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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





(Mark One)

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

For the Quarterly Period Ended June 30, 2008



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

For the transition period from  to

Commission File Number: 000-28342





VALLEY FINANCIAL CORPORATION

(Exact name of registrant as specified in its
charter)







|                                                              |  |                                     
|------------------------------------------------------------- |  | ------------------------------------
|VIRGINIA                                                      |  | 54-1702380                          
|(State or other jurisdiction of incorporation or organization |  | (I.R.S. Employer Identification No.)
|                                                              | 
|36 Church Avenue, S.W. Roanoke, Virginia                      |  | 24011                               
|(Address of principal executive offices)                      |  | (Zip Code)                          

(540) 342-2265

(Registrants telephone number, including area code)

Not Applicable

(Former name, former address, and former fiscal year, if changed since last report)





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

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



|                                                                          |  |                             
|------------------------------------------------------------------------- |  | ----------------------------
|Large accelerated filer   ̈                                                |  | Accelerated filer   ̈        
|Non-accelerated filer   ̈    (Do not check if a smaller reporting company) |  | Smaller reporting company  x

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

At August 12, 2008, 4,672,551 shares of common stock, no par value, of the registrant were outstanding.









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VALLEY FINANCIAL CORPORATION

FORM 10-Q

June 30, 2008

TABLE OF CONTENTS



|                              |  |                                                                                       |  |   
|----------------------------- |  | ------------------------------------------------------------------------------------- |  | --
|Part I. FINANCIAL INFORMATION |  |                                                                                      
|                              |  |                                                                                      
|Item 1.                       |  | Financial Statements                                                                  |  |   
|                              |  |                                                                                      
|                              |  | Consolidated Balance Sheets                                                           |  | 4 
|                              |  | Consolidated Statements of Income                                                     |  | 5 
|                              |  | Consolidated Statements of Cash Flows                                                 |  | 7 
|                              |  | Notes to Consolidated Financial Statements                                            |  | 9 
|                              |  |                                                                                      
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 20
|                              |  |                                                                                      
|Item 3.                       |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 40
|                              |  |                                                                                      
|Item 4.                       |  | Controls and Procedures                                                               |  | 40
|                              | 
|Part II. OTHER INFORMATION    |  |                                                                                      
|                              |  |                                                                                      
|Item 1.                       |  | Legal Proceedings                                                                     |  | 40
|                              |  |                                                                                      
|Item 1A.                      |  | Risk Factors                                                                          |  | 40
|                              |  |                                                                                      
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 40
|                              |  |                                                                                      
|Item 3.                       |  | Defaults Upon Senior Securities                                                       |  | 41
|                              |  |                                                                                      
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                   |  | 41
|                              |  |                                                                                      
|Item 5.                       |  | Other Information                                                                     |  | 41
|                              |  |                                                                                      
|Item 6.                       |  | Exhibits                                                                              |  | 41
|                              | 
|SIGNATURES                    |  | 42                                                                                   
|                              | 
|EXHIBITS INDEX                |  | 43                                                                                   
|                              | 
|CERTIFICATIONS                |  | 44                                                                                   



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Cautionary Statement Regarding Forward-Looking Statements

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



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



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



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



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



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



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



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



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



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



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

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



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PART 1  FINANCIAL INFORMATION

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

VALLEY FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)



|                                                                                                                                                             |  |                    |         |   |                   |   |        
|------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------ | ------- | - | ----------------- | - | -------
|                                                                                                                                                             |  | (Unaudited)6/30/08 |         |   | (Audited)12/31/07
|Assets                                                                                                                                                       |  |                    |         |   |                   |   |        
|Cash and due from banks                                                                                                                                      |  | $                  | 10,151  |   |                   | $ | 10,895 
|Interest-bearing deposits in banks                                                                                                                           |  |                    | 219     |   |                   |   | 95     
|Securities available-for-sale                                                                                                                                |  |                    | 65,515  |   |                   |   | 58,540 
|Securities held-to-maturity (approximate market values of $11,863 at June 30, 2008 and $17,666 at December 31, 2007)                                         |  |                    | 11,847  |   |                   |   | 17,582 
|Restricted equity securities                                                                                                                                 |  |                    | 5,067   |   |                   |   | 4,963  
|Loans, net of allowance for loan losses of $5,018 at June 30, 2008 and $4,883 at December 31, 2007                                                           |  |                    | 509,621 |   |                   |   | 482,281
|Foreclosed assets, net                                                                                                                                       |  |                    | 1,336   |   |                   |   | 445    
|Premises and equipment, net                                                                                                                                  |  |                    | 6,864   |   |                   |   | 6,463  
|Bank owned life insurance                                                                                                                                    |  |                    | 12,116  |   |                   |   | 11,639 
|Accrued interest receivable                                                                                                                                  |  |                    | 2,618   |   |                   |   | 2,975  
|Other assets                                                                                                                                                 |  |                    | 4,823   |   |                   |   | 5,089  
|                                                                                                                                                             |  |                    |         |   |                   |   |        
|Total assets                                                                                                                                                 |  | $                  | 630,177 |   |                   | $ | 600,967
|                                                                                                                                                             |  |                    |         |   |                   |   |        
|                                                                                                                                                             |  |                   
|Liabilities and Shareholders Equity                                                                                                                         |  |                    |         |   |                   |   |        
|Liabilities:                                                                                                                                                 |  |                    |         |   |                   |   |        
|Noninterest-bearing deposits                                                                                                                                 |  | $                  | 20,671  |   |                   | $ | 16,362 
|Interest-bearing deposits                                                                                                                                    |  |                    | 428,308 |   |                   |   | 416,091
|                                                                                                                                                             |  |                    |         |   |                   |   |        
|Total deposits                                                                                                                                               |  |                    | 448,979 |   |                   |   | 432,453
|                                                                                                                                                             |  |                    |         |   |                   |   |        
|Federal funds purchased and securities sold under agreements to repurchase                                                                                   |  |                    | 48,015  |   |                   |   | 36,582 
|Short-term borrowings                                                                                                                                        |  |                    | 12,000  |   |                   |   | 13,000 
|Long-term borrowings                                                                                                                                         |  |                    | 58,000  |   |                   |   | 55,000 
|Guaranteed preferred beneficial interests in the Companys junior subordinated debentures                                                                    |  |                    | 16,496  |   |                   |   | 16,496 
|Accrued interest payable                                                                                                                                     |  |                    | 3,259   |   |                   |   | 3,828  
|Other liabilities                                                                                                                                            |  |                    | 2,172   |   |                   |   | 2,892  
|                                                                                                                                                             |  |                    |         |   |                   |   |        
|Total liabilities                                                                                                                                            |  |                    | 588,921 |   |                   |   | 560,251
|                                                                                                                                                             |  |                    |         |   |                   |   |        
|Commitments and other contingencies                                                                                                                          |  |                    |        |   |                   |   |       
|                                                                                                                                                             |  |                   
|Shareholders equity:                                                                                                                                        |  |                    |         |   |                   |   |        
|Preferred stock, no par value. Authorized 10,000,000 shares; none issued and outstanding                                                                     |  |                    |        |   |                   |   |       
|Common stock, no par value. Authorized 10,000,000 shares; issued and outstanding 4,631,822 at June 30, 2008 and 4,593,581 at
December 31, 2007, respectively |  |                    | 22,067  |   |                   |   | 21,879 
|Retained earnings                                                                                                                                            |  |                    | 19,557  |   |                   |   | 18,801 
|Cumulative effect of the change in accounting principle on retained earnings                                                                                 |  |                    | 178     |   |                   |   |       
|Accumulated other comprehensive income (loss)                                                                                                                |  |                    | (546    | ) |                   |   | 36     
|                                                                                                                                                             |  |                    |         |   |                   |   |        
|Total shareholders equity                                                                                                                                   |  |                    | 41,256  |   |                   |   | 40,716 
|                                                                                                                                                             |  |                    |         |   |                   |   |        
|Total liabilities and shareholders equity                                                                                                                   |  | $                  | 630,177 |   |                   | $ | 600,967
|                                                                                                                                                             |  |                    |         |   |                   |   |        

See accompanying notes to consolidated financial statements.



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VALLEY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except share and per share data)



|                                                                                                      |  |                |           |   |                |   |           |         |  |   |           |   |  |   |           |  
|----------------------------------------------------------------------------------------------------- |  | -------------- | --------- | - | -------------- | - | --------- | ------- |  | - | --------- | - |  | - | --------- | -
|                                                                                                      |  | 3 Months Ended |           |   | 6 Months Ended |  
|                                                                                                      |  | 6/30/08        |           |   | 6/30/07        |   |           | 6/30/08 |  |   | 6/30/07   |  
|Interest Income:                                                                                      |  |                |           |   |                |   |           |         |  |   |           |   |  |   |           |  
|Interest and fees on loans                                                                            |  | $              | 7,638     |   |                |   | 8,743     |         |  | $ | 15,970    |   |  | $ | 17,317    |  
|Interest on securitiestaxable                                                                        |  |                | 1,047     |   |                |   | 793       |         |  |   | 2,064     |   |  |   | 1,555     |  
|Interest on securities-nontaxable                                                                     |  |                | 98        |   |                |   | 118       |         |  |   | 203       |   |  |   | 253       |  
|Interest on deposits in banks                                                                         |  |                | 12        |   |                |   | 1         |         |  |   | 17        |   |  |   | 109       |  
|                                                                                                      |  |                |           |   |                |   |           |         |  |   |           |   |  |   |           |  
|Total interest income                                                                                 |  |                | 8,795     |   |                |   | 9,655     |         |  |   | 18,254    |   |  |   | 19,234    |  
|                                                                                                      |  |                |           |   |                |   |           |         |  |   |           |   |  |   |           |  
|Interest Expense:                                                                                     |  |                |           |   |                |   |           |         |  |   |           |   |  |   |           |  
|Interest on deposits                                                                                  |  |                | 3,487     |   |                |   | 4,248     |         |  |   | 7,572     |   |  |   | 8,598     |  
|Interest on short-term borrowings                                                                     |  |                | 147       |   |                |   | 316       |         |  |   | 299       |   |  |   | 593       |  
|Interest on long-term borrowings                                                                      |  |                | 550       |   |                |   | 551       |         |  |   | 1,107     |   |  |   | 1,132     |  
|Interest on guaranteed preferred beneficial interests in the Companys junior subordinated debentures |  |                | 187       |   |                |   | 297       |         |  |   | 450       |   |  |   | 590       |  
|Interest on federal funds purchased and securities sold under agreements to repurchase                |  |                | 213       |   |                |   | 400       |         |  |   | 477       |   |  |   | 636       |  
|                                                                                                      |  |                |           |   |                |   |           |         |  |   |           |   |  |   |           |  
|Total interest expense                                                                                |  |                | 4,584     |   |                |   | 5,812     |         |  |   | 9,905     |   |  |   | 11,549    |  
|                                                                                                      |  |                |           |   |                |   |           |         |  |   |           |   |  |   |           |  
|Net interest income                                                                                   |  |                | 4,211     |   |                |   | 3,843     |         |  |   | 8,349     |   |  |   | 7,685     |  
|                                                                                                      |  |                |           |  
|Provision for loan losses                                                                             |  |                | 388       |   |                |   | 122       |         |  |   | 679       |   |  |   | 842       |  
|                                                                                                      |  |                |           |   |                |   |           |         |  |   |           |   |  |   |           |  
|Net interest income after provision for loan losses                                                   |  |                | 3,823     |   |                |   | 3,721     |         |  |   | 7,670     |   |  |   | 6,843     |  
|                                                                                                      |  |                |           |   |                |   |           |         |  |   |           |   |  |   |           |  
|Noninterest Income:                                                                                   |  |                |           |   |                |   |           |         |  |   |           |   |  |   |           |  
|Service charges on deposit accounts                                                                   |  |                | 289       |   |                |   | 314       |         |  |   | 551       |   |  |   | 605       |  
|Income earned on bank owned life insurance                                                            |  |                | 142       |   |                |   | 130       |         |  |   | 278       |   |  |   | 257       |  
|Other income on real estate loans                                                                     |  |                | 9         |   |                |   | 20        |         |  |   | 15        |   |  |   | 33        |  
|Realized losses on sale of securities                                                                 |  |                |          |   |                |   | (50       | )       |  |   | (14       | ) |  |   | (50       | )
|Realized gains on disposal of derivative instruments                                                  |  |                |          |   |                |   |          |         |  |   |          |   |  |   | 51        |  
|Realized gain/(loss) on disposal of equipment                                                         |  |                | (2        | ) |                |   |          |         |  |   | (2        | ) |  |   |          |  
|Other income                                                                                          |  |                | 240       |   |                |   | 155       |         |  |   | 366       |   |  |   | 304       |  
|                                                                                                      |  |                |           |   |                |   |           |         |  |   |           |   |  |   |           |  
|Total noninterest income                                                                              |  |                | 678       |   |                |   | 569       |         |  |   | 1,194     |   |  |   | 1,200     |  
|                                                                                                      |  |                |           |   |                |   |           |         |  |   |           |   |  |   |           |  
|Noninterest Expense:                                                                                  |  |                |           |   |                |   |           |         |  |   |           |   |  |   |           |  
|Compensation expense                                                                                  |  |                | 1,872     |   |                |   | 1,591     |         |  |   | 3,590     |   |  |   | 3,283     |  
|Occupancy expense                                                                                     |  |                | 225       |   |                |   | 182       |         |  |   | 439       |   |  |   | 380       |  
|Equipment expense                                                                                     |  |                | 172       |   |                |   | 136       |         |  |   | 324       |   |  |   | 278       |  
|Data processing expense                                                                               |  |                | 204       |   |                |   | 147       |         |  |   | 412       |   |  |   | 311       |  
|Advertising and marketing expense                                                                     |  |                | 155       |   |                |   | 113       |         |  |   | 302       |   |  |   | 156       |  
|Insurance                                                                                             |  |                | 108       |   |                |   | 90        |         |  |   | 209       |   |  |   | 169       |  
|Audit fees                                                                                            |  |                | 62        |   |                |   | 85        |         |  |   | 121       |   |  |   | 188       |  
|Legal                                                                                                 |  |                | 51        |   |                |   | 57        |         |  |   | 76        |   |  |   | 85        |  
|Franchise tax expense                                                                                 |  |                | 101       |   |                |   | 84        |         |  |   | 201       |   |  |   | 169       |  
|Business manager expense                                                                              |  |                | 43        |   |                |   | 68        |         |  |   | 95        |   |  |   | 151       |  
|Deposit expense                                                                                       |  |                | 57        |   |                |   | 63        |         |  |   | 110       |   |  |   | 128       |  
|Loan expenses                                                                                         |  |                | 59        |   |                |   | 44        |         |  |   | 92        |   |  |   | 76        |  
|Computer software expense                                                                             |  |                | 117       |   |                |   | 90        |         |  |   | 224       |   |  |   | 166       |  
|Foreclosed asset expenses, net                                                                        |  |                | 4         |   |                |   |          |         |  |   | 17        |   |  |   | 1         |  
|Other expense                                                                                         |  |                | 328       |   |                |   | 355       |         |  |   | 658       |   |  |   | 706       |  
|                                                                                                      |  |                |           |   |                |   |           |         |  |   |           |   |  |   |           |  
|Total noninterest expense                                                                             |  |                | 3,558     |   |                |   | 3,105     |         |  |   | 6,870     |   |  |   | 6,247     |  
|                                                                                                      |  |                |           |   |                |   |           |         |  |   |           |   |  |   |           |  
|Income before income taxes                                                                            |  |                | 943       |   |                |   | 1,185     |         |  |   | 1,994     |   |  |   | 1,796     |  
|                                                                                                      |  |                |           |  
|Income tax expense                                                                                    |  |                | 255       |   |                |   | 267       |         |  |   | 558       |   |  |   | 403       |  
|                                                                                                      |  |                |           |   |                |   |           |         |  |   |           |   |  |   |           |  
|Net income                                                                                            |  | $              | 688       |   |                | $ | 918       |         |  | $ | 1,436     |   |  |   | 1,393     |  
|                                                                                                      |  |                |           |   |                |   |           |         |  |   |           |   |  |   |           |  
|Earnings per share                                                                                    |  |                |           |   |                |   |           |         |  |   |           |   |  |   |           |  
|Basic earnings per share                                                                              |  | $              | $0.15     |   |                | $ | 0.22      |         |  | $ | $0.31     |   |  | $ | 0.34      |  
|                                                                                                      |  |                |           |   |                |   |           |         |  |   |           |   |  |   |           |  
|Diluted earnings per share                                                                            |  | $              | $0.15     |   |                | $ | 0.22      |         |  | $ | $0.31     |   |  |   | 0.33      |  
|                                                                                                      |  |                |           |   |                |   |           |         |  |   |           |   |  |   |           |  
|Weighted average shares                                                                               |  |                | 4,627,582 |   |                |   | 4,161,546 |         |  |   | 4,622,761 |   |  |   | 4,143,326 |  
|                                                                                                      |  |                |           |   |                |   |           |         |  |   |           |   |  |   |           |  



