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

                                  FORM 10-QSB

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

                  For the Quarterly Period Ended June 30, 1998

                       Commission File Number:  33-77568


                          VALLEY FINANCIAL CORPORATION

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

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

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


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

At May 12, 1998, 964,040 shares of the issuer's common stock, no par value, were
outstanding.

Transitional small business disclosure format:  Yes ___   No _x_.


<PAGE>

                          VALLEY FINANCIAL CORPORATION
                                  FORM 10-QSB
                                 June 30, 1998

                                     INDEX


Part I.   FINANCIAL INFORMATION

          Item 1.  Financial Statements

                   Consolidated Balance Sheets                            3
                   Consolidated Statements of Income                      4
                   Consolidated Statements of Cash Flows                  6
                   Notes to Consolidated Financial
                      Statements                                          7

          Item 2.  Management's Discussion and Analysis                  10

Part II.  OTHER INFORMATION

          Item 4.  Submission of Matters to a Vote of
                      Security Holders                                   18

          Item 5.  Other Information                                     19

          Item 6.  Exhibits and Reports on Form 8-K                      19

SIGNATURES                                                               20

                                       2
<PAGE>

                         PART I - FINANCIAL INFORMATION

Item 1.   Financial Statements.

<TABLE>
<CAPTION>
                          VALLEY FINANCIAL CORPORATION
                          CONSOLIDATED BALANCE SHEETS
                                  (Unaudited)

                                                  June 30      December 31
                                                    1998          1997
                                                  --------     -----------
                                             (in thousands, except share data)
<S>                                               <C>          <C>
Assets
   Cash and due from banks (note 2)                $ 3,234         $ 3,324
   Money market investments:
       Federal funds sold                                0           1,440
       Interest-bearing deposits                         8              33
                                                   -------         -------
           Total money market investments                8           1,473

   Securities available for sale (note 3)           24,499          21,144
   Loans:
       Commercial loans                             15,417          12,997
       Commercial real estate loans                 19,493          10,812
       Residential real estate loans                14,353          13,502
       Loans to individuals                         11,479           9,336
                                                   -------         -------
           Total loans                              60,742          46,647
   Less unearned income                                (44)            (38)
   Less allowance for loan losses (note 4)            (587)           (459)
                                                   -------         -------
       Total net loans                              60,111          46,150

   Premises and equipment                            1,283           1,315
   Organizational costs                                106             134
   Other assets                                      1,145           1,137
                                                   -------         -------
           Total assets                            $90,386         $74,677
                                                   =======         =======

Liabilities and Shareholders' Equity
   Deposits:
       Non-interest bearing demand deposits          8,251           7,956
       Interest bearing demand deposits             20,112          18,395
       Savings deposits                                898             653
       Certificates of deposits greater
         than $100,000                               7,074           6,481
       Other time deposits                          36,218          32,103
                                                   -------         -------
           Total deposits                           72,553          65,588

   Short-term borrowings                             3,479               0
   Federal Home Loan Bank advances                   5,000               0
   Other liabilities                                   857             810
                                                   -------         -------
       Total liabilities                            81,889          66,398
                                                  --------        --------

   Preferred stock, no par value.  Authorized
     10,000,000 shares; none issued and
     outstanding
   Common stock, no par value.  Issued and
      outstanding 964,040 at June 30, 1998
      and December 31, 1997 (note 5)                 9,089           9,089
   Accumulated deficit                                (606)           (866)
   Accumulated other comprehensive income               14              56
                                                   -------         -------
       Total shareholders' equity                    8,497           8,279
                                                   -------         -------

           Total liabilities and shareholders'
             equity                                $90,386         $74,677
                                                   =======         =======

See accompanying notes to consolidated financial statements

</TABLE>
                                       3
<PAGE>

<TABLE>
<CAPTION>
                          VALLEY FINANCIAL CORPORATION
                       CONSOLIDATED STATEMENTS OF INCOME
                                  (Unaudited)

                                             For the Period   For the Period
                                            January 1, 1998  January 1, 1997
                                                Through          Through
                                             June 30, 1998    June 30, 1997
                                            ---------------  ---------------
                                         (in thousands, except per share data)
<S>                                         <C>              <C>
Interest Income:
   Interest and fees on loans                        $2,239           $1,617
   Interest on money market investments                  40               44
   Interest on investment securities
     available-for-sale                                 763              504
                                                     ------            -----
       Total interest income                          3,042            2,165

