounts increased by $5.1 million and $2.4 million, respectively. Interest-bearing demand deposits and savings decreased by $700,000 and $400,000, respectively.



18



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##### Table of Contents

At March 31, 2004 noninterest-bearing demand deposits were $41.8 million or 17.0% of total deposits. On
December 31, 2003 noninterest-bearing demand deposits were $36.7 million or 16.4% of total deposits. Nonmaturity deposits (noninterest bearing demand deposits, interest bearing demand deposits, money market accounts and savings accounts) were $93.5
million or 38.0% of total deposits at March 31, 2004, compared with $87.1 million or 39.0% of total deposits at December 31, 2003. Total interest bearing deposits stood at $204.7 million at March 31, 2004, an increase of $18.4 million or 9.9% over
their level of $186.3 million at December 31, 2003.



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



Short-Term Borrowings



The Companys short-term borrowings decreased by $2.6 million from its
level of $17.6 million at December 31, 2003 to a total of $15.0 million as of March 31, 2004. Short-term borrowings at March 31, 2004 consist of a Federal Home Loan Bank of Atlanta daily rate credit in the amount of $5.0 million and a Federal Home
Loan Bank of Atlanta adjustable rate credit in the amount of $10.0 million. The decrease is due to the repayment of federal funds purchased in the amount of $2.6 million.



The proceeds of the $5.0 million Federal Home Loan Bank of Atlanta daily rate credit were received in September of 2003. The
borrowing matures daily and is rolled over on a daily basis at the stated Federal Home Loan Bank of Atlanta daily rate. There is no stated maturity date. Interest is paid monthly on the daily rate credit.



The Federal Home Loan Bank of Atlanta adjustable rate credit in the amount of
$10.0 million matures on December 16, 2004. The advance reprices quarterly on the date of each quarterly interest payment. The current rate is 1.16%. See the liquidity section for further information on the preceding borrowings.



The Company has in place a commercial sweep account program. The balance in
the program increased by $600,000 from its level of $4.7 million at December 31, 2003 to a total of $5.3 million as of March 31, 2004. 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.



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##### Table of Contents

Long-Term Borrowings



Federal Home Loan Bank 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. Long-term convertible Federal Home Loan Bank advances totaled $37.0 million at March 31, 2004 and December 31, 2003. See Footnote 9 of the Companys Consolidated Financial
Statements for more information on the long-term advances.



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



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



The Trusts preferred securities and common securities may be included
in the Companys Tier 1 capital for regulatory capital adequacy purposes to the extent that they do not exceed 25% of the Companys total Tier I capital excluding the securities. Amounts in excess of this ratio will not be considered Tier
1 capital but may be included in the calculation of the Companys total risk-based capital ratio. The Companys obligations with respect to the issuance of the Trusts preferred securities and common securities constitute a full and
unconditional guarantee by the Company of the Trusts obligations with respect to the preferred securities and common securities. Subject to certain exceptions and limitations, the Company may elect from time to time to defer interest payments
on its junior subordinated debentures, which would result in a deferral of distribution payments on the Trusts preferred trust securities and common securities.



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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##### Table of Contents

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 and 100 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.



The Company also estimates
interest sensitivity by the Economic Value of Equity (EVE).



Capital
Adequacy



The Companys financial position at March
31, 2004 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.



At the 2004 Annual Meeting of Shareholders held on April 28, 2004, it was
announced that the Board of Directors had taken two significant actions affecting the Companys common stock. First, a 2-for-1 stock split was declared, payable May 31, 2004 to shareholders of record May 14, 2004. Secondly, the first
semi-annual cash dividend in the Companys history was declared, in the amount of $.06 per share on each of the post-split shares payable July 1, 2004 to shareholders of record June 1, 2004.



Total shareholders equity increased by $800,000 during the first three
months of 2004. The increase is attributable to net income for the first three months of $630,000, an increase of $222,000 in accumulated other comprehensive income, resulting from unrealized gains on investment securities and $5,000 in proceeds
from the exercise of stock options in February of 2004. Exclusive of unrealized gains (losses) on investment securities, shareholders equity was $22.0 million at March 31, 2004 and $21.4 million at December 31, 2003.