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|                             |  |   |           |  |   |           |  |   |           |  |   |          
|---------------------------- |  | - | --------- |  | - | --------- |  | - | --------- |  | - | ---------
|Diluted average shares       |  |   | 4,655,084 |  |   | 4,226,650 |  |   | 4,653,308 |  |   | 4,216,031
|                             |  |   |           |  |   |           |  |   |           |  |   |          
|Dividends declared per share |  | $ | 0.07      |  | $ | 0.07      |  | $ | 0.07      |  | $ | 0.07     
|                             |  |   |           |  |   |           |  |   |           |  |   |          

See accompanying notes to consolidated financial statements.



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VALLEY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands, except share and per share data)



|                                                                                       |  |                |         |   |         |   |         |  
|-------------------------------------------------------------------------------------- |  | -------------- | ------- | - | ------- | - | ------- | -
|                                                                                       |  | 6 Months Ended |        
|                                                                                       |  | 6/30/08        |         |   | 6/30/07 |  
|Cash flows from operating activities                                                   |  |                |         |   |         |   |         |  
|Net income                                                                             |  | $              | 1,436   |   |         | $ | 1,393   |  
|Adjustments to reconcile net income to net cash provided by operating activities:      |  |                |         |   |         |   |         |  
|Provision for loan losses                                                              |  |                | 679     |   |         |   | 842     |  
|Depreciation and amortization                                                          |  |                | 415     |   |         |   | 406     |  
|Stock option expense                                                                   |  |                | 51      |   |         |   | 85      |  
|(Increase) decrease in deferred income tax                                             |  |                | 469     |   |         |   | (2      | )
|Net losses on sale of securities                                                       |  |                | 14      |   |         |   | 50      |  
|Net gains on disposal of derivative instruments                                        |  |                |        |   |         |   | (51     | )
|Net losses on disposal of fixed assets                                                 |  |                | 2       |   |         |   |        |  
|Net amortization of bond premiums/discounts                                            |  |                | 82      |   |         |   | 77      |  
|(Increase) decrease in unearned fees                                                   |  |                | (16     | ) |         |   | 28      |  
|(Increase) decrease in interest receivable                                             |  |                | 357     |   |         |   | (162    | )
|(Increase) in other assets                                                             |  |                | (189    | ) |         |   | (126    | )
|(Increase) in value of life insurance contracts                                        |  |                | (277    | ) |         |   | (257    | )
|Increase (decrease) in accrued interest payable                                        |  |                | (569    | ) |         |   | 539     |  
|(Decrease) in other liabilities                                                        |  |                | (900    | ) |         |   | (127    | )
|                                                                                       |  |                |         |   |         |   |         |  
|Net cash provided by operating activities                                              |  |                | 1,554   |   |         |   | 2,695   |  
|                                                                                       |  |                |         |   |         |   |         |  
|Cash flows from investing activities                                                   |  |                |         |   |         |   |         |  
|(Increase) in interest- bearing deposits in banks                                      |  |                | (124    | ) |         |   | (2      | )
|Decrease in federal funds sold                                                         |  |                |        |   |         |   | 16,630  |  
|Purchases of premises and equipment                                                    |  |                | (832    | ) |         |   | (130    | )
|Purchases of securities available-for-sale                                             |  |                | (23,842 | ) |         |   | (8,331  | )
|Purchases of securities held-to-maturity                                               |  |                |        |   |         |   |        |  
|Purchases of restricted equity securities                                              |  |                | (779    | ) |         |   | (109    | )
|Proceeds from sales/calls/paydowns/maturities of securities available-for-sale         |  |                | 16,236  |   |         |   | 5,846   |  
|Proceeds from paydowns on securities held-to-maturity                                  |  |                | 5,687   |   |         |   | 2,248   |  
|Principal repayments of restricted equity securities                                   |  |                | 675     |   |         |   |        |  
|Purchase of bank owned life insurance                                                  |  |                | (200    | ) |         |   |        |  
|Capitalized expenses on foreclosed assets                                              |  |                | (250    | ) |         |   |        |  
|Increase in loans, net                                                                 |  |                | (28,643 | ) |         |   | (11,589 | )
|                                                                                       |  |                |         |   |         |   |         |  
|Net cash (provided) used in investing activities                                       |  |                | (32,072 | ) |         |   | 4,563   |  
|                                                                                       |  |                |         |   |         |   |         |  
|Cash flows from financing activities                                                   |  |                |         |   |         |   |         |  
|Increase in noninterest-bearing deposits                                               |  |                | 4,309   |   |         |   | 199     |  
|Increase (decrease) in interest-bearing deposits                                       |  |                | 12,217  |   |         |   | (25,343 | )
|Increase (decrease) in short-term borrowings                                           |  |                | (1,000  | ) |         |   | 8,000   |  
|Increase in federal funds purchased and securities sold under agreements to repurchase |  |                | 11,433  |   |         |   | 16,714  |  
|Increase (decrease) in long-term borrowings                                            |  |                | 3,000   |   |         |   | (8,000  | )
|Cash dividends paid                                                                    |  |                | (322    | ) |         |   | (288    | )
|Proceeds from issuance of common stock                                                 |  |                | 137     |   |         |   | 309     |  
|                                                                                       |  |                |         |   |         |   |         |  
|Net cash provided (used) by financing activities                                       |  |                | 29,774  |   |         |   | (8,409  | )
|                                                                                       |  |                |         |   |         |   |         |  
|Net (Decrease) in cash and due from banks                                              |  |                | (744    | ) |         |   | (1,151  | )
|                                                                                       |  |                |         |   |         |   |         |  
|Cash and due from banks at beginning of year                                           |  |                | 10,895  |   |         |   | 9,778   |  
|                                                                                       |  |                |         |   |         |   |         |  
|Cash and due from banks at end of year                                                 |  | $              | 10,151  |   |         |   | 8,627   |  
|                                                                                       |  |               
|Supplemental disclosure of cash flow information:                                      |  |                |         |   |         |   |         |  
|Cash paid during the period for interest                                               |  | $              | 10,474  |   |         | $ | 11,010  |  
|                                                                                       |  |                |         |   |         |   |         |  
|Cash paid during the period for taxes                                                  |  | $              | 212     |   |         | $ |        |  
|                                                                                       |  |                |         |   |         |   |         |  
|Noncash financing and investing activities:                                            |  |                |         |   |         |   |         |  
|Transfer of loans to foreclosed property                                               |  | $              | 641     |   |         | $ |        |  



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|                                                            |  |   |   |  |   |      
|----------------------------------------------------------- |  | - | - |  | - | -----
|Reclassification of borrowings from long-term to short-term |  | $ |  |  | $ | 8,000
|                                                            |  |   |   |  |   |      

See accompanying notes to consolidated financial statements.



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VALLEY FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

June 30, 2008 (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 2007 Annual Report on Form
10-K.

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



|(2) | Cash and Cash Equivalents
|--- | -------------------------

For purposes of reporting cash
flows, cash and cash equivalents include cash and due from banks. To comply with Federal Reserve regulations, the Bank is required to maintain certain average reserve balances. The daily cash reserve requirement for the two weeks including
June 30, 2008 was $201, less cash on hand in the amount of $1,123, or a net of $0.

As a condition of our correspondent bank
agreement, the Bank is also required to maintain a target balance. The target balance as of June 30, 2008 was $250.



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

The carrying values, unrealized gains,
unrealized losses, and approximate fair values of available-for-sale and held-to-maturity investment securities at June 30, 2008 are shown in the tables below. As of June 30, 2008, investments (including both available-for-sale and
held-to-maturity) and restricted equity securities with amortized costs and fair values of $76,197 and $76,213, respectively, were pledged as collateral for public deposits, a line of credit available from the Federal Home Loan Bank, customer sweep
accounts, and for other purposes as required or permitted by law. At June 30, 2008 we evaluated our investment portfolio and determined all unrealized losses presented in the table below are not related to an issuers financial condition
but are due to changes in the level of interest rates and no declines are deemed to be other than temporary in nature.

The following table
sets forth the composition of securities available for sale at June 30, 2008. Securities available for sale are carried at approximate market value.



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Available-for-Sale Investment Portfolio  Category Distribution

(dollars in thousands)



|                                    |  |                |        |                 |   |                  |  |                        |       |  |   |       
|----------------------------------- |  | -------------- | ------ | --------------- | - | ---------------- |  | ---------------------- | ----- |  | - | ------
|                                    |  | AmortizedCosts |        | UnrealizedGains |   | UnrealizedLosses |  | ApproximateFair Values
|U. S. Government and federal agency |  | $              | 673    |                 | $ | 8                |  | $                      |      |  | $ | 681   
|Government-sponsored enterprises    |  |                | 18,939 |                 |   | 167              |  |                        | 91    |  |   | 19,015
|Mortgage-backed securities          |  |                | 28,621 |                 |   | 43               |  |                        | 563   |  |   | 28,101
|Collateralized mortgage obligations |  |                | 13,742 |                 |   | 25               |  |                        | 385   |  |   | 13,382
|States and political subdivisions   |  |                | 4,368  |                 |   | 30               |  |                        | 62    |  |   | 4,336 
|                                    |  |                |        |                 |   |                  |  |                        |       |  |   |       
|Total securities available for sale |  | $              | 66,343 |                 | $ | 273              |  | $                      | 1,101 |  | $ | 65,515
|                                    |  |                |        |                 |   |                  |  |                        |       |  |   |       

The following table sets forth the composition of securities held to maturity at June 30,
2008. Securities held to maturity are carried at amortized cost.