Interest Expense:
   Interest on certificates of deposit
     greater than $100,000                              188              133
   Interest on other deposits                         1,275              992
   Interest on borrowed funds                           109                4
                                                     ------            -----
                                                      1,572            1,129
                                                     ------            -----
       Net interest income                            1,470            1,036
Provision for loan losses (note 4)                      128               82
                                                     ------            -----
   Net interest income after provision for
     loan losses                                      1,342              954
                                                     ------            -----

Noninterest Income:
   Service charges on deposit accounts                   73               53
   Other fee income                                      39               30
   Securities gains                                      10                0
                                                     ------            -----
       Total noninterest income:                        122               83

Noninterest Expense:
   Salaries and employee benefits                       579              446
   Occupancy and equipment expense, net                 147              141
   Data processing expense                               55               42
   Marketing and advertising expense                     37               54
   Office supply expense                                 30               27
   Other expense                                        220              169
   Amortization of organizational expense                28               29
                                                     ------            -----
       Total noninterest expense                      1,096              908
                                                     ------            -----

Income before income taxes                           $  368            $ 129
                                                     ------            -----

Provision for income taxes                           $  108            $   0
                                                     ------            -----

Net income                                           $  260            $ 129
                                                     ======            =====

Net income per share (note 5)                        $ 0.27            $0.13
                                                     ======            =====

See accompanying notes to consolidated financial statements

</TABLE>
                                       4
<PAGE>

<TABLE>
<CAPTION>
                          VALLEY FINANCIAL CORPORATION
                       CONSOLIDATED STATEMENTS OF INCOME
                                  (Unaudited)

                                             For the Period   For the Period
                                             April 1, 1998     April 1, 1997
                                                Through          Through
                                             June 30, 1998    June 30, 1997
                                            ---------------  ---------------
                                         (in thousands, except per share data)
<S>                                         <C>              <C>
Interest Income:
   Interest and fees on loans                        $1,204           $  877
   Interest on money market investments                   4               12
   Interest on investment securities
     available-for-sale                                 401              279
                                                     ------            -----
       Total interest income                          1,609            1,168
Interest Expense:
   Interest on certificates of deposit
     greater than $100,000                               96               72
   Interest on other deposits                           656              529
   Interest on borrowed funds                            90                4
                                                     ------            -----
                                                        842              605
                                                     ------            -----
       Net interest income                              767              563

Provision for loan losses (note 4)                       97               46
                                                     ------            -----
   Net interest income after provision for
     loan losses                                        670              517
                                                     ------            -----

Noninterest Income:
   Service charges on deposit accounts                   38               30
   Other fee income                                      16               14
   Securities gains                                       0                0
                                                     ------            -----
       Total noninterest income:                         54               44

Noninterest Expense:
   Salaries and employee benefits                       293              234
   Occupancy and equipment expense, net                  75               72
   Data processing expense                               29               21
   Marketing and advertising expense                     19               21
   Office supply expense                                 16                9
   Other expense                                        103               88
   Amortization of organizational expense                14               14
                                                     ------            -----
       Total noninterest expense                        549              459
                                                     ------            -----

Income before income taxes                           $  175            $ 102
                                                     ------            -----

Provision for income taxes                           $   45            $   0
                                                     ------            -----

Net income                                           $  130            $ 102
                                                     ======            =====

Net income per share (note 5)                        $ 0.13            $0.11
                                                     ======            =====

See accompanying notes to consolidated financial statements

</TABLE>
                                       5
<PAGE>

<TABLE>
<CAPTION>
                          VALLEY FINANCIAL CORPORATION
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (Unaudited)

