<PAGE>

                                 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 March 31, 2001

                       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 April 30, 2001, 1,213,207 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
                                March 31, 2001

                                     INDEX


Part I.  FINANCIAL INFORMATION

     Item 1.  Financial Statements

                Consolidated Balance Sheets                             3
                Consolidated Statements of Income                       4
                Consolidated Statements of Cash Flows                   5
                Notes to Consolidated Financial Statements              6

     Item 2.  Management's Discussion and Analysis                      9

Part II.  OTHER INFORMATION

     Item 4.  Submission of Matters to a Vote of Security Holders      20

     Item 5.  Other Information                                        20

     Item 6.  Exhibits and Reports on Form 8-K                         20

SIGNATURES                                                             21

                                       2
<PAGE>


Item 1.  Financial Statements.

                         VALLEY FINANCIAL CORPORATION
                          CONSOLIDATED BALANCE SHEETS
                     (In thousands, except per share data)
<TABLE>
<CAPTION>
                                                         (Unaudited)
                                                           March 31           December 31
                                                             2001                 2000
                                                           --------           -----------
<S>                                                        <C>                <C>
Assets
    Cash and due from banks                                $  3,548             $  3,988
    Money market investments:
        Federal funds sold                                    1,298                    -
        Interest-bearing deposits in other banks                140                  113
                                                           --------             --------
               Total money market investments                 1,438                  113


    Securities available for sale                            36,224               36,873
    Restricted equity securities                              1,260                1,010
    Loans:
        Commercial and industrial loans                      31,244               30,070
        Commercial real estate loans                         42,750               43,146
        Real estate construction                              7,097                5,879
        Residential real estate loans                        22,904               18,926
        Loans to individuals                                 17,760               16,467
                                                           --------             --------
               Total loans                                  121,755              114,488
    Less unearned income                                        (42)                 (51)
    Less allowance for loan losses                           (1,227)              (1,190)
                                                           --------             --------
               Net loans                                    120,486              113,247
    Premises and equipment                                    3,165                3,075
    Accrued interest receivable                               1,173                1,266
    Other assets                                                508                  592
                                                           --------             --------
               Total assets                                $167,802             $160,164
                                                           ========             ========

Liabilities and Shareholders' Equity
    Deposits:
        Non-interest bearing demand deposits               $ 15,359             $ 17,254
        Interest bearing demand deposits                      9,550                7,293
        Money market deposits                                21,163               19,302
        Other savings deposits                                1,698                1,836
        Certificates of deposits >100,000                    19,878               16,668
        Other time deposits                                  63,973               67,521
                                                           --------             --------
               Total deposits                               131,621              129,874
                                                           --------             --------

Short-term borrowings                                             -                1,762
Securities sold under agreements to repurchase                4,262                1,983
Accrued interest payable                                      1,397                1,523
Other liabilities                                               350                  367
Federal Home Loan Bank advances                              15,000               10,000
                                                            -------             --------
              Total liabilities                             152,630              145,509
                                                           --------             --------
Commitments and other contingencies

Preferred stock, no par value. Authorized 10,000,000
   shares; none issued and outstanding
Common stock, no par value. Authorized 10,000,000
    shares; issued and outstanding 1,213,207 at
    March 31, 2001 and 1,213,207 at December 31, 2000        12,299               12,299
Accumulated retained earnings                                 2,740                2,401
Accumulated other comprehensive income (loss)                   133                  (45)
                                                            -------             --------
              Total shareholders' equity                     15,172               14,655
                                                           --------             --------
              Total liabilities and shareholders' equity   $167,802             $160,164
                                                           ========             ========

See accompanying notes to consolidated financial statements.
</TABLE>

                                       3
<PAGE>

                         VALLEY FINANCIAL CORPORATION
                       CONSOLIDATED STATEMENTS OF INCOME
                                  (Unaudited)
                     (In thousands, except per share data)
<TABLE>
<CAPTION>
                                                   For the Period           For the Period
                                                   January 1, 2001          January 1, 2000
                                                      Through                  Through
                                                   March 31, 2001           March 31, 2000
                                                   ---------------          ---------------
<S>                                                <C>                      <C>
Interest Income:
    Interest and fees on loans                         $ 2,595                    $2,044
    Interest on money market investments                    16                        20
    Interest on securities - taxable                       483                       455
    Interest on securities - nontaxable                     96                        98
                                                       -------                    ------
              Total interest income                      3,190                     2,617
                                                       -------                    ------
Interest Expense:
    Interest on certificates of deposit > 100,000          294                       169
    Interest on other deposits                           1,243                       977
    Interest on Federal Home Loan Bank advances            184                       132
    Interest on repurchase agreements                       49                        23
    Interest on borrowed funds                              32                        15
                                                       -------                    ------
              Total interest expense                     1,802                     1,316
                                                       -------                    ------
              Net interest income                        1,388                     1,301