Held-to-Maturity Investment Portfolio  Category Distribution

(dollars in thousands)



|                                    |  |                |        |                 |   |                  |  |                        |    |  |   |       
|----------------------------------- |  | -------------- | ------ | --------------- | - | ---------------- |  | ---------------------- | -- |  | - | ------
|                                    |  | AmortizedCosts |        | UnrealizedGains |   | UnrealizedLosses |  | ApproximateFair Values
|Government-sponsored enterprises    |  | $              | 2,979  |                 | $ | 23               |  | $                      |   |  | $ | 3,002 
|Mortgage-backed securities          |  |                | 1,555  |                 |   |                 |  |                        | 34 |  |   | 1,521 
|Collateralized mortgage obligations |  |                | 513    |                 |   |                 |  |                        | 25 |  |   | 488   
|States and political subdivisions   |  |                | 6,800  |                 |   | 63               |  |                        | 11 |  |   | 6,852 
|                                    |  |                |        |                 |   |                  |  |                        |    |  |   |       
|Total securities held to maturity   |  | $              | 11,847 |                 | $ | 86               |  | $                      | 70 |  | $ | 11,863
|                                    |  |                |        |                 |   |                  |  |                        |    |  |   |       



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

The following table summarizes
the loan loss experience for the six-month periods ended June 30, 2008 and 2007.

Allowance for Loan Losses

(dollars in thousands)



|                          |  |      |       |   |      |   |       |  
|------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                          |  | 2008 |       |   | 2007 |  
|Balance at January 1      |  | $    | 4,883 |   |      | $ | 5,658 |  
|Provision for loan losses |  |      | 679   |   |      |   | 842   |  
|Recoveries:               |  |      |       |   |      |   |       |  
|Commercial                |  |      | 51    |   |      |   |      |  
|Loans to individuals      |  |      |      |   |      |   | 6     |  
|Charged off loans:        |  |      |       |   |      |   |       |  
|Commercial                |  |      | (164  | ) |      |   | (429  | )
|Commercial Real Estate    |  |      | (252  | ) |      |   |      |  
|Residential Real Estate   |  |      | (115  | ) |      |   |      |  



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|                         |  |   |       |   |  |   |       |  
|------------------------ |  | - | ----- | - |  | - | ----- | -
|Real Estate Construction |  |   | (43   | ) |  |   |      |  
|Loans to individuals     |  |   | (21   | ) |  |   | (2    | )
|                         |  |   |       |   |  |   |       |  
|Balance at June 30       |  | $ | 5,018 |   |  | $ | 6,075 |  
|                         |  |   |       |   |  |   |       |  



|(5) | Earnings Per Share
|--- | ------------------

Basic earnings per share is based upon
the weighted average number of common shares outstanding during the period. The weighted average shares outstanding for the diluted earnings per share computations were adjusted to reflect the assumed conversion of shares available under stock
options. The following tables summarize earnings per share and the shares utilized in the computations:



|        |  |                                     |           |                 |   |           |  |         |           |  |   |          
|------- |  | ----------------------------------- | --------- | --------------- | - | --------- |  | ------- | --------- |  | - | ---------
|        |  | Earnings Per Share                 
|        |  | 6 Months Ending                     |           | 3 Months Ending
|        |  | 6/30/08                             |           | 6/30/07         |   | 6/30//08  |  | 6/30/07
|Basic   |  | $                                   | 0.31      |                 | $ | 0.34      |  | $       | 0.15      |  | $ | 0.22     
|Diluted |  | $                                   | 0.31      |                 | $ | 0.33      |  | $       | 0.15      |  | $ | 0.22     
|        | 
|        |  | Weighted Average Shares Outstanding
|        |  | 6 Months Ending                     |           | 3 Months Ending
|        |  | 06/30/08                            |           | 6/30/07         |   | 6/30/08   |  | 6/30/07
|Basic   |  |                                     | 4,622,761 |                 |   | 4,143,326 |  |         | 4,627,582 |  |   | 4,161,546
|Diluted |  |                                     | 4,653,308 |                 |   | 4,216,031 |  |         | 4,655,084 |  |   | 4,226,650



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

For the six months ended
June 30, 2008 and 2007, total comprehensive income (loss) was $853 and $823 respectively.

The information that follows discloses the
reclassification adjustments and the income taxes related to the net unrealized gains (losses) on securities available-for-sale and net unrealized gains (losses) on derivatives not held for trading that are included in other comprehensive income
(loss), net of income taxes for the six- and three-month periods ended June 30, 2008 and 2007.



|                                                                                                       |  |                                      |      |   |                                      |   |      |         |  |   |         |   |  |   |      |  
|------------------------------------------------------------------------------------------------------ |  | ------------------------------------ | ---- | - | ------------------------------------ | - | ---- | ------- |  | - | ------- | - |  | - | ---- | -
|                                                                                                       |  | 6 Months Ended(dollars in thousands) |      |   | 3 Months Ended(dollars in thousands) |  
|                                                                                                       |  | 6/30/08                              |      |   | 6/30/07                              |   |      | 6/30/08 |  |   | 6/30/07 |  
|Net unrealized gains (losses) on securities available for sale:                                        |  |                                      |      |   |                                      |   |      |         |  |   |         |   |  |   |      |  
|Net unrealized holding gains (losses) during the year                                                  |  | $                                    | (896 | ) |                                      | $ | (808 | )       |  | $ | (1,397  | ) |  | $ | (915 | )
|Less reclassification adjustments for realized gains included in net income, net of tax                |  |                                      |     |   |                                      |   | 33   |         |  |   |        |   |  |   | 33   |  
|Net unrealized gains (losses) on derivatives not held for trading                                      |  |                                      |     |   |                                      |   | (55  | )       |  |   |        |   |  |   |     |  
|Less reclassification adjustments for realized gains on derivatives included in net income, net of tax |  |                                      |     |   |                                      |   | (34  | )       |  |   |        |   |  |   |      |  



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|                                                       |  |   |      |   |  |   |      |   |  |   |      |   |  |   |      |  
|------------------------------------------------------ |  | - | ---- | - |  | - | ---- | - |  | - | ---- | - |  | - | ---- | -
|Income tax benefit (expense)                           |  |   | 313  |   |  |   | 293  |   |  |   | 475  |   |  |   | 310  |  
|                                                       |  |   |      |   |  |   |      |   |  |   |      |   |  |   |      |  
|Other comprehensive income (loss), net of income taxes |  | $ | (583 | ) |  | $ | (571 | ) |  | $ | (922 | ) |  | $ | (572 | )
|                                                       |  |   |      |   |  |   |      |   |  |   |      |   |  |   |      |  



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

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

The Companys exposure to credit loss in the
event of nonperformance by the other party to the financial instruments for commitments to extend credit is represented by the contractual amount of those instruments. The same credit policy is used in making commitments as is used for
on-balance-sheet risk. At June 30, 2008 outstanding commitments to extend credit were $151,017 as compared to $144,656 at December 31, 2007.

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 June 30, 2008 aggregate loans to
directors, executive officers, and principal shareholders totaled $25,396. An analysis of loan activity to directors, executive officers, and principal shareholders is as follows:

Loans to Related Parties

(dollars in thousands)



|                                    |  |   |        |  
|----------------------------------- |  | - | ------ | -
|Balances as of January 1, 2008      |  | $ | 29,450 |  
|Addition of new director/officer(s) |  |   |       |  
|Advances                            |  |   | 5,410  |  
|Repayments                          |  |   | (9,464 | )
|                                    |  |   |        |  
|Balances as of June 30, 2008        |  | $ | 25,396 |  
|                                    |  |   |        |  



|(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 $58,000 as of June 30, 2008. There are four convertible advances in the amount of $5,000 each, one convertible advance in the amount of $15,000, one
convertible advance in the amount of $10,000 and one fixed-rate advance in the amount of $13,000. The Federal Home Loan Bank of Atlanta has the option to



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convert the four $5,000 convertible advances on the conversion dates below, and on any quarterly interest payment date thereafter, with at least two business
days notice. If called, these convertible advances will be converted into a 3-month London Interbank Offered Rate (LIBOR) based adjustable rate credit (ARC) at 3-month LIBOR. The Federal Home Loan Bank of Atlanta has the option to
convert the $15,000 and the $10,000 convertible advances on the conversion dates below, with at least two business days notice. If called, these advances will be converted into a 3-month LIBOR based adjustable rate credit at 3-month LIBOR plus or
minus the then-current spread of such advance.

The following table provides more information on the outstanding advances as of
June 30, 2008 and December 31, 2007:

LONG-TERM FEDERAL HOME LOAN BANK ADVANCES

(dollars in thousands)



|                  |  |                   |  |                   |  |             |   |  |                |        |                 |   |       
|----------------- |  | ----------------- |  | ----------------- |  | ----------- | - |  | -------------- | ------ | --------------- | - | ------
|Advance Date      |  | Maturity Date     |  | Conversion Date   |  | CurrentRate |   |  | 6/30/08Balance |        | 12/31/07Balance
|December 2, 1999  |  | December 2, 2009  |  | Quarterly         |  | 5.460       | % |  | $              | 5,000  |                 | $ | 5,000 
|May 24, 2000      |  | May 24, 2010      |  | Quarterly         |  | 6.490       | % |  |                | 5,000  |                 |   | 5,000 
|February 9, 2001  |  | February 9, 2011  |  | Quarterly         |  | 4.970       | % |  |                | 5,000  |                 |   | 5,000 
|March 11, 2003    |  | March 11, 2013    |  | March 11, 2008    |  | n/a         |   |  |                |       |                 |   | 7,000 
|June 29, 2006     |  | June 29, 2016     |  | n/a               |  | 5.030       | % |  |                | 13,000 |                 |   | 13,000
|November 9, 2006  |  | November 9, 2016  |  | November 10, 2008 |  | 4.280       | % |  |                | 5,000  |                 |   | 5,000 
|December 28, 2007 |  | December 28, 2010 |  | December 28, 2009 |  | 3.785       | % |  |                | 15,000 |                 |   | 15,000
|March 29, 2008    |  | March 29,2018     |  | March 29, 2011    |  | 2.625       | % |  |                | 10,000 |                 |   |      
|                  |  |                   |  |                   |  |             |   |  |                |        |                 |   |       
|                  |  |                   |  |                   |  | TOTAL       |   |  | $              | 58,000 |                 | $ | 55,000
|                  |  |                   |  |                   |  |             |   |  |                |        |                 |   |       



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

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

Valley Financial (VA) Statutory Trust II, a statutory business trust
(Trust II), was created by the Company on September 26, 2005, at which time Trust II issued $7,000 in aggregate liquidation amount of $1 par value preferred capital trust securities which mature December 15, 2035. Distributions
are payable on the securities at a floating rate equal to the 3-month LIBOR plus 1.49%, and the securities may be prepaid at par by Trust II at any time after December 15, 2010. The principal assets of Trust II are $7,217 of the Companys
junior subordinated debentures which mature on December 15, 2035, and bear interest at a floating rate equal to the 3-month LIBOR plus 1.49%, and which are callable by the Company after December 15, 2010. All $217 in aggregation
liquidation amount of Trust IIs common securities are held by the Company.



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



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

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

The Company has two share-based compensation plans, which are
described below. The compensation cost that has been charged against income for those plans was approximately $51 and $85 for the six-month periods ended June 30, 2008 and 2007, respectively and approximately $25 and $42 for the three-month
periods ended June 30, 2008 and 2007, respectively. The Company currently has 36,367 nonqualified stock options outstanding at June 30, 2008, which were fully vested as of January 1, 2008. There were no income tax implications for
share-based compensation for the three-month or six-month period ended June 30, 2008.

Stock Option Plans

The Company has a 2005 Key Employee Equity Award Plan (the 2005 Plan). The 2005 Plan gives the Company flexibility in tailoring equity-based compensation
awards for employees from time to time to the continuing objective of aligning employee incentives with the interests of shareholders as the Company grows and develops. In addition to incentive and nonqualified stock options, the 2005 Plan permits
the grant of restricted stock, stock appreciation rights and stock units to persons designated as Key Employees. The 2005 Plan will remain in effect for ten years, subject to the right of the Board of Directors to terminate the 2005 Plan
earlier, except with respect to awards made prior to and outstanding on that date which remain valid in accordance with their terms. The maximum aggregate number of shares of the Companys common stock (no par value) that may be issued pursuant
to awards made under the Plan may not exceed 250,000. Accordingly, 250,000 shares of authorized but unissued common stock are reserved for use in the 2005 Plan. Within the maximum limits, the Plan specifies that stock appreciation rights may not be
granted with respect to more than 500 shares per recipient (2,000 shares for a new employee recipient) per year; and restricted shares and stock units, respectively, may not be granted for more than 5,000 shares per year per recipient.