--------------------------------------------------------------------------------
                                             For the Period   For the Period
                                            January 1, 1998  January 1, 1997
                                                Through          Through
                                             June 30, 1998    June 30, 1997
--------------------------------------------------------------------------------
                                                    (in thousands)
<S>                                         <C>              <C>
Cash Flows From Operating Activities:
   Net income                                      $   260           $   129
   Adjustments to reconcile net income
     to net cash provided by operating
     activities:
        Provision for loan losses                      128                82
        Depreciation/amortization of
          premises/equipment                            52                72
        Amortization or organizational
          expenses                                      28                29
        Amortization/accretion of premiums/
          discounts, net                                (3)                4
        Gain on sale of securities                      10                 0
        Increase in unearned fees                        6                 5
        Increase in other assets                        (8)             (150)
        Increase in other liabilities                   69               186
--------------------------------------------------------------------------------
Net cash provided by operating activities              542               357
--------------------------------------------------------------------------------
Cash Flows From Investing Activities:
   Net decrease in money market investments          1,465             1,922
   Purchases of premises and equipment                 (20)              (63)
   Purchases of securities                         (14,723)           (8,794)
   Proceeds from sales, calls and maturities
     of securities                                  11,297             2,565
   Net increase in loans                           (14,095)           (8,083)
--------------------------------------------------------------------------------
Net cash used in investing activities              (16,076)          (12,453)
--------------------------------------------------------------------------------
Cash Flows From Financing Activities:
   Increase (decrease) in time deposits
     greater than $100,000                          (1,407)            1,138
   Increase in other time deposits                   4,115             4,690
   Net increase in other deposits                    4,257             5,523
   Increase in short-term borrowings                 3,479               318
   Proceeds from Federal Home Loan Bank
     advances                                        5,000                 0
--------------------------------------------------------------------------------
Net cash provided by financing activities           15,444            11,669
--------------------------------------------------------------------------------
Net Decrease in Cash and Due From Banks                (90)             (427)

Cash and Due From Banks at Beginning of Period       3,324             2,149
--------------------------------------------------------------------------------
Cash and Due From Banks at End of Period           $ 3,234           $ 1,722
--------------------------------------------------------------------------------

See accompanying notes to consolidated financial statements

</TABLE>
                                       6
<PAGE>

                          VALLEY FINANCIAL CORPORATION

                   Notes to Consolidated Financial Statements
                                 June 30, 1998
                                  (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, N.A. (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 1997 Annual Report on Form 10-
          KSB.

     (2)  Cash and Cash Equivalents

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

                                       7
<PAGE>

     (3)  Securities

          The carrying values, unrealized gains, unrealized losses and
          approximate fair values of investment securities at June 30, 1998 are
          shown in the table below.  As of June 30, 1998, investments with an
          amortized cost of $199 were pledged as collateral for public deposits.


<TABLE>
<CAPTION>
                                Carrying  Unrealized  Unrealized  Approximate
Securities held to maturity:     Values     Gains       Losses    Fair Values
----------------------------    -----------------------------------------------
<S>                             <C>       <C>         <C>         <C>           
U.S. Treasury                          0           0           0           0

U.S. Government agencies               0           0           0           0

Mortgage-backed securities             0           0           0           0

States and political
  subdivisions                         0           0           0           0

Corporate debt securities              0           0           0           0

Equity securities                      0           0           0           0
                                       -           -           -           -
   Total securities held to
     maturity                          0           0           0           0
----------------------------    -----------------------------------------------

Securities available for sale:

U.S. Treasury                    $   199         $ 0         $ 0     $   199

U.S. Government agencies         $15,179         $48        ($32)    $15,195

Mortgage-backed securities       $ 3,574         $26         ($8)    $ 3,592

States and political
  subdivisions                   $ 4,692         $13        ($35)    $ 4,670

Corporate debt securities        $    99         $ 2          $0     $   101

Equity securities                $   735         $ 7          $0     $   742
                                 -------         ---       -----     -------
   Total securities available
     for sale                    $24,478         $96        ($75)    $24,499
----------------------------    -----------------------------------------------
Total securities                 $24,478         $96        ($75)    $24,499
                                 =======         ===       =====     =======

</TABLE>
                                       8
<PAGE>

     (4)  Allowance for Loan Losses

          Changes in the allowance for loan losses are as follows:

<TABLE>
<CAPTION>
                                               1998          1997
                                               ----          ----
               <S>                             <C>           <C>
               Balance at January 1, 1998      $459          $328

               Provision for loan losses        128            82

               Recoveries                         0             0

               Charged off loans                  0             0
                                               ----          ----
               Balance at June 30              $587          $410
                                               ====          ====

</TABLE>

     (5)  Net Income Per Share

          Net income per share is based upon the weighted average number of
          common shares outstanding during the period.

     (6)  Comprehensive Income

          In June 1997, the Financial Accounting Standards Board ("FASB") issued
          Statement of Financial Accounting Standards No. 130, "Reporting
          Comprehensive Income."  Statement 130 establishes standards for
          reporting and display of comprehensive income and its components
          (revenues, expenses, gains and losses) in a full set of general
          purpose financial statements.  Statement 130 was issued to address
          concerns over the practice of reporting elements of comprehensive
          income directly in equity.