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



Capital
Ratios



|         |  |         |   |  |          |   |  |         |   |  |         |  
|-------- |  | ------- | - |  | -------- | - |  | ------- | - |  | ------- | -
|Ratio    |  | 3/31/04 |   |  | 12/31/03 |   |  | 3/31/03 |   |  | Minimum |  
|Tier 1   |  | 10.0    | % |  | 10.3     | % |  | 9.1     | % |  | 4       | %
|Total    |  | 11.0    | % |  | 11.3     | % |  | 10.1    | % |  | 8       | %
|Leverage |  | 8.2     | % |  | 8.4      | % |  | 7.7     | % |  | 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.



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, provide the Companys asset
liquidity. The Companys ratio of liquid assets to deposits and short-term borrowings was 24.3% at March 31, 2004 and 20.9% at December 31, 2003. The Company sells excess funds as overnight federal funds sold to provide an immediate source of
liquidity. The Company had federal funds sold of $12.5 million and $0 at March 31, 2004 and December 31, 2003, respectively. During the first three months of 2004, deposit growth in the amount of $23.5 million surpassed $9.0 million in loan growth,
providing $14.5 million in excess funds. The $14.5 million excess deposit over loan growth, combined with an increase in securities sold under agreements to repurchase in the amount of $600,000, was used to fund total investment growth in the amount
of $3.4 million and repay federal funds purchased in the amount of $2.6 million. The remaining $9.1 million excess, along with $2.3 million provided by a decrease in cash and due from banks and interest bearing balances, was the primary contributor
to the $12.5 million increase in federal funds sold.



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 December 2003 the Financial Accounting Standards Board (FASB) revised Statement No. 132, Employers Disclosures about Pensions and Other Postretirement Benefits  an amendment of FASB Statements No.
87, 88, and 106, which revises employers disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans required by FASB Statements No. 87, 88, and 106. This
Amendment requires additional disclosures to those in the original Statement No, 132 about assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. Additional
information should include the types of plan assets, investment strategy, and measurement(s) dates. The required information should be provided separately for pension plans and for other postretirement benefit plans. The provisions of this Statement
are effective for financial statements with fiscal years ending after December 15, 2003. The interim-period disclosures required by this Statement are effective for interim periods beginning after December 15, 2003.



In May 2003 the Financial Accounting Standards Board (FASB) issued Statement
No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both
liabilities and equity. This Statement dictates certain instruments be classified as liabilities such as: 1) a financial instrument issued in the form of shares that is mandatorily redeemable  that embodies an unconditional obligation
requiring the issuer to redeem it by transferring its assets at a specified or determinable date or upon an event that is certain to occur; 2) a financial instrument, other than an outstanding share, that, at inception, embodies an obligation to
repurchase the issuers equity shares, or is indexed to such an obligation, and that requires or may require the issuer to settle the obligation by transferring assets; and 3) a financial instrument that embodies an unconditional obligation, or
a financial instrument other than an outstanding share that embodies a conditional obligation, that the issuer must or may settle by issuing a variable number of its equity shares. This Statement does not apply to features that are embedded in a
financial instrument that is not a derivative in its entirety. It also does not affect the classification or measurement of convertible bonds, puttable stock, or other outstanding shares that are conditionally redeemable. This Statement is effective
for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic
entities. It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the Statement and still existing at the beginning of the interim period of
adoption. Restatement is not permitted.



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##### Table of Contents

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.



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.



24



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##### Table of Contents

Item 3. Controls and Procedures.



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



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



PART II. OTHER INFORMATION



Item 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, 2004:
|--- | ------------------------------------------------------------------------------



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



| | 3.3 | Bylaws as amended July 19, 2003 (incorporated herein by reference to Exhibit 3.3 of Form 10-KSB filed March 30, 2004, File No. 000-28342).
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------



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



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##### Table of Contents

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



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



| | *10.16 | Split-Dollar Insurance Agreement dated August 20, 2003, by and between Valley Bank and Ellis L. Gutshall (incorporated herein by reference to Exhibit 10.16 of Form 10-QSB filed
November 14, 2003, File No. 33-77568).
| | ------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| | *10.17 | Split-Dollar Insurance Agreement dated August 20, 2003, by and between Valley Bank and A. Wayne Lewis (incorporated herein by reference to Exhibit 10.17 of Form 10-QSB filed
November 14, 2003, File No. 33-77568).
| | ------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | *10.18 | Split-Dollar Insurance Agreement dated August 20, 2003, by and between Valley Bank and J. Randy Woodson (incorporated herein by reference to Exhibit 10.18 of Form 10-QSB filed
November 14, 2003, File No. 33-77568).
| | ------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | *10.19 | Insurance Loan Agreement dated December 31, 2003 by and among Valley Financial Corporation, Valley Bank, and A. Wayne Lewis (incorporated herein by reference to Exhibit 10.19 of
Form 10-KSB filed March 30, 2004, File No. 000-28342).
| | ------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | *10.20 | Insurance Transfer Agreement dated December 31, 2003 by and among Valley Financial Corporation, Valley Bank, and Ellis L. Gutshall (incorporated herein by Reference to Exhibit 10.20
of Form 10-KSB filed March 30, 2004, File No. 000-28342).
| | ------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 11 | Statement re Computation of Earnings per Share (filed herewith as Note 5).
| | -- | --------------------------------------------------------------------------