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

Under the 2005 Plan, there are options for 86,350 shares granted to officers and key employees
currently outstanding as of June 30, 2008. Under the 1995 Plan, there are options for 131,157 shares granted to officers and key employees currently outstanding as of June 30, 2008. All stock options (for both plans) have been granted with
an exercise price equal to the stocks fair market value at the date of the grant. Stock options under the Plan generally have 10-year terms, vest at the rate of 20 percent per year, and become fully exercisable five years from the date of the
grant.

As of June 30, 2008, there are 17,641 shares available for grant under the 1995 Plan and 161,879 shares available for grant
under the 2005 Plan. In addition, certain other options for shares (adjusted for stock splits), of which are outstanding, based on meeting certain past performance criteria have been granted. In addition, there are 36,367 nonqualified stock options
outstanding as of June 30, 2008.

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

The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing
model. The risk-free interest rate is based on the U.S. Treasury rate for the expected life at the time of grant. Volatility is based on the volatilities of our trading history. The expected life is based on the average life of the options of
10 years and the weighted average vesting period of 5 years, and forfeitures are estimated based on the Companys history. The following table illustrates the assumptions for the Black-Scholes model used in determining the fair value
of options granted to employees for the six-month period ended June 30, 2007. There were no options granted during the six-month period ended June 30, 2008.



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

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



|                        |  |                                      |    |                                      |   |         |  |         |    |  |   |   
|----------------------- |  | ------------------------------------ | -- | ------------------------------------ | - | ------- |  | ------- | -- |  | - | --
|                        |  | 6 Months Ended(dollars in thousands) |    | 3 Months Ended(dollars in thousands)
|                        |  | 6/30/08                              |    | 6/30/07                              |   | 6/30/08 |  | 6/30/07
|Option Grants           |  | $                                    | 51 |                                      | $ | 63      |  | $       | 25 |  | $ | 42
|Restricted Stock Grants |  |                                      |   |                                      |   | 22      |  |         |   |  |   |  
|                        |  |                                      |    |                                      |   |         |  |         |    |  |   |   



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|                           |  |   |    |  |   |    |  |   |    |  |   |   
|-------------------------- |  | - | -- |  | - | -- |  | - | -- |  | - | --
|Total Compensation Expense |  | $ | 51 |  | $ | 85 |  | $ | 25 |  | $ | 42
|                           |  |   |    |  |   |    |  |   |    |  |   |   

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

As of June 30, 2008, there was $238 of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested stock-based payments granted to employees. A maturity schedule of the unrecognized
compensation cost as of June 30, 2008 is as follows:



|                  |  |               |    |      |   |      |  |      |    |      |   |      |  |       |    |  |   |   |  |   |    
|----------------- |  | ------------- | -- | ---- | - | ---- |  | ---- | -- | ---- | - | ---- |  | ----- | -- |  | - | - |  | - | ---
|                  |  | Remaining2008 |    | 2009 |   | 2010 |  | 2011 |    | 2012 |   | 2013 |  | Total
|Compensation Cost |  | $             | 43 |      | $ | 87   |  | $    | 58 |      | $ | 36   |  | $     | 14 |  | $ | 0 |  | $ | 238

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

General Stock Option Information

A summary of option activity under the stock option plans during the six-month period ended June 30, 2008 is presented below:



|                       |  |                    |   |  |                              |       |                                    |   |                                   |  |                                |     |  |           
|---------------------- |  | ------------------ | - |  | ---------------------------- | ----- | ---------------------------------- | - | --------------------------------- |  | ------------------------------ | --- |  | ----------
|                       |  | OptionsOutstanding |   |  | WeightedAverageExercisePrice |       | WeightedAverageGrantDate FairValue |   | IntrinsicValue ofOptionsExercised |  | WeightedAverageContractualTerm
|Balance at 12/31/07    |  | 298,715            |   |  | $                            | 7.68  |                                    | $ | 4.87                              |  | $                              | 440 |  | 4.18 years
|                       |  |                    |   |  |                              |       |                                    |   |                                   |  |                                |     |  |           
|Exercised              |  | (38,241            | ) |  |                              | 3.59  |                                    |   | 8.04                              |  |                                | 199 |  |           
|Forfeited              |  | (6,600             | ) |  |                              | 11.88 |                                    |   | 3.64                              |  |                                |    |  |           
|Granted                |  |                   |   |  |                              |      |                                    |   |                                  |  |                                |    |  |           
|Expired                |  |                   |   |  |                              |      |                                    |   |                                  |  |                                |    |  |           
|                       |  |                    |   |  |                              |       |                                    |   |                                   |  |                                |     |  |           
|Balance at 6/30/08     |  | 253,874            |   |  | $                            | 8.19  |                                    | $ | 4.43                              |  | $                              | 199 |  | 4.10 years
|                       |  |                    |   |  |                              |       |                                    |   |                                   |  |                                |     |  |           
|Exercisable at 6/30/08 |  | 180,354            |   |  | $                            | 6.62  |                                    | $ | 4.54                              |  | $                              | n/a |  | 2.49 years
|                       |  |                    |   |  |                              |       |                                    |   |                                   |  |                                |     |  |           

Cash received from option exercises under all share-based payment arrangements for the three- and
six-month periods ended June 30, 2008 was $137 and $41, respectively. Cash received from option exercises for the three- and six-month periods ended June 30, 2007 was $267 and $309, respectively.

Information regarding shares vested during the six-month periods ended June 30, 2008 and 2007 are as follows:



|                        |  |                        |  |                                                        |   
|----------------------- |  | ---------------------- |  | ------------------------------------------------------ | --
|Six-Month Period Ending |  | Number ofShares Vested |  | Total Fair Value ofShares Vested(dollars in thousands)
|June 30, 2008           |  | 7,540                  |  | $                                                      | 24
|June 30, 2007           |  | 10,420                 |  | $                                                      | 10



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There were no shares vested during the three-month periods ending June 30, 2008 or 2007.

Information regarding the stock options outstanding at June 30, 2008 is summarized below:



|                         |  |                    |  |                                             |  |                                 |  |                    |  |                                
|------------------------ |  | ------------------ |  | ------------------------------------------- |  | ------------------------------- |  | ------------------ |  | -------------------------------
|Range of Exercise Prices |  | Number Outstanding |  | Weighted Average Remaining Contractual Life |  | Weighted Average Exercise Price |  | Number Exercisable |  | Weighted Average Exercise Price
|$3.18 - $3.81            |  | 36,367             |  | 0.08 years                                  |  | $3.18                           |  | 36,367             |  | $3.18                          
|$3.82 - $5.94            |  | 94,257             |  | 1.35 years                                  |  | $5.23                           |  | 94,257             |  | $5.23                          
|$5.95 - $12.85           |  | 98,200             |  | 7.53 years                                  |  | $11.44                          |  | 37,190             |  | $11.03                         
|$12.86 - $14.23          |  | 25,050             |  | 6.82 years                                  |  | $13.82                          |  | 12,540             |  | $13.97                         
|                         |  |                    |  |                                             |  |                                 |  |                    |  |                                
|Totals                   |  | 253,874            |  | 4.10 years                                  |  | $8.19                           |  | 180,354            |  | $6.62                          
|                         |  |                    |  |                                             |  |                                 |  |                    |  |                                

The aggregate intrinsic value of options outstanding and options exercisable as of June 30,
2008 was $445 and $446, respectively. The aggregate intrinsic value of options outstanding and options exercisable as of June 30, 2007 was $1,095 and $1,091, respectively.

A summary of the status of the Companys non-vested options as of June 30, 2008 and changes during the six-month period then ended is presented
below:



|                             |  |                              |   |  |                                    |     
|---------------------------- |  | ---------------------------- | - |  | ---------------------------------- | ----
|                             |  | Non-VestedOptionsOutstanding |   |  | WeightedAverageGrantDate FairValue
|Non-vested options, 12/31/07 |  | 86,780                       |   |  | $                                  | 4.03
|                             |  |                              |   |  |                                    |     
|Granted                      |  |                             |   |  |                                    |    
|Vested                       |  | (7,540                       | ) |  |                                    |     
|Forfeited                    |  | (5,720                       | ) |  |                                    |     
|                             |  |                              |   |  |                                    |     
|Non-vested options, 6/30/08  |  | 73,520                       |   |  | $                                  | 4.15
|                             |  |                              |   |  |                                    |     

A summary of the status of the Companys non-vested restricted stock as of June 30, 2008
and changes during the six-month period then ended is presented below:



|                  |  |                                      |   |  |                                    |      
|----------------- |  | ------------------------------------ | - |  | ---------------------------------- | -----
|                  |  | Non-VestedRestrictedStockOutstanding |   |  | WeightedAverageGrantDate FairValue
|Balance, 12/31/07 |  | 12,225                               |   |  | $                                  | 12.52
|                  |  |                                      |   |  |                                    |      
|Granted           |  |                                     |   |  |                                    |      
|Vested            |  |                                     |   |  |                                    |      
|Forfeited         |  | (12,225                              | ) |  |                                    |      
|                  |  |                                      |   |  |                                    |      



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##### Table of Contents

|                 |  |   |  |   |     
|---------------- |  | - |  | - | ----
|Balance, 6/30/08 |  |  |  | $ | 0.00
|                 |  |   |  |   |     

All non-vested restricted stock grants outstanding as of December 31, 2007 were automatically
forfeited on January 31, 2008 as the performance goals associated with these grants were not met. No compensation expense was recognized for the grants.



|(12) | Restatement of Beginning Retained Earnings
|---- | ------------------------------------------

In September
2006, the FASB ratified the consensuses reached by the FASBs Emerging Issues Task Force (EITF) relating to EITF 06-4, Accounting for the Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements (EITF 06-4). Entities purchase life insurance for various reasons including protection against loss of key employees and to fund postretirement benefits. The two most common types of life insurance arrangements are
endorsement split dollar life, which the Company owns, and collateral assignment split dollar life. EITF 06-4 covers the former and EITF 06-10 covers the latter. EITF 06-4 states that entities with endorsement split-dollar life insurance
arrangements that provide a benefit to an employee that extends to postretirement periods should recognize a liability for future benefits in accordance with SFAS No. 106, Employers Accounting for Postretirement Benefits Other Than
Pensions, (if, in substance, a postretirement benefit plan exists), or Accounting Principles Board (APB) Opinion No. 12, Omnibus Opinion 1967 (if the arrangement is, in substance, an individual deferred
compensation contract). Effective January 1, 2008, the Company recognized the effects of applying this issue as a change in accounting principle through a cumulative-effect adjustment to retained earnings. The reduction of beginning retained
earnings resulting from the cumulative-effect of the adoption of EITF 06-4 was $178. Expense amounting to approximately $12 was recognized in compensation expense in the six-month period ended June 30, 2008.



|(13) | Fair Value
|---- | ----------

The Company utilizes fair value measurements
to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available-for-sale, trading securities, and derivatives, if present, are recorded at fair value on a recurring basis.
Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, loans held for investment and certain other assets. These nonrecurring fair value adjustments
typically involve application of lower of cost or market accounting or write-downs of individual assets.

Fair Value Hierarchy

Under SFAS 157, the Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are
traded and the reliability of the assumptions used to determine fair value. These levels are:



|        |  |                                                                                                                                                                                                                                                                                                                                               
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Level 1 |  | Valuation is based upon quoted prices for identical instruments traded in active markets.                                                                                                                                                                                                                                                     
|        | 
|Level 2 |  | Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation
techniques for which all significant assumptions are observable in the market.                                                                  
|        | 
|Level 3 |  | Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions
that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash



18



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##### Table of Contents

| |  |                                    
| |  | -----------------------------------
| |  | flow models and similar techniques.

Following is a description of valuation methodologies used for assets and liabilities recorded at
fair value.

Investment Securities Available-for-Sale

Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured
using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the securitys credit rating, prepayment assumptions and other factors such as credit loss assumptions.
Level securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include
mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

Loans

The Company does not record loans at fair
value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the
contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with SFAS 114, Accounting by Creditors for Impairment of a Loan, (SFAS
114). The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an
allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At June 30, 2008, all of the total impaired loans were evaluated based on the fair value of the
collateral. In accordance with SFAS 157, impaired loans where an allowance is established based on the fair value of the collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable
market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised
value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

Foreclosed Assets

Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of
carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or managements estimation of the value of the collateral. When the fair value of the collateral is based on an observable
market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2. When the appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised
value and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3.