          This statement requires that all items recognized under accounting
          standards as components of comprehensive income be reported in a
          financial statement that is displayed in equal prominence with the
          other financial statements.  It does not require a specific format for
          that financial statement but requires that an enterprise display an
          amount representing total comprehensive income for the period in that
          financial statement.  Enterprises are required to classify items of
          "other comprehensive income" by their nature in the financial
          statement and display the accumulated balance of other comprehensive
          income separately from retained earnings and additional paid-in
          capital in the equity section of the balance sheet.  It does not
          require per share amounts of comprehensive income to be disclosed. 

          Statement 130 is effective for fiscal years beginning after December 
          15, 1997.  Comparative financial statements provided for earlier 
          periods are required to be reclassified to reflect the provisions 
          of this statement.  Publicly traded enterprises that issue 
          condensed financial statements for interim periods are required to 
          report a total for comprehensive income in those financial 
          statements. 

                                          9
<PAGE>

          Adoption of Statement 130 on January 1, 1998 did not have any 
          effect on the consolidated financial position, results of 
          operations or liquidity of the Company.  However, Statement 130 
          does have an effect on financial statement displays presented by 
          the Company since the Company has net unrealized gains (losses) on 
          available-for-sale securities, an item of other comprehensive 
          income.  For the six months ended June 30, 1998 and 1997, total 
          comprehensive income was $218 and $114, respectively.  For the three
          months ended June 30, 1998 and 1997, total comprehensive income was 
          $154 and $159, respectively.


Item 2.  Management's Discussion and Analysis (000's omitted, except for share 
and per share information).

The following is management's discussion and analysis of the financial 
condition and results of operations of the Company as of and for the six 
months and three months ended June 30, 1998 and 1997.  The discussion should 
be read in conjunction with the Company's Consolidated Financial Statements 
and Notes thereto.

Overview

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

Total assets at June 30, 1998 were $90,386, up 21% from $74,677 at December 31, 
1997.  The principal components of the Company's assets at the end of the 
period were $24,499 in securities available-for-sale and $60,742 in gross 
loans.  Total liabilities at June 30, 1998 were $81,899, up 23% from $66,398 
at December 31, 1997, with the increase almost entirely represented by $6,965
growth in deposits, $3,479 in federal funds purchased and $5,000 in advances 
from the Federal Home Loan Bank of Atlanta. 

Total shareholders' equity at June 30, 1998 was $8,497, consisting of $9,089 
in net proceeds from the Company's initial public offering, reduced by the 
accumulated deficit of $606 and increased by $14 of unrealized gains on 
securities available-for-sale, net of related deferred tax liability.  At 
December 31, 1997, total shareholder's equity was $8,279.

The Company had net income of $260 for the six months ended June 30, 1998, 
compared with $129 recorded for the six months ended June 30, 1997, a 102% 
increase.  The significant improvement in profitability results from higher 
net interest income partially offset by increased noninterest expenses in 
virtually all categories.  Net income for the three months ended June 30, 
1998 was $130, a 28% increase over the $102 recorded for the second quarter 
of 1997.  Comparability of net income is affected by the income tax provision
of $108 and $45 booked for the six month and three month periods ended June 
30, 1998, respectively, versus no income tax expense booked in the same 
periods in 1997.

                                         10
<PAGE>

Profitability as measured by the Company's return on average assets ("ROA") 
was .64% for the  six months ended June 30, 1998, compared to .45% for the 
same period in 1997.  ROA for the second quarter of 1998 was .60% versus .66% 
in the second quarter of 1997.  Return on average equity ("ROE") was 6.26% for 
the six months ended June 30, 1998 compared to 3.53% for the same period in 
1997.  ROE for the second quarter of the year was 6.16% in 1998 and 5.47% in 
1997.

Results of Operations

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

Net interest income was $1,470 for the six months ended June 30, 1998 and is
attributable to interest income from loans and securities exceeding the cost of
interest paid on deposits and borrowed funds.  Net interest income for the 
first half of 1998 increased 42% from $1,036 for the same period in 1997.  
The net interest margin on a fully taxable equivalent ("FTE") basis was 3.91% 
for the first six months of  1998, an increase of 10 basis points from the 
3.81% reported for the same period in 1997.  The increase in the margin from 
year to year is attributable to higher yields on earning assets and lower 
deposit costs, partly offset by a smaller relative share of the Company's 
total funds being provided by interest-free capital funds as rapid growth has 
occurred.