| | 31.1 | Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
| | ---- | -----------------------------------------------------------------------------------------------------------------



| | 31.2 | Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
| | ---- | -----------------------------------------------------------------------------------------------------------------



| | 32.1 | Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 32.2 | Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

---

|* | Management contract or compensatory plan or agreement required to be filed as an Exhibit to this Form 10-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 one report on Form 8-K during the quarter ended March 31, 2004. The report, dated January 23, 2004,
reported the Companys consolidated financial results for the quarter ended December 31, 2003.



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SIGNATURES



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



|                  |  |                                                                     
|----------------- |  | --------------------------------------------------------------------
|                  |  | VALLEY FINANCIAL CORPORATION                                        
|                  | 
|May 17, 2004 Date |  | /s/ Ellis L. Gutshall                                               
|                  |  | Ellis L. Gutshall, President and Chief Executive
Officer            
|                  | 
|May 17, 2004 Date |  | /s/ A. Wayne Lewis                                                  
|                  |  | A. Wayne Lewis, Executive Vice President and Chief Financial Officer



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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).                                                                                                                                                       |  |           
|              |  |                                                                                                                                                                                                                                                                                    
|3.3           |  | Bylaws as amended July 19, 2003 (incorporated herein by reference to Exhibit 3.3 of Form 10-KSB filed March 30, 2004, File No. 000-28342).                                                                                                                                          |  |           
|              |  |                                                                                                                                                                                                                                                                                    
|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 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).                                                                            |  | 
|      |  |                                                                                                                                                                                                                                                                                        
|10.16 |  | Split-Dollar Insurance Agreement dated August 20, 2003, by and between Valley Bank and Ellis L. Gutshall (incorporated herein by reference to Exhibit 10.16 of Form 10-QSB filed November 14,
2003, File No. 33-77568).                                                                 |  | 
|      |  |                                                                                                                                                                                                                                                                                        
|10.17 |  | Split-Dollar Insurance Agreement dated August 20, 2003, by and between Valley Bank and A. Wayne Lewis (incorporated herein by reference to Exhibit 10.17 of Form 10-QSB filed November 14,
2003, File No. 33-77568).                                                                    |  | 
|      |  |                                                                                                                                                                                                                                                                                        
|10.18 |  | Split-Dollar Insurance Agreement dated August 20, 2003, by and between Valley Bank and J. Randy Woodson (incorporated herein by reference to Exhibit 10.18 of Form 10-QSB filed November 14,
2003, File No. 33-77568).                                                                  |  | 



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##### Table of Contents

|      |  |                                                                                                                                                                                                                                                 |  |   
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --
|      |  |                                                                                                                                                                                                                                                
|10.19 |  | Insurance Loan Agreement dated December 31, 2003 by and among Valley Financial Corporation, Valley Bank, and A. Wayne Lewis (incorporated herein by reference to Exhibit 10.19 of Form 10-KSB
filed March 30, 2004, File No. 000-28342).        |  |   
|      |  |                                                                                                                                                                                                                                                
|10.20 |  | Insurance Transfer Agreement dated December 31, 2003 by and among Valley Financial Corporation, Valley Bank, and Ellis L. Gutshall (incorporated herein by reference to Exhibit 10.20 of Form
10-KSB filed March 30, 2004, File No. 000-28342). |  |   
|      |  |                                                                                                                                                                                                                                                
|11    |  | Statement re Computation of Earnings per Share (filed herewith as Note 5).                                                                                                                                                                      |  |   
|      |  |                                                                                                                                                                                                                                                
|31.1  |  | Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                                                               |  | 32
|      |  |                                                                                                                                                                                                                                                
|31.2  |  | Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                                                               |  | 33
|      |  |                                                                                                                                                                                                                                                
|32.1  |  | Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                |  | 34
|      |  |                                                                                                                                                                                                                                                
|32.2  |  | Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                |  | 35



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