19



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##### Table of Contents

Assets and Liabilities Recorded at Fair Value on a Recurring Basis



|                                         |  |       |        |         |   |         |  |         |        |  |   |  
|---------------------------------------- |  | ----- | ------ | ------- | - | ------- |  | ------- | ------ |  | - | -
|(dollars in thousands) June 30, 2008     |  | Total |        | Level 1 |   | Level 2 |  | Level 3
|Investment securities available-for-sale |  | $     | 65,515 |         | $ | 19,696  |  | $       | 45,819 |  | $ | 
|                                         |  |       |        |         |   |         |  |         |        |  |   |  
|Total assets at fair value               |  | $     | 65,515 |         | $ | 19,696  |  | $       | 45,819 |  | $ | 
|                                         |  |       |        |         |   |         |  |         |        |  |   |  
|Total liabilities at fair value          |  | $     |       |         | $ |        |  | $       |       |  | $ | 
|                                         |  |       |        |         |   |         |  |         |        |  |   |  

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

The Company may be required from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting
principles. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below.



|                                     |  |       |       |         |   |         |  |         |       |  |   |  
|------------------------------------ |  | ----- | ----- | ------- | - | ------- |  | ------- | ----- |  | - | -
|(dollars in thousands) June 30, 2008 |  | Total |       | Level 1 |   | Level 2 |  | Level 3
|Impaired loans                       |  | $     | 7,258 |         | $ |        |  | $       | 7,258 |  | $ | 
|Foreclosed assets                    |  |       | 1,336 |         |   |        |  |         | 1,336 |  |   | 
|                                     |  |       |       |         |   |         |  |         |       |  |   |  
|Total assets at fair value           |  | $     | 8,642 |         | $ |        |  | $       | 8,642 |  | $ | 
|                                     |  |       |       |         |   |         |  |         |       |  |   |  
|Total liabilities at fair value      |  | $     |      |         | $ |        |  | $       |      |  | $ | 
|                                     |  |       |       |         |   |         |  |         |       |  |   |  



|(14) | Other Items
|---- | -----------

On July 1, 2008, the Company paid its
ninth consecutive semi-annual cash dividend on the Companys stock, in the amount of $0.07 per share, payable on to shareholders of record May 30, 2008.



|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

Managements discussion and analysis of the financial condition and results of operations of the Company as of and for the six months ended
June 30, 2008 and 2007 is as follows. The discussion should be read in conjunction with the Companys Consolidated Financial Statements and Notes on the December 31, 2007 Form 10-K.

Critical Accounting Policies

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



20



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##### Table of Contents

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



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



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



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

We establish the allowance for loan losses through charges to earnings through a provision for loan losses. Loan losses are charged against the allowance when we believe that the collection of the principal is unlikely. Subsequent
recoveries of losses previously charged against the allowance are credited to the allowance. The allowance represents an amount that, in our judgment, will be appropriate to absorb probable losses on existing loans that may become uncollectible.
Some of the factors we consider in determining the appropriate level of the allowance for loan losses are as follows:



| |  |  | 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
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | Problem loan trends over a 3-year historical time period
| | - |  | --------------------------------------------------------



| |  |  | Loan growth trends over a 3-year historical time period
| | - |  | -------------------------------------------------------

The general component of the reserve covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could
affect our estimate of probable losses. It also reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. The allowance for loan losses is
evaluated on a regular basis by management. On a quarterly basis, we perform a detailed analysis of the allowance for loan losses to verify the adequacy and appropriateness of the allowance in meeting possible losses in the loan portfolio.

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

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



21



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##### Table of Contents

(accounting rules for loss contingencies). We apply a specific loss factor to each category based upon our historical loss experience for each category of
loans over the previous five years. The loss factor is multiplied by the outstanding balance in the loan category to estimate potential loss for our allowance for loan losses. We then evaluate certain environmental and qualitative factors that are
relevant to our portfolio and make a risk assessment of low, medium, or high for each factor. An additional loss factor is assigned to the portfolio according to the risk assessment. This evaluation is inherently subjective, because it requires
estimates that may be significantly revised as more information becomes available.

Bank regulators also periodically review the loan
portfolio and other assets to assess their quality, and we employ independent, third party loan reviewers as well. This evaluation is inherently subjective because it requires estimates that may be significantly revised as more information becomes
available.

We believe the allowance for loan losses is appropriate to provide for expected losses in the loan portfolio, but there are no
assurances that it will be.

Overview

The Company was incorporated as a Virginia stock corporation on March 15, 1994, primarily to own and control all of the capital stock of the Bank. The Bank opened for business on May 15, 1995. There are currently eight
full-service branch locations, operating in various locations throughout the Cities of Roanoke and Salem, Town of Vinton, and the County of Roanoke. The Bank also has a wealth management subsidiary, Valley Wealth Management Services, Inc. which
markets investment and insurance products. Net income derived for the new subsidiary is not significant at this time.

Performance Summary

The following table shows our key performance ratios for the period ended June 30, 2008 and December 31, 2007 and
June 30, 2007:



|                               |  |                      |      |   |                        |   |      |                      |  |   |      |  
|------------------------------ |  | -------------------- | ---- | - | ---------------------- | - | ---- | -------------------- |  | - | ---- | -
|Key Performance Ratios         | 
|                               |  |                      |     
|                               |  | 6 monthsEnded6/30/08 |      |   | 12 monthsEnded12/31/07 |   |      | 6 monthsEnded6/30/07 | 
|Return on average assets       |  |                      | 0.47 | % |                        |   | 0.50 | %                    |  |   | 0.48 | %
|Return on average equity (1)   |  |                      | 6.93 | % |                        |   | 8.03 | %                    |  |   | 8.10 | %
|Net interest margin (2)        |  |                      | 2.91 | % |                        |   | 2.84 | %                    |  |   | 2.86 | %
|Cost of funds                  |  |                      | 3.52 | % |                        |   | 4.31 | %                    |  |   | 4.32 | %
|Yield on earning assets        |  |                      | 6.31 | % |                        |   | 7.03 | %                    |  |   | 7.08 | %
|Basic net earnings per share   |  | $                    | 0.31 |   |                        | $ | 0.69 |                      |  | $ | 0.34 |  
|Diluted net earnings per share |  | $                    | 0.31 |   |                        | $ | 0.68 |                      |  | $ | 0.33 |  



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



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



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Non-GAAP Financial Measures

The Company measures the net interest margin as an indicator of profitability. The net interest margin is calculated by dividing tax-equivalent net interest income by total average earning assets. Because a portion of interest income earned
by the Company is nontaxable, the tax-equivalent net interest income is considered in the calculation of this ratio. Tax-equivalent net interest income is calculated by adding the tax benefit realized from interest income that is nontaxable to total
interest income then subtracting total interest expense. The tax rate utilized in calculating the tax benefit for 2008 and 2007 is 34%. The reconciliation of tax-equivalent net interest income, which is not a measurement under GAAP, to net interest
income, is reflected in the table below.



|                                                                      |  |   |       |  
|--------------------------------------------------------------------- |  | - | ----- | -
|Net Interest Income Tax-Equivalent Calculation (dollars in thousands) | 
|Net interest income, non tax-equivalent                               |  | $ | 8,349 |  
|Less: tax-exempt interest income                                      |  |   | (203  | )
|Add: tax-equivalent of tax-exempt interest income                     |  |   | 308   |  
|                                                                      |  |   |       |  
|Net interest income, tax-equivalent                                   |  | $ | 8,454 |  
|                                                                      |  |   |       |  

Growth

The following table shows our key growth indicators:



|                       |  |         |         |          |   |         |  |   |        
|---------------------- |  | ------- | ------- | -------- | - | ------- |  | - | -------
|Key Growth Indicators 
|(dollars in thousands)
|                       |  |         |        
|                       |  | 6/30/08 |         | 12/31/07 |   | 6/30/07
|Investment securities  |  | $       | 82,429  |          | $ | 81,085  |  | $ | 73,335 
|Loans, net             |  | $       | 509,621 |          | $ | 482,281 |  | $ | 476,113
|Deposits               |  | $       | 448,979 |          | $ | 432,453 |  | $ | 416,345
|Total assets           |  | $       | 630,177 |          | $ | 600,967 |  | $ | 584,916

In comparison to the same period last year, our total assets grew by $45.3 million or 8%, net
loans grew by $33.5 million or 7% and total deposits grew by $32.6 million or 8%. In February, 2008, we introduced a new checking account product, My Lifestyle Checking, to our retail consumers and have raised approximately $9 million in deposits in
this product at the end of the second quarter. This product offers a certificate of deposit like rate (currently 5.01%) on balances up to $25,000 if the customer meets the qualification criteria, including the following:



| |  |  | Make 12 check card transactions per statement cycle;
| | - |  | ----------------------------------------------------



| |  |  | Receive one direct deposit or one auto debit or credit transaction per statement cycle; and
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | Receive bank statement electronically via email.
| | - |  | ------------------------------------------------

We are very excited about the potential of this product and are pleased with our performance in the early months of this campaign. Additionally, our money market account which has an interest rate tied to the



23



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##### Table of Contents

Wall Street Journal Prime rate continues to attract customers, as we have amassed almost $80 million in deposits in this account as of the end of the second
quarter of 2008.

Our primary focus in 2007 was restoring our credit quality and as such, we reported lower than normal growth rates for
loans, deposits and assets as compared to our historical performance. Maintaining our credit quality will continue to be a primary focus for 2008, especially as we navigate through the effects of the current economic slow down. We remain cautiously
optimistic about the remainder of this year, but continue to be concerned about the continued weakness in the residential real estate market and general slowdown in economic activity. We did not participate in the subprime, Alt-A or third-party
originated mortgage programs that have resulted in heavy loan losses at many banks throughout the country.

Total liabilities at
June 30, 2008 were $588.9 million, up 5% from $560.2 million at December 31, 2007 with the increase primarily represented by a $16.5 million increase in deposits and a $7.5 million increase in federal funds purchased.

Shareholders Equity

Total shareholders
equity at June 30, 2008 was $41.3 million compared to $40.7 million at December 31, 2007, an increase of $600,000 or 1.5%. The change in shareholders equity was impacted by earnings, proceeds from the exercise of incentive stock
options and nonqualified stock options, incentive stock option expense, the change in unrealized gains and losses for securities available-for-sale, and the cumulative effect adjustment to retained earnings for application of EITF Issue
No. 06-10 Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements. This EITF requires that an employer recognize a liability for the postretirement benefit related to a collateral assignment split-dollar life
insurance arrangement in accordance with either FASB Statement No. 106 or APB Opinion No. 12, as appropriate, if the employer has agreed to maintain a life insurance policy during the employees retirement or provide the employee with
a death benefit based on the substantive agreement with the employee. The Company has two split-dollar life insurance arrangements currently in effect that fall under this pronouncement, and as a result recorded a $178,000 cumulative effect
adjustment to retained earnings during the first quarter of 2008. The adoption of this change in accounting principle will result in an additional $30,000 in compensation expense recorded for the year ended December 31, 2008.

Total shareholders equity (exclusive of unrealized gains (losses) on investment securities and derivatives) was $41.8 million at June 30, 2008
compared with $40.7 million at December 31, 2007, an increase of $1.1 million or 3%.

Net Income

We earned net income of $1,436,000 for the six months ended June 30, 2008, an increase of $43,000 or 3% over the $1,393,000 reported for the same
period in 2007. We earned net income of $688,000 for the three- month period ended June 30, 2008, a decrease of $230,000 or 25% over the $918,000 reported for the same period in 2007. A discussion of the individual components making up net
income follows.

Net Interest Income

Net interest income is our principal source of earnings and is calculated as the amount which loan and investment (earning assets) income exceeds the interest expense on deposits and borrowings (interest-bearing liabilities). Changes in the
volume and mix of earning assets and interest-bearing liabilities, as well as their respective yields and rates, have a significant impact on the level of net interest income.



24



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Total interest income amounted to $18,254,000 for the six months ended June 20, 2008, a decrease of
5% over the $19,234,000 reported for the same period in 2007. Total interest income was $8,795,000 for the three months ended June 30, 2008, a decrease of 9% over the $9,655,000 reported for the three months ended June 30, 2007.

Total interest expense was $9,905,000 for the six months ended June 20, 2008, a decrease of 14% over the $11,549,000 reported for the
same period in 2007. Total interest expense was $4,584,000 for the three months ended June 30, 2008, a decrease of 21% over the $5,812,000 reported for the three months ended June 30, 2007.

As a result of the above, net interest income was $8,349,000 for the six months ended June 30, 2008, an increase of $664,000 or 9% from the
$7,685,000 reported for the same period in 2007. Net interest income was $4,211,000 for the three months ended June 30, 2008, an increase of $368,000 or 10% from the $3,843,000 reported for the same period in 2007. Our net interest margin was
2.91% for the six months ended June 30, 2008, up 5 basis points compared to the 2.86% reported for the same period last year. Our net interest margin was 2.89% for the three months ended June 30, 2008, up 4 basis points compared to the
2.85% reported for the same period last year. We continue to see the net interest margin under considerable pressure from the intense competition for deposits. Additionally, the significant reduction in the fed funds rate during 2008 is adding
pressure to the margin as we are an asset-sensitive bank, whereby our asset yields tend to reprice faster than our deposit costs in a declining interest rate environment. The increase in net interest margin for the six and three-month periods ending
June 30, 2008 is primarily related to the increase in interest income as a result of the significant reduction in our nonperforming assets as compared to December 31, 2007, which in turn, added over $6 million back to performing status
during the first quarter.