For the three months ended June 30, 1998 net interest income was $767 and the 
FTE net interest margin was 3.86%.  Net interest income was $563 and the net 
interest margin was 3.85% for the second quarter of 1997.

Provision for Loan Losses.  A provision for loan losses of $128 was provided 
during the six months ended June 30, 1998, an increase of $46 or 56% over the 
same period in 1997, in recognition of management's estimate of inherent risks 
associated with lending activities.  Due to the Bank's limited operating 
history, this estimate is primarily based on industry practices and 
consideration of local economic factors.  The amount of the provision for 
loan losses is a charge against current earnings, and actual loan losses are 
charged against the allowance for loan losses. The allowance for loan losses 
was $587 as of June  30, 1998 and represented approximately .98% of net loans
outstanding versus .99% of net loans at December 31, 1997 (see Note 4 to
the Consolidated Financial Statements). 

Provision expense was $97 for the three months ended June 30, 1998 compared to 
$46 for the same period in 1997, a 111% increase.  The increase in provision 
expense is due to growth in average loans outstanding.

                                         11
<PAGE>

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

Noninterest Income.  Noninterest income of $122 in the six months ended June 
30, 1998 consisted of service charges and fees on accounts, gains on 
securities sold and other miscellaneous income, and represented an increase 
of $39 or 47% over the $83 reported for the same period one year earlier.  
For the three months ended June 30, 1998 noninterest income was $54, an 
increase of $10 or 23% over the $44 reported for the second quarter of 1997. 
Future levels of noninterest income are expected to increase as a direct 
result of business growth and expansion.  

Noninterest Expense.  Noninterest expense for the first six months of 1998 was
$1,096, an increase of $188 or 21% over the same period in 1997.  The largest
components of the increase were compensation expense as additional employees 
were hired due to growth, and loan closing costs incurred in a successful 
home equity line of credit promotion.  Noninterest expense for the quarter 
ended June 30, 1998 was $549, an increase of $90 or 20% over the second 
quarter of 1997.  Noninterest expenses are expected to increase in future 
years as a direct result of business growth and expansion. 

Year 2000.  Many banks and other companies are encountering various degrees of
difficulty and expense in modifying or replacing computer software and 
hardware to adapt to the coming date changeover from 1999 to 2000.  The 
Company, being relatively new, enjoys certain advantages with respect to Year 
2000 issues in that much of its hardware and software are newer versions 
requiring less remediation to be able to cope with the century change.  
Additionally, the Company's major software applications are either operated 
or maintained by outside vendors whose responsibility it is to ensure Year 
2000 compliance.  The Company has adopted a formal Year 2000 Action Plan 
pursuant to which it is reviewing and testing its operating systems.  
Management currently expects Year 2000 expenses will total less than $100, 
but there can be no assurance that the actual total will not be greater. 
Should one or more of the Company's major software vendors fail to make good 
on its representation to be Year 2000 compliant, there could be significant 
adverse consequences to the Company's operations.  The Company also is taking 
steps to assess the potential impacts of Year 2000 issues on its major 
commercial borrowers.  Should a commercial borrower fail to deal adequately 
with Year 2000's impact on its computer systems, its operations could be 
jeopardized and its ability to repay its loan threatened.

Income Taxes.  An expense of $108 was recognized in the six months ended June 
30, 1998 to reflect the Company's anticipated federal income tax liability 
for the period.  This equated to an effective tax rate of 29%.  Provision for 
income taxes was $45 for the second quarter of 1998, an effective tax rate of 
26%.  The Company recorded no expense in 1997 for federal or state income 
taxes, due to the availability of net operating loss carryforwards.

                                         12
<PAGE>

Liquidity and Asset/Liability Management

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

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

The Company's asset liquidity is provided by cash and due from banks, federal 
funds sold, investments available for sale, managing investment maturities/
prepayments and loan repayments.  The Company's ratio of liquid assets to 
deposits and short term borrowings was 36% at June 30, 1998 and 40% at 
December 31, 1997.  The Company sells excess funds as overnight federal funds 
sold to provide an immediate source of liquidity.  The Company had no Federal 
funds sold at June 30, 1998 compared to $1,440 at December 31, 1997.

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

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

Interest Rate Risk

Interest rate risk is the risk to earnings or capital generated by movement of
interest rates.  It can come from differences between the timing of rate 
changes and the timing of cash flows (repricing risk); from changing rate 
relationships among yield curves that affect bank activities (basis risk); 
from changing rate relationships across the spectrum of maturities (yield 
curve risk); and from interest rate related options imbedded in bank products 
(option risk). 

                                         13
<PAGE>

While no single measure can completely identify the impact of changes in 
interest rates on net interest income, a commonly-used technique within the 
industry is to assess the differences in the amounts of rate-sensitive assets 
and rate-sensitive liabilities.  These differences or "gaps" provide an 
indication of the extent to which net interest income may be affected by 
future changes in interest rates.  A "positive gap" exists when rate-
sensitive assets exceed rate-sensitive liabilities and indicates that a 
greater volume of assets than liabilities will reprice during agiven period. 
A positive gap may enhance earnings in a rising interest rate environment 
and may inhibit earnings in a declining interest rate environment.  
Conversely, when rate-sensitive liabilities exceed rate-sensitive assets (a 
"negative gap"), a greater volume of liabilities than assets will reprice 
within the period.  In such a case, a rising interest rate environment may 
inhibit earnings and a declining interest rate environment may enhance 
earnings. 

Some financial institutions evaluate their "gaps" strictly from a balance 
sheet perspective, calculating the absolute difference between the volumes of 
assets and liabilities that have the contractual ability to reprice within a 
given period in response to changes in interest rates.  Company management 
believes this "balance sheet gap" methodology does not adequately take into 
consideration the differences in the way various balance sheet items react to 
changing interest rates.  For example, the rate on savings accounts does not 
move in direct tandem with changes in the prime rate, but typically increases
or decreases to a much lesser extent.  On the other hand,  home equity lines 
and many commercial loans are tied directly to prime and immediately reprice 
to the full extent of any changes in the prime rate.  Accordingly, the 
Company utilizes an "income statement gap" methodology that analyzes the 
various asset and liability categories and assigns them a "change ratio" that
estimates their relative change in response to a change in the prime rate, 
based on industry trends and the Company's own experience.  At least 
quarterly, the Company calculates the Banks "income statement gap" to 
estimate how many assets and liabilities would reprice and to what extent 
within a one year period in response to changes in the prime rate, and 
compares the results to internal policy guidelines. 

Impact of Inflation

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

                                         14
<PAGE>

Investment Portfolio

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

Investment securities at June 30, 1998 were $24,499, an increase of $3,355 or
16% from their level of $21,144 on December 31, 1997.  The increase was 
attributable to investment of funds available from deposit growth and the 
purchase of investment securities with the proceeds of a $5,000 advance from 
the Federal Home Loan Bank of Atlanta, partially offset by the liquidation of
investment securities to fund strong loan growth in the second quarter.

For more information on the investment portfolio, see Note 3 to the Consolidated
Financial Statements.

Loan Portfolio

The Company's total loans were $60,742 at June 30, 1998, an increase of $14,095
or 30% from the $46,647 reported at December 31, 1997.  The Company's ratio of 
net loans to total deposits stood at 83% at June 30, 1998 and 70% at December 
31, 1997.  Management seeks to maintain the ratio of loans to deposits in a 
range of 70% to 85%. 

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

                                         15
<PAGE>

Commercial Loans.  Commercial and industrial loans accounted for 25% of the 
loan portfolio as of June 30, 1998  and stood at $15,417 versus $12,997 six 
months earlier.  Such loans generally are made to provide operating lines of 
credit, to finance the purchase of inventory or equipment, and for other 
business purposes.  The creditworthiness of the borrower is analyzed and 
re-evaluated on a periodic basis.  Most commercial loans are collateralized 
with business assets such as accounts receivable, inventory and equipment.  
Even with substantial collateral such as all the assets of the business and 
personal guarantees, commercial lending involves considerable risk of loss 
in the event of a business downturn or failure of the business.

Commercial Real Estate Loans.  Commercial real estate construction and 
commercial real estate mortgages represent interim and permanent financing 
of commercial properties that are secured by real estate, and were 32% of 
total loans at June 30, 1998.  Outstanding loans in this category equaled 
$19,493 and $10,812 at June 30, 1998 and December 31, 1997, respectively.  
The Company prefers to make commercial real estate loans secured by owner-
occupied properties.  These borrowers are engaged in business activities 
other than real estate, and the primary source of repayment is not solely 
dependent on conditions in the real estate market. 