Interest Rate Risk

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



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



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



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



| | ¡ |  | interest rate options,
| | - |  | ----------------------



| | ¡ |  | loan prepayment options,
| | - |  | ------------------------



| | ¡ |  | deposit early withdrawal options,
| | - |  | ---------------------------------



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



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

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

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



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

The model also incorporates managements forecasts for balance sheet growth, noninterest income and noninterest expense. The interest rate scenarios
are used for analytical purposes and do not necessarily represent managements view of future market movements. Rather, these are intended to provide a measure of the degree of volatility interest rate movements may apply to our earnings.
Modeling the sensitivity of earnings to interest rate risk is highly dependent on numerous assumptions embedded in the simulation model. While the earnings sensitivity analysis incorporates managements best estimate of interest rate and
balance sheet dynamics under various market rate movements, the actual behavior and resulting earnings impact likely will differ from that projected. Our cumulative repricing gap for the 90-day time period indicates an asset-sensitive position as of
March 31, 2008 (the most recent date for which information is currently available).

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

Derivative Financial Instruments

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

Noninterest Income

Noninterest income
for the three months ended June 30, 2008 and 2007 is shown in the following table:

Noninterest Income

(dollars in thousands)



|                                           |  |                      |     |   |                      |   |     |                      |  |     |   
|------------------------------------------ |  | -------------------- | --- | - | -------------------- | - | --- | -------------------- |  | --- | --
|                                           |  | 3 monthsEnded6/30/08 |     |   | 3 monthsEnded6/30/07 |   |     | %Increase/(Decrease) | 
|Service charges on deposits                |  | $                    | 289 |   |                      | $ | 314 |                      |  | (8  | )%
|Income earned on bank owned life insurance |  |                      | 142 |   |                      |   | 130 |                      |  | 9   | % 
|Realized securities gains/(losses)         |  |                      |    |   |                      |   | (50 | )                    |  | 100 | % 
|Gains/(losses) on disposal of equipment    |  |                      | (2  | ) |                      |   |    |                      |  | N/M |   
|Other income                               |  |                      | 249 |   |                      |   | 175 |                      |  | 42  | % 
|                                           |  |                      |     |   |                      |   |     |                      |  |     |   



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|                         |  |   |     |  |   |     |  |    |  
|------------------------ |  | - | --- |  | - | --- |  | -- | -
|Total noninterest income |  | $ | 678 |  | $ | 569 |  | 19 | %
|                         |  |   |     |  |   |     |  |    |  

Noninterest income for the six months ended June 30, 2008 and 2007 is as follows:

Noninterest Income

(dollars in
thousands)



|                                           |  |                      |       |   |                      |   |       |                      |  |      |   
|------------------------------------------ |  | -------------------- | ----- | - | -------------------- | - | ----- | -------------------- |  | ---- | --
|                                           |  | 6 monthsEnded6/30/08 |       |   | 6 monthsEnded6/30/07 |   |       | %Increase/(Decrease) | 
|Service charges on deposits                |  | $                    | 551   |   |                      | $ | 605   |                      |  | (9   | )%
|Income earned on bank owned life insurance |  |                      | 278   |   |                      |   | 257   |                      |  | 8    | % 
|Realized derivatives gains/(losses)        |  |                      |      |   |                      |   | 51    |                      |  | (100 | )%
|Realized securities gains/(losses)         |  |                      | (14   | ) |                      |   | (50   | )                    |  | 72   | % 
|Gains/(losses) on disposal of equipment    |  |                      | (2    | ) |                      |   |      |                      |  | N/M  |   
|Other income                               |  |                      | 381   |   |                      |   | 337   |                      |  | 13   | % 
|                                           |  |                      |       |   |                      |   |       |                      |  |      |   
|Total noninterest income                   |  | $                    | 1,194 |   |                      | $ | 1,200 |                      |  | (1   | )%
|                                           |  |                      |       |   |                      |   |       |                      |  |      |   

As can be seen from the tables above, our
noninterest income was up 19% quarter over quarter, but down 1% for the six month period ended June 30, 2008 as compared to the same period last year. In both cases, our service charges on deposit income is trailing last year primarily due to
lower non sufficient funds fees. The increase in other income year over year is due to $45,000 of income recorded on one of our tax credit partnerships for 2007. This income was not reported to us until the second quarter of 2008 (with the receipt
of the tax credit partnerships K-1). The increase in other income for the 2ndquarter is due to this nonrecurring item as well as an increase
in income earned by Valley Wealth Management Services, our wealth management subsidiary.

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



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



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



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



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

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



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



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



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

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



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



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



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



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



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



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



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



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Levels of income derived from these categories vary. For example, general market conditions and new
insurance premiums purchased affect the income earned on bank owned life insurance. Fees for the issuance of official checks and customer check sales tend to grow as new branches are added. Fee schedules, while subject to change, generally do not
alone yield a significant or discernable increase in income when they change.

Noninterest Expense

Noninterest expense for the three-month period ended June 30, 2008 and 2007 is shown in the following table:

Noninterest Expense

(dollars in thousands)



|                                  |  |                      |       |                      |       |                      |     |   
|--------------------------------- |  | -------------------- | ----- | -------------------- | ----- | -------------------- | --- | --
|                                  |  | 3 monthsEnded6/30/08 |       | 3 monthsEnded6/30/07 |       | %Increase/(Decrease) |    
|Compensation expense              |  | $                    | 1,872 |                      | 1,591 |                      | 18  | % 
|Occupancy expense                 |  |                      | 225   |                      | 182   |                      | 24  | % 
|Equipment expense                 |  |                      | 172   |                      | 136   |                      | 26  | % 
|Data processing expense           |  |                      | 204   |                      | 147   |                      | 39  | % 
|Advertising and marketing expense |  |                      | 155   |                      | 113   |                      | 37  | % 
|Insurance expense                 |  |                      | 108   |                      | 90    |                      | 20  | % 
|Audit fees                        |  |                      | 62    |                      | 85    |                      | (27 | )%
|Legal fees                        |  |                      | 51    |                      | 57    |                      | (11 | )%
|Franchise tax expense             |  |                      | 101   |                      | 84    |                      | 20  | % 
|Business manager expense          |  |                      | 43    |                      | 68    |                      | (37 | )%
|Deposit expense                   |  |                      | 57    |                      | 63    |                      | (10 | )%
|Loan expense                      |  |                      | 59    |                      | 44    |                      | 34  | % 
|Computer software expense         |  |                      | 117   |                      | 90    |                      | 30  | % 
|Other expense                     |  |                      | 332   |                      | 355   |                      | (8  | )%
|                                  |  |                      |       |                      |       |                      |     |   
|Total noninterest expense         |  | $                    | 3,558 |                      | 3,105 |                      | 15  | % 
|                                  |  |                      |       |                      |       |                      |     |   

Our noninterest expenses have increased by $453,000 or 15% for the three-months ended
June 30, 2008 as compared to the three-months ended June 30, 2007.



| |  |  | Our compensation expense has increased due to the officer merit increases that were effective January 1, 2008 as well as the addition of several new lending
related positions during the first half of this year and the addition of our Director of Internal Audit in late 2007.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Occupancy and equipment expenses have increased primarily due to the renovation of the 5thfloor of our main headquarters. We took occupancy of this floor in February 2008. We anticipate a further increase in these expenses during the 2ndhalf of 2008 with the opening of our new full-service branch office in South Roanoke.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Our data processing expenses have increased due to our conversion to an all imaged environment during the third quarter of 2007.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | Advertising and marketing expenses are up due to the television and radio advertising campaign for our new checking account product, My LifeStyle Checking.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The increase in loan expense is related to the Special Assets consultant we hired during the first quarter of 2008 to assist with the work-out of our problem
assets.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Computer software expenses have increased primarily due to software costs associated with My LifeStyle checking, as well as costs associated with a new loan
documentation system.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The significant decreases in noninterest expenses are in our audit fees and business manager fees:



| |  |  | Audit expenses have decreased due to the movement of our internal audit function from an outsourced environment to internal.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | Business manager expenses are down due to an overall reduction in our business manager portfolio.
| | - |  | -------------------------------------------------------------------------------------------------

Noninterest expense for the six months ended June 30, 2008 and 2007 is as follows:

Noninterest Expense

(dollars in thousands)



|                                  |  |                      |       |                      |   |                      |  |     |   
|--------------------------------- |  | -------------------- | ----- | -------------------- | - | -------------------- |  | --- | --
|                                  |  | 6 monthsEnded6/30/08 |       | 6 monthsEnded6/30/07 |   | %Increase/(Decrease) | 
|Compensation expense              |  | $                    | 3,590 |                      | $ | 3,283                |  | 9   | % 
|Occupancy expense                 |  |                      | 439   |                      |   | 380                  |  | 16  | % 
|Equipment expense                 |  |                      | 324   |                      |   | 278                  |  | 18  | % 
|Data processing expense           |  |                      | 412   |                      |   | 311                  |  | 32  | % 
|Advertising and marketing expense |  |                      | 302   |                      |   | 156                  |  | 94  | % 
|Insurance expense                 |  |                      | 209   |                      |   | 169                  |  | 24  | % 
|Audit fees                        |  |                      | 121   |                      |   | 188                  |  | (36 | )%
|Legal fees                        |  |                      | 76    |                      |   | 85                   |  | (11 | )%
|Franchise tax expense             |  |                      | 201   |                      |   | 169                  |  | 19  | % 
|Business manager expense          |  |                      | 95    |                      |   | 151                  |  | (37 | )%
|Deposit expense                   |  |                      | 110   |                      |   | 128                  |  | (14 | )%
|Loan expense                      |  |                      | 92    |                      |   | 76                   |  | 21  | % 
|Computer software expense         |  |                      | 224   |                      |   | 166                  |  | 35  | % 
|Other expense                     |  |                      | 675   |                      |   | 707                  |  | (5  | )%
|                                  |  |                      |       |                      |   |                      |  |     |   
|Total noninterest expense         |  | $                    | 6,870 |                      | $ | 6,247                |  | 10  | % 
|                                  |  |                      |       |                      |   |                      |  |     |   

In total, our noninterest expenses have increased by $623,000 or 10% over the same period last
year. We have experienced a number of increases and decreases in the various categories year-to-date, most of



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which were explained in more detail above as the largest share of the increase occurred during the second quarter of 2008.

Noninterest expenses are expected to continue to increase as a direct result of business growth, expansion, and complexity of banking operations as well
as compliance with the Sarbanes-Oxley Act, which imposes additional management and reporting burdens on reporting companies such as this one.

Income
Taxes

To reflect our anticipated federal income tax liability, an expense of $558,000 effective tax rate of 28.0% was recognized for
the six months ended June 30, 2008, compared to an expense of $403,000 at an effective tax rate of 22.4% recognized for the six months ended June 30, 2007. The provision for income taxes for the second quarter of 2008 was $255,000 at an
effective tax rate of 27.0%, as compared to $267,000 at an effective tax rate of 22.5% for the second quarter of 2007. During the second quarter of 2007, we recognized a federal tax credit resulting in a reduction in income tax expense of $74,000.
This item, along with the decrease in our holdings of tax-exempt municipal securities by approximately $3.6 million during 2008, contributed to the overall increase in our effective tax rate as compared to 2007. Additionally, factors contributing to
the difference between the effective tax rate and the statutory rate of 34% include provision for loan loss reserves not allowed for tax purposes, tax-exempt interest income on municipal securities (net of disallowance), and purchased tax credits
carried forward and tax-exempt income earned on bank-owned life insurance.

Investment Securities

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



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



| | ¡ |  | Treasury notes
| | - |  | --------------



| | ¡ |  | Callable agency bonds
| | - |  | ---------------------



| | ¡ |  | Noncallable agency bonds
| | - |  | ------------------------



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



| | ¡ |  | Pools issued by government agencies
| | - |  | -----------------------------------



| | ¡ |  | AAA rated corporate mortgage pools
| | - |  | ----------------------------------



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



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



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



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



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



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



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



| | ¡ |  | Community Bankers Bank shares
| | - |  | -----------------------------

Investment securities (available for sale and held to maturity), including restricted equity securities, at June 30, 2008 were $82.4 million, an increase of $1.3 million or 1.6% from their level of $81.1 million on December 31,
2007. See Note 3 to the Consolidated Financial Statements.



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##### Table of Contents

Loan Portfolio

Our total loans were $514.6 million at June 30, 2008, an increase of $27.4 million or 5.6% from the $487.2 million reported at December 31, 2007. Our ratio of total loans to total funding sources (customer
deposits, securities sold under agreements to repurchase, federal funds purchased, Federal Home Loan Bank advances, and guaranteed preferred beneficial interests in the Companys junior subordinated debentures) stood at 88.2% at June 30,
2008 and 88.0% at December 31, 2007. Management seeks to maintain the ratio of loans to funding sources at a maximum of 90%.