Residential Real Estate Loans.  Residential real estate loans are secured by 
first deeds of trust on 1-4 family residential properties.  This category 
had $14,353 in loans (24% of total loans) at June 30, 1998 and $13,502 in 
such loans at December 31, 1997.  To mitigate interest rate risk, the 
Company usually limits the final maturity of residential real estate loans 
held for its own portfolio to 15-20 years and offers a bi-weekly payment 
option to encourage faster repayment.  Residential real estate lending 
involves risk elements when there is lack of timely payment and/or a decline 
in the value of the collateral.

Loans to Individuals. Loans to individuals include installment loans and home 
equity lines of credit/loans secured by junior liens on residential real 
estate.  The loan proceeds typically are used to purchase vehicles, finance 
home remodeling or higher education, or for other consumer purposes.  Loans 
to individuals totaled $11,479 (19% of total loans) at June 30, 1998 compared
to $9,336 at December 31, 1997.

Nonperforming Assets.  The Company had no nonperforming assets at June 30, 
1998 or December 31, 1997.

Deposits

As of June 30, 1998, total deposits were $72,553, an increase of $6,965 or 
11% from their level of $65,588 at December 31, 1997.  The increase in total 
deposits was due to increases in previously-existing accounts as well as new 
accounts opened. 

                                         16
<PAGE>

At June 30, 1998 noninterest bearing demand deposits were $8,251 or 11% of 
total deposits.  At December 31, 1997 noninterest bearing demand deposits 
were $7,956 or 12% of total deposits.  Nonmaturity deposits (noninterest 
bearing demand deposits, interest bearing demand deposits, money market 
accounts and savings accounts) were $29,261 or 40% of total deposits at June 
30, 1998, up from $27,004 or 41% of total deposits at December 31, 1997.  
Total interest bearing deposits stood at $64,302 at June 30, 1998, an 
increase of $6,670 or 12% over their level of $57,632 at December 31, 1997.

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

Capital Resources

The Company's financial position at June 30, 1998 reflects liquidity and 
capital levels currently adequate to fund  anticipated future business 
expansion.  Capital ratios are well in excess of required regulatory 
minimums for a well-capitalized institution.  The adequacy of the Company's 
capital is reviewed by management on an ongoing basis.  Management seeks to 
maintain a capital structure adequate to support anticipated asset growth 
and serve as a cushion to absorb potential losses.  Total shareholders equity
was $8,497 at June 30, 1998 compared with $8,279 at December 31, 1997, an 
increase of $218 or 3%.  The increase is attributable to the first half's 
net income of $260 reduced by $42 in decreased accumulated other 
comprehensive income from the level at December 31, 1997. 

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


<TABLE>
<CAPTION>

     Ratio          6/30/98        12/31/97       6/30/97        Minimum
     -----          -------        --------       -------        -------
     <S>            <C>            <C>            <C>            <C>
     Tier 1          12.7%          15.6%          17.7%           4%

     Total           13.6%          16.5%          18.6%           8%

     Leverage         9.7%          11.5%          13.2%           3%

</TABLE>

It is anticipated that the Company's capital adequacy ratios will continue to 
decline as long as the rate of asset growth continues to outstrip the rate of 
internal capital generation through retention of earnings.  If this trend 
continues, the Company in the future will have to raise additional capital 
funds or curtail its rate of asset growth. 

                                         17
<PAGE>

                             PART II.  OTHER INFORMATION


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

The Company held its 1998 Annual Meeting of Shareholders on April 16, 1998, 
at which meeting four Class A and one Class C directors were re-elected to 
new three year terms.  The following table indicates the total votes in 
favor of, and withheld from voting on, the re-election of each nominee, and 
provides certain information with respect to those directors not standing for 
re-election whose term of office continued past the 1998 Annual Meeting of 
Shareholders:

<TABLE>
<CAPTION>

                                   Term of        Affirmative       Votes
        Director Name              Office           Votes          Withheld
        -------------              -------        -----------      --------
        <S>                        <C>            <C>              <C>
        Class A Directors

        Eddie F. Hearp           1998-2001           766,132          2,800
        Anna L. Lawson           1998-2001           764,177          4,000
        John W. Starr, M.D.      1998-2001           764,732          4,200
        Michael E. Warner        1998-2001           764,932          4,000

        Class B Directors
        Abney S. Boxley, III     1996-1999
        W. Jackson Burrows       1996-1999
        William D. Elliot        1996-1999
        Barbara B. Lemon         1996-1999
        Ward W. Stevens, M.D.    1996-1999

        Class C Directors

        Ellis L. Gutshall        1997-2000
        Mason Haynesworth        1998-2000           764,432          4,500
        A. Wayne Lewis           1997-2000
        George W. Logan          1997-2000
        Maury L. Strauss         1997-2000

</TABLE>

                                         18
<PAGE>

Item 5.  Other Information.