The loan
portfolio primarily consists of commercial, real estate (including real estate term loans, construction loans and other loans secured by real estate) and loans to individuals for household, family and other consumer purposes. We adjust the mix of
lending and the terms of our loan programs according to economic and market conditions, asset/liability management considerations and other factors. Loans typically (in excess of 90%) are made to businesses and individuals located within our primary
and secondary market area, most of whom maintain deposit accounts with the Bank. There is no concentration of loans exceeding 10% of total loans, which is not disclosed in the Consolidated Financial Statements and the Notes to the Consolidated
Financial Statements or discussed below.

The following table summarizes the loan portfolio by category, net of deferred fees, as of the
six-month periods ended June 30, 2008 and 2007 and the year ended December 31, 2007:

Loan Portfolio Summary

(dollars in thousands)



|                                                           |  |         |  |          |  |         |  |       |  |         |  |      
|---------------------------------------------------------- |  | ------- |  | -------- |  | ------- |  | ----- |  | ------- |  | -----
|                                                           |  | 6/30/08 |  | 12/31/07 |  | 6/30/07
|                                                           |  | $       |  | %        |  | $       |  | %     |  | $       |  | %    
|Commercial                                                 |  | 84,515  |  | 16.4     |  | 87,552  |  | 18.0  |  | 86,477  |  | 17.9 
|Commercial real estate                                     |  | 195,238 |  | 37.9     |  | 170,599 |  | 35.1  |  | 177,461 |  | 36.8 
|Real estate construction                                   |  | 106,194 |  | 20.6     |  | 106,195 |  | 21.8  |  | 92,990  |  | 19.3 
|Residential real estate                                    |  | 122,773 |  | 23.9     |  | 115,458 |  | 23.7  |  | 118,005 |  | 24.5 
|Loans to individuals (except those secured by real estate) |  | 5,919   |  | 1.2      |  | 7,361   |  | 1.4   |  | 7,255   |  | 1.5  
|                                                           |  |         |  |          |  |         |  |       |  |         |  |      
|Total loans                                                |  | 514,639 |  | 100.0    |  | 487,165 |  | 100.0 |  | 482,188 |  | 100.0
|                                                           |  |         |  |          |  |         |  |       |  |         |  |      

Loan Category Analysis

Commercial Loans. Commercial loans generally are made to provide operating lines of credit, to finance the purchase of inventory or equipment, and for other business purposes. The credit worthiness of the
borrower is analyzed and re-evaluated on a periodic basis. Most commercial loans are collateralized with business assets such as accounts receivable, inventory and equipment. Even with substantial collateral, such as all the assets of the business
and personal guarantees, commercial lending involves considerable risk of loss in the event of a business downturn or failure of the business.

Commercial Real Estate Loans.Commercial real estate construction and commercial real estate mortgages represent interim and permanent financing of commercial properties that are secured by real estate.

Real Estate Construction Loans. Real estate construction loans represent interim financing on



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residential and commercial properties under construction, and are secured by real estate. Once construction is completed and the loan becomes permanent, the
loans are reclassified as either commercial real estate loans, which are secured by commercial property or residential real estate loans, which are secured by first deeds of trust.

Residential Real Estate Loans. Residential real estate loans are secured by first deeds of trust on 1-4 family residential properties. To mitigate
interest rate risk, the Company usually limits the final maturity of residential real estate loans held for its own portfolio to 15-20 years, although exceptions are made for competitive reasons and under special programs. Residential real estate
lending involves risk elements when there is lack of timely payment and/or a decline in the value of the collateral.

Loans to
Individuals.Loans to individuals include installment loans, home equity lines of credit, and loans secured by junior liens on residential real estate. The loan proceeds typically are used to purchase vehicles, finance home remodeling, higher
education, or for other consumer purposes.

Asset Quality

Summary of Allowance for Loan Losses

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

In recognition of our estimate of inherent risks associated with lending activities, a provision for loan losses of $679,000
was provided during the six months ended June 30, 2008, a decrease of $163,000 or 19.4% in comparison to the $842,000 reported during the same period in 2007. Net charge-offs for the six-month period ended June 30, 2008 were $544,000 as
compared to $428,000 for the six-month period ended June 30, 2007. The ratio of the allowance for loan losses to total loans outstanding was approximately 1.0% at June 30, 2008, which compares to approximately 1.0% of gross loans at
December 31, 2007 (see Note 4 to the Consolidated Financial Statements). These estimates are primarily based on our historical loss experience, portfolio concentrations, evaluation of individual loans and economic conditions.

A provision for loan losses of $388,000 was provided during the three months ended June 30, 2008, an increase of $266,000 or 218% over the $122,000
reported during the same period in 2007. Net charge-offs for the quarter ended June 30, 2008 were $233,000 as compared to $428,000 for the same period last year. While our second quarter earnings were adversely impacted by an additional
allocation to our allowance for loan and lease losses as a result of the current economic environment, we are quite pleased with the continued improvement in our asset quality ratios. As of June 30, 2008, total non-performing assets amounted to
$2,088,000, or 0.33% of total assets, compared to $8,653,000, or 1.48% of total assets as of June 30, 2007, representing a $6,565,000 or 76% decrease year over year. We do remain concerned about the weakness in the residential real estate
market and the general slowdown in economic activity; however, we are confident in our ability to effectively evaluate the risk within our portfolio and manage our way through this economic cycle.

We regularly review asset quality and re-evaluate the allowance for loan losses. However, no assurance can be given that unforeseen adverse economic
conditions or other circumstances will not result in increased provisions in the future. Additionally, regulatory examiners may require us to recognize additions



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to the allowance based upon their judgment about the loan portfolio and other information available to them at the time of their examinations. (See
Allowance for Loan Losses under Critical Accounting Policies.)

Nonperforming Assets and Impaired Loans

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

A restructured loan is a loan in which the original contract terms have been modified due to a borrowers financial condition or there has been a transfer of assets in full or partial satisfaction of the loan. A modification of
original contractual terms is generally a concession to a borrower that a lending institution would not normally consider.

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

For the six months ended June 30, 2008, our non-performing assets to total assets ratio decreased to 0.33% from 1.24%
at December 31, 2007. Our loans past due more than 90 days as a percentage of total loans were at 0.00% at June 30, 2008 and December 31, 2007. Our foreclosed, repossessed and idled properties increased from $445,000 at
December 31, 2007 to $1,336,000 at June 30, 2008. The increase is attributable to the following:



| |  |  | Development costs of $58,000 on the one acquisition and development project included in OREO.
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | Foreclosure on a spec house and 7 residential lots with a fair market value of approximately $535,000. The spec house was sold subsequent to the end of the second
quarter with no additional loss taken.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Foreclosure on a residential house with a fair market value of approximately $296,000. The house was sold subsequent to the end of the second quarter with a slight
gain taken.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A total of $216,000 in specific reserves is included in the balance of the allowance for loan losses as of
June 30, 2008 for impaired loans, which compares to a total of $673,000 as of December 31, 2007 and $1,811,000 as of June 30, 2007. Although we presently believe any potential loss exposure has been fully reserved for our impaired
loans at June 30, 2008 and the remaining balances are secured by customer assets pledged as collateral, it is obviously a situation which can change, which we are constantly monitoring.

Nonperforming assets at June 30, 2008, December 31, 2007 and June 30, 2007 are presented in the following table:

Nonperforming Assets

(dollars in
thousands)



|                               |  |         |     |          |   |         |  |   |      
|------------------------------ |  | ------- | --- | -------- | - | ------- |  | - | -----
|                               |  | 6/30/08 |     | 12/31/07 |   | 6/30/07
|Nonaccrual loans               |  | $       | 752 |          | $ | 7,029   |  | $ | 8,649
|Loans past due 90 days or more |  |         |    |          |   |        |  |   | 4    



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|                                             |  |   |       |  |   |       |  |   |      
|-------------------------------------------- |  | - | ----- |  | - | ----- |  | - | -----
|Restructured loans                           |  |   |      |  |   |      |  |   |     
|                                             |  |   |       |  |   |       |  |   |      
|Total nonperforming loans                    |  | $ | 752   |  | $ | 7,029 |  | $ | 8,653
|                                             |  |   |       |  |   |       |  |   |      
|Foreclosed, repossessed and idled properties |  |   | 1,336 |  |   | 445   |  |   |     
|                                             |  |   |       |  |   |       |  |   |      
|Total nonperforming assets                   |  | $ | 2,088 |  | $ | 7,474 |  | $ | 8,653
|                                             |  |   |       |  |   |       |  |   |      

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

If nonaccrual loans had performed in accordance with their original terms, additional interest income in the amount of $99,262 for the six-month period
ended June 30, 2008; $909,586 for the year ended December 31, 2007; and $466,636 for the six-month period ended June 30, 2007 would have been recorded.

Other Assets

We have purchased life insurance contracts on key employees, the tax-exempt income from
which is the funding vehicle for the Companys Supplemental Executive Retirement Plan (SERP) and other employee benefit costs including health insurance, dental insurance, life insurance, and 401(k) employer match. Bank owned life
insurance was $12.1 million at June 30, 2008 an increase of $500,000 over the $11.6 million reported as of December 31, 2007. The increase is due to the $0.3 million increase in the cash surrender value of the life insurance contracts and
a $0.2 million purchase of additional life insurance on one of our key executives.

Deposits

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

The following table summarizes our total deposits for the
six-months ended June 30, 2008 and for the year ended December 31, 2007:

Deposit Summary

(dollars in thousands)



|                                       |  |         |  |          |  |                     |  |       |  |        |  |     
|-------------------------------------- |  | ------- |  | -------- |  | ------------------- |  | ----- |  | ------ |  | ----
|                                       |  | 6/30/08 |  | 12/31/07 |  | Increase/(Decrease)
|                                       |  | $       |  | %        |  | $                   |  | %     |  | $      |  | %   
|Time deposits                          |  | 271,120 |  | 60.4     |  | 263,941             |  | 61.0  |  | 7,179  |  | 2.7 
|Interest bearing demand & money market |  | 103,650 |  | 23.1     |  | 100,840             |  | 23.3  |  | 2,810  |  | 2.8 
|Savings                                |  | 53,538  |  | 11.9     |  | 51,310              |  | 11.9  |  | 2,228  |  | 4.3 
|                                       |  |         |  |          |  |                     |  |       |  |        |  |     
|Total interest bearing deposits        |  | 428,308 |  | 95.4     |  | 416,091             |  | 96.2  |  | 12,217 |  | 2.9 
|                                       |  |         |  |          |  |                    
|Noninterest demand & official checks   |  | 20,671  |  | 4.6      |  | 16,362              |  | 3.8   |  | 4,309  |  | 26.3
|                                       |  |         |  |          |  |                     |  |       |  |        |  |     
|Total deposits                         |  | 448,979 |  | 100.0    |  | 432,453             |  | 100.0 |  | 16,526 |  | 3.8 
|                                       |  |         |  |          |  |                     |  |       |  |        |  |     



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We would prefer to have transaction accounts comprise a larger percentage of total deposits, but in order
to fund our loan growth we often have to rely on higher-cost certificates of deposit. Within the certificate of deposit category, in the past, we have marketed CDs nationally to institutional depositors, primarily banks, thrift institutions and
credit unions, through an Internet-based rate posting service. National market CDs at June 30, 2008 were $5.0 million and represent 1.9% of total CDs and 1.1% of total deposits at June 30, 2008. Additionally, our Prime Money Market account
which has an interest rate tied to the Wall Street Journal Prime rate continues to attract customers, as we have amassed $79.7 million in deposits in this account as of the end of the second quarter of 2008 as compared to $73.3 million as of
December 31, 2007.

Short-Term Borrowings

Total short-term borrowings (including federal funds purchased and securities sold under agreements to repurchase) increased by $10.4 million from their level of $49.6 million at December 31, 2007 to a total of $60.0 million as of
June 30, 2008. The increase is due to an increase in our federal funds purchased position of $7.4 million and an increase in our commercial sweep account program of $4.0 million. Short-term borrowings at June 30, 2008 include Federal Home
Loan Bank of Atlanta (FHLB) borrowings in the amount of $12.0 million, a federal funds purchased position of $10.7 million and a commercial sweep account program in the amount of $37.3 million.

The FHLB borrowings include two fixed rate credits. The first loan is a $5 million fixed rate credit at 4.4975% that matures on October 31, 2008 and
the second FHLB borrowing is a $7 million fixed rate credit at 2.675% that matures on November 12, 2008.

The commercial sweep program
involves balances subject to repurchase agreements which are reported as short term borrowings rather than deposits since they are not FDIC insured. The balance in the program is $37.3 million at June 30, 2008, an increase of $4.0 million from
the $33.3 million level at December 31, 2007. The program consists of a demand deposit account from which we invest available balances daily in securities on an overnight basis subject to repurchase. On the following business day, we repurchase
from the customer the securities for an amount equal to the amount of available balances invested in the securities. Interest is calculated daily at the rate applicable for each overnight period; however, it is posted to the customer accounts only
once per month.

Long-Term Borrowings

Federal Home Loan Bank advances are relatively cost-effective funding sources and provide us with the flexibility to structure borrowings in a manner that aids in the management of interest rate risk and liquidity. Long-term convertible
Federal Home Loan Bank advances totaled $58.0 million at June 30, 2008 and $55.0 million at December 31, 2007. (See Footnote 9 of the Companys Consolidated Financial Statements for more information on the long-term advances.)

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

Valley Financial Statutory Trust III, a statutory business trust (Trust III) was created by the Company on December 15, 2006, at which
time Trust III issued $5 million in aggregate liquidation amount of $1 par value preferred capital trust securities which mature January 30, 2037. Distributions are payable on the securities at a floating rate equal to the 3-month LIBOR plus
1.73%, and the securities may be prepaid at par by Trust III at any time after January 20, 2012. The principal assets of Trust III are $5.2 million of the



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Companys junior subordinated debentures which mature on January 30, 2037, and bear interest at a floating rate equal to the 3-month LIBOR plus
1.73%, and which are callable by the Company after January 30, 2012. All $155,000 in aggregation liquidation amount of Trust IIIs common securities are held by the Company.

Valley Financial (VA) Statutory Trust II, a statutory business trust (Trust II), was created on September 26, 2005, at which time Trust
II issued $7.0 million in aggregate liquidation amount of $1 par value preferred capital trust securities which mature December 15, 2035. Distributions are payable on the securities at a floating rate equal to the 3-month LIBOR plus 1.49%, and
the securities may be prepaid at par by Trust II at any time after December 15, 2010. The principal assets of Trust II are $7.2 million of the Companys junior subordinated debentures which mature on December 15, 2035, and bear
interest at a floating rate equal to the 3-month LIBOR plus 1.49%, and which are callable by the Company after December 15, 2010. All $217,000 in aggregation liquidation amount of Trust IIs common securities are held by the Company.

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

The debenture proceeds from Trust I, Trust II, and Trust III are included in our Tier 1 capital for regulatory
capital adequacy purposes to the extent that they do not exceed 25% of our total Tier I capital including the securities. Of the total $16,000,000 in trust preferred proceeds from all three trusts, $13,935,000 is included in Tier 1 capital at
June 30, 2008. The remaining $2,065,000 is included in Tier 2 capital at June 30, 2008. Our obligations with respect to the issuance of Trust I, Trust II and Trust IIIs preferred securities and common securities constitute a full and
unconditional guarantee of Trust I, Trust II and Trust IIIs obligations with respect to the preferred securities and common securities. Subject to certain exceptions and limitations, we may elect from time to time to defer interest payments on
our junior subordinated debentures, which would result in a deferral of distribution payments on Trust I, Trust II and Trust IIIs preferred trust securities and common securities.

Capital Adequacy

We seek to maintain a capital structure adequate to support anticipated asset
growth and serve as a cushion to absorb potential losses. Our financial position at June 30, 2008 reflects liquidity and capital levels currently adequate to fund anticipated near-term business expansion. We review the adequacy of our capital
on an ongoing basis at the Company and Bank level and are committed to maintaining a total risk based capital ratio of 10% or greater at the Bank level, as is required for a well capitalized institution.



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

Valley Financial Corporation



|         |  |                 |   |  |         |   |  |          |   |  |         |  
|-------- |  | --------------- | - |  | ------- | - |  | -------- | - |  | ------- | -
|Ratio    |  | WellCapitalized |   |  | 6/30/08 |   |  | 12/31/07 |   |  | 6/30/07 |  
|Tier 1   |  | 6.0             | % |  | 10.4    | % |  | 10.7     | % |  | 9.4     | %
|         |  |                 |   | 
|Total    |  | 10.0            | % |  | 11.8    | % |  | 12.1     | % |  | 11.5    | %
|         |  |                 |   | 
|Leverage |  | 5.0             | % |  | 9.0     | % |  | 9.1      | % |  | 8.1     | %

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

Valley Bank



|         |  |                 |   |  |         |   |  |          |   |  |         |  
|-------- |  | --------------- | - |  | ------- | - |  | -------- | - |  | ------- | -
|Ratio    |  | WellCapitalized |   |  | 6/30/08 |   |  | 12/31/07 |   |  | 6/30/07 |  
|Tier 1   |  | 6.0             | % |  | 9.4     | % |  | 9.6      | % |  | 9.3     | %
|         |  |                 |   | 
|Total    |  | 10.0            | % |  | 10.4    | % |  | 10.6     | % |  | 10.6    | %
|         |  |                 |   | 
|Leverage |  | 5.0             | % |  | 8.1     | % |  | 8.2      | % |  | 8.1     | %

The Company paid its ninth consecutive semi-annual cash dividend on the Companys common
stock, in the amount of $0.07 per share on July 1, 2008 to shareholders of record May 30, 2008.

Liquidity

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

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

Liquid assets, which include cash and due from banks, interest-bearing deposits at other banks and non-pledged securities available-for-sale, at
June 30, 2008, totaled $11.6 million compared to $20.0 million at December 31, 2007. Our funding sources consist of an established federal funds line with a regional correspondent bank totaling $12.0 million that had a $2.7
million balance as of June 30, 2008, three established federal funds lines with third party banks totaling $23.0 million that had outstanding balances totaling $8.0 million as of June 30, 2008, and an established line with
the FHLB that had $70.0 million outstanding under a total line of $87.5 million as of June 30, 2008. We believe these arrangements will be



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##### Table of Contents

renewed at maturity.

We sell excess funds as
overnight federal funds sold to provide an immediate source of liquidity. We had federal funds sold of $0 at June 30, 2008 and December 31, 2007.

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

Recent and Future Accounting Considerations

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, (SFAS 141(R)) which replaces SFAS 141. SFAS 141(R)
establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any controlling interest; recognizes and
measures goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business
combination. FAS 141(R) is effective for acquisitions by the Company taking place on or after January 1, 2009. Early adoption is prohibited. Accordingly, a calendar year-end company is required to record and disclose business combinations
following existing accounting guidance until January 1, 2009. The Company will assess the impact of SFAS 141(R) if and when a future acquisition occurs.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements  an amendment of ARB No. 51 (SFAS 160). SFAS 160 establishes new
accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Before this statement, limited guidance existed for reporting noncontrolling interests (minority interest). As a result,
diversity in practice exists. In some cases minority interest is reported as a liability and in others it is reported in the mezzanine section between liabilities and equity. Specifically, SFAS 160 requires the recognition of a noncontrolling
interest (minority interest) as equity in the consolidated financials statements and separate from the parents equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face
of the income statement. SFAS 160 clarifies that changes in a parents ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this
statement requires that a parent recognize gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. SFAS 160 also
includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interests. SFAS 160 is effective for the Company on January 1, 2009. Earlier adoption is prohibited. The Company currently does not have any
noncontrolling interests and therefore anticipates no immediate impact related to the adoption of SFAS 160.

In February 2008, the FASB
issued FASB Staff Position No. 140-3, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions (FSP 140-3). This FSP provides guidance on accounting for a transfer of a financial asset and
the transferors repurchase financing of the asset. This FSP presumes that an initial transfer of a financial asset and a repurchase financing are considered part of the same arrangement (linked transaction) under SFAS No. 140. However, if
certain criteria are met, the initial transfer and repurchase financing are not evaluated as a linked transaction and are evaluated separately under Statement 140. FSP 140-3 will be effective for financial statements issued for fiscal years
beginning after November 15, 2008, and interim periods within those fiscal years and earlier application is not permitted.



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Accordingly, this FSP is effective for the Company on January 1, 2009. The Company is currently evaluating the impact, if any, the adoption of FSP
140-3 will have on its financial position, results of operations and cash flows.

In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging Activitiesan amendment of FASB Statement No. 133 (SFAS 161). This Statement changes the disclosure requirements for derivative instruments and hedging
activities. Specifically, SFAS 161 requires entities to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133
and its related interpretations, and (c) how derivative instruments and related hedged items affect an entitys financial position, financial performance, and cash flows. This Statement is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This Statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The Company currently does
not hold any derivative instruments and therefore anticipates no immediate impact related to the adoption of SFAS 161.

In April 2008, the
FASB issued FASB Staff Position No. 142-3, Determination of the Useful Life of Intangible Assets (FSP 142-3). This FSP amends the factors that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under
SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R), Business Combinations, and other U.S. generally accepted accounting principles. This FSP is effective for
financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years and early adoption is prohibited. Accordingly, this FSP is effective for the Company on January 1, 2009. The
Company does not believe the adoption of FSP 142-3 will have a material impact on its financial position, results of operations or cash flows.

In May, 2008, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 162, The Hierarchy of Generally Accepted Accounting Principles, (SFAS
No. 162). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with
generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). SFAS No. 162 will be effective 60 days following the SECs approval of the Public Company Accounting Oversight Boards amendments to AU
Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The FASB has stated that it does not expect SFAS No. 162 will result in a change in current practice. The application of
SFAS No. 162 will have no effect on the Companys financial position, results of operations or cash flows.

The FASB issued FASB
Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement), (FSP No. APB 14-1). The Staff Position specifies that issuers of
convertible debt instruments that may be settled in cash upon conversion should separately account for the liability and equity components in a manner that will reflect the entitys nonconvertible debt borrowing rate when interest cost is
recognized in subsequent periods. FSP No. APB 14-1 provides guidance for initial and subsequent measurement as well as derecognition provisions. The Staff Position is effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early adoption is not permitted. The adoption of this



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##### Table of Contents

Staff Position will have no material effect on the Companys financial position, results of operations or cash flows.

In June, 2008, the FASB issued FASB Staff Position No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions are
Participating Securities, (FSP EITF 03-6-1). The Staff Position provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are participating securities and must be
included in the earnings per share computation. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. All prior-period earnings per share data
presented must be adjusted retrospectively. Early application is not permitted. The adoption of this Staff Position will have no material effect on the Companys financial position, results of operations or cash flows.



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

Not applicable.



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

As of the end of the
period covered by the report, an evaluation was performed under the supervision and with the participation of the Companys management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and
procedures were effective. There have not been any changes in our internal control over financial reporting that occurred during the last quarter that has materially affected, or is reasonably likely to materially affect, internal control over
financial reporting.

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

PART II. OTHER INFORMATION



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

There were no material pending
legal proceedings, other than ordinary routine litigation incidental to the business, during the quarter.



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

Not applicable.



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

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



40



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##### Table of Contents

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

There were no
defaults upon Senior Securities in the quarter.



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

We held our 2008 Annual Meeting of Shareholders on April 30, 2008, at which meeting six Class B directors were reelected to new three-year terms. The following table indicates the total votes in favor of, and withheld from voting on,
the re-election of each nominee:



|                          |  |                |  |                  |  |               |  |             
|------------------------- |  | -------------- |  | ---------------- |  | ------------- |  | ------------
|DIRECTOR NAME             |  | TERM OF OFFICE |  | AFFIRMATIVEVOTES |  | VOTESWITHHELD |  | VOTESAGAINST
|Class B Directors         |  |                |  |                  |  |               |  |             
|Abney S. Boxley, III      |  | 2008-2011      |  | 3,731,001        |  | 70,992        |  |            
|William D. Elliot         |  | 2008-2011      |  | 3,731,151        |  | 70,992        |  |            
|Barbara B. Lemon          |  | 2008-2011      |  | 3,731,151        |  | 70,992        |  |            
|Samuel L. Lionberger, Jr. |  | 2008-2011      |  | 3,731,151        |  | 70,992        |  |            
|Ward W. Stevens, M.D.     |  | 2008-2011      |  | 3,731,151        |  | 70,992        |  |            
|Edward B. Walker          |  | 2008-2011      |  | 3,731,151        |  | 70,992        |  |            



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

None.



|Item 6. | Exhibits
|------- | --------



|               |  |                                                                                                                                                 
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                     
|11.0           |  | Statement re Computation of Earnings per Share (filed herewith as Note 5).                                                                      
|               | 
|31.1           |  | Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*                                               
|               | 
|31.2           |  | Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*                                               
|               | 
|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.*
|               | 
|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.
|- | ---------------



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SIGNATURES

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



|                |  |                                                         
|--------------- |  | --------------------------------------------------------
|                |  | VALLEY FINANCIAL CORPORATION                            
|                | 
|August 12, 2008 |  | /s/ Ellis L. Gutshall                                   
|Date            |  | Ellis L. Gutshall, President and Chief Executive Officer
|                | 
|August 12, 2008 |  | /s/ Kimberly B. Snyder                                  
|Date            |  | Kimberly B. Snyder, Executive Vice President and        
|                |  | Chief Financial Officer                                 



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EXHIBIT INDEX



|               |  |                                                                                                                                                 
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                     
|11.0           |  | Statement re Computation of Earnings per Share (filed herewith as Note 5).                                                                      
|               | 
|31.1           |  | Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*                                               
|               | 
|31.2           |  | Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*                                               
|               | 
|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.*
|               | 
|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.
|- | ---------------



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