None.

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

(a)  The Company filed the following exhibits for the quarter ended June 30, 
     1998:

     27.  Financial Data Schedule

(b)  The Company filed one report on Form 8-K during the quarter ended June 
     30, 1998.  The report, dated April 20, 1998, reported the Company's 
     consolidated financial results for the quarter ended March 31, 1998.

                                         19
<PAGE>

                                     SIGNATURES

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


                                   VALLEY FINANCIAL CORPORATION



August 13, 1998                    /s/ Ellis L. Gutshall
------------------------           -------------------------------------
Date                               Ellis L. Gutshall, President
                                   and Chief Executive Officer



August 13, 1998                    /s/ A. Wayne Lewis
------------------------           -------------------------------------
Date                               A. Wayne Lewis, Executive
                                   Vice President and Chief
                                   Financial Officer

                                         20
<PAGE>

                                     Exhibit 27
                               Financial Data Schedule


[ARTICLE]                                                       9
[MULTIPLIER]                                                1,000
[LEGEND]
[RESTATED]
[CIK]                                                  0000921590
[NAME]                                  VALLEY FINANCIAL CORP/VA/
[FISCAL-YEAR-END]                                     DEC-31-1998
[PERIOD-START]                                        JAN-01-1998
[PERIOD-END]                                          JUN-30-1998
[PERIOD-TYPE]                                               6-MOS
[CASH]                                                      3,234
[INT-BEARING-DEPOSITS]                                          8
[FED-FUNDS-SOLD]                                                0
[TRADING-ASSETS]                                                0
[INVESTMENTS-HELD-FOR-SALE]                                24,499
[INVESTMENTS-CARRYING]                                          0
[INVESTMENTS-MARKET]                                            0
[LOANS]                                                    60,742
[ALLOWANCE]                                                   587
[TOTAL-ASSETS]                                             90,386
[DEPOSITS]                                                 72,553
[SHORT-TERM]                                                3,479
[LIABILITIES-OTHER]                                           857
[LONG-TERM]                                                 5,000

                                         21
<PAGE>

[COMMON]                                                    9,089
[PREFERRED-MANDATORY]                                           0
[PREFERRED]                                                     0
[OTHER-SE]                                                      0
[TOTAL-LIABILITIES-AND-EQUITY]                             90,386
[INTEREST-LOAN]                                             2,239
[INTEREST-INVEST]                                             763
[INTEREST-OTHER]                                               40
[INTEREST-TOTAL]                                            3,042
[INTEREST-DEPOSIT]                                          1,463
[INTEREST-EXPENSE]                                          1,572
[INTEREST-INCOME-NET]                                       1,470
[LOAN-LOSSES]                                                 128
<SECURITIES-GAIN>                                              10
[EXPENSE-OTHER]                                             1,096
[INCOME-PRETAX]                                               368
[INCOME-PRE-EXTRAORDINARY]                                    368
[EXTRAORDINARY]                                                 0
[CHANGES]                                                       0
[NET-INCOME]                                                  260
[EPS-PRIMARY]                                                0.27
[EPS-DILUTED]                                                0.27
[YIELD-ACTUAL]                                               3.91
[LOANS-NON]                                                     0
[LOANS-PAST]                                                    0
[LOANS-TROUBLED]                                                0

                                         22
<PAGE>

[LOANS-PROBLEM]                                                 0
[ALLOWANCE-OPEN]                                              459
[CHARGE-OFFS]                                                   0
[RECOVERIES]                                                    0
[ALLOWANCE-CLOSE]                                             587
[ALLOWANCE-DOMESTIC]                                          587
[ALLOWANCE-FOREIGN]                                             0
[ALLOWANCE-UNALLOCATED]                                       587

                                         23
<PAGE>