Provision for loan losses                                   37                        64
                                                       -------                    ------
    Net interest income after provision for
      loan losses                                        1,351                     1,237
                                                       -------                    ------

Noninterest income:
    Service charges on deposit accounts                     86                        64
    Other fee income                                        21                        20
    Securities gains (losses)                               (2)                        -
                                                       -------                    ------
    Total noninterest income                               105                        84
                                                       -------                    ------
Noninterest expense:
    Compensation expense                                   529                       477
    Occupancy expense                                       72                        59
    Data processing and equipment expense                  110                        99
    Other expense                                          296                       237
                                                        ------                    ------
              Total noninterest expense                  1,007                       872
                                                         -----                     -----
Net income before taxes                                    449                       449

Provision for income taxes                                 110                       125
                                                       -------                  --------

Net income                                             $   339                  $    324
                                                       =======                  ========
Basic earnings per share                               $  0.28                  $  0. 32
                                                       =======                  ========

Diluted earnings per share                             $  0.27                  $   0.31
                                                       =======                  ========
</TABLE>
See accompanying notes to consolidated financial statements.

                                       4
<PAGE>

                         VALLEY FINANCIAL CORPORATION
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (Unaudited)
                     (In thousands, except per share data)
<TABLE>
<CAPTION>

                                             For the Period      For the Period
                                            January 1, 2001     January 1, 2000
                                                Through             Through
                                             March 31, 2001      March 31, 2000
                                            ----------------    ----------------
<S>                                          <C>                <C>
Cash Flows From Operating
 Activities:
   Net income                                   $   339           $   324
   Adjustments to reconcile net
    income to net cash provided by
    operating activities:
    Provision for loan losses                        37                64
    Depreciation and amortization
     of bank premises and equipment                  65                69
    Loss on sale of securities                        2                 -
    Amortization (accretion) of
     premiums and discounts                          10                 1
    Increase (decrease) in unearned fees             (9)                1
    (Increase) decrease in accrued
     interest receivable                             93               (45)
    (Increase) decrease in other assets             (16)                2
    Increase (decrease) in accrued interest
     payable                                       (126)              198
    Decrease in other liabilities                   (17)             (293)
                                                -------           -------
Net cash provided by operating activities           378               321
                                                -------           -------

Cash Flows From Investing Activities:
   (Increase) decrease in money market
    investments                                  (1,325)            6,075
   Purchases of premises and equipment             (148)              (27)
   Purchases of securities available-for-sale    (6,739)           (3,389)
   Purchases of restricted equity securities       (250)                -
   Proceeds from sales, calls, and maturities
    of securities available-for-sale              7,647               200
   Increase in loans                             (7,267)           (7,355)
                                                -------           -------
Net cash used in investing activities            (8,082)           (4,496)
                                                -------           -------

Cash Flows From Financing Activities:
   Increase (decrease) in time deposits
    greater than $100,000                         3,210              (616)
   Decrease in other time deposits               (3,548)           (1,739)
   Increase in other deposits                     2,085               175
   Increase (decrease) in short-term
    borrowings                                   (1,762)            3,589
   Increase in securities sold under
    agreements to repurchase                      2,279             2,272
   Proceeds from Federal Home Loan
    Bank advances                                 5,000                 -
                                                -------           -------
   Net cash provided by financing
    activities                                    7,264             3,681
                                                -------           -------
Net decrease in Cash and Due From Banks            (440)             (494)

Cash and Due From Banks at Beginning
 of Period                                        3,988             4,027
                                                -------           -------
Cash and Due From Banks at End of Period        $ 3,548           $ 3,533
                                                =======           =======

Supplemental disclosure of cash flow
 information:
   Cash paid during the period for interest     $ 1,895           $ 1,271
                                                =======           =======
   Cash paid during the period for taxes        $     -           $   331
                                                =======           =======
See accompanying notes to consolidated financial statements.
</TABLE>

                                       5
<PAGE>

                         VALLEY FINANCIAL CORPORATION
                  Notes to Consolidated Financial Statements
                                March 31, 2001
                                  (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 2000 Annual Report on Form 10-KSB.

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

     (2) Cash and Cash Equivalents

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

                                       6
<PAGE>

     (3) Securities

           The carrying values, unrealized gains, unrealized losses and
         approximate fair values of investment securities at March 31, 2001 are
         shown in the table below. The entire investment portfolio is classified
         as available-for-sale in order to provide maximum liquidity for funding
         needs. As of March 31, 2001, investments with amortized costs and fair
         values of $21,146 and $21,280, 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.

                  Investment Portfolio - Category Distribution
                          (dollars in thousands)

<TABLE>
<CAPTION>
                                         Amortized       Unrealized      Unrealized       Approximate
                                           Costs           Gains           Losses         Fair Values
                                       --------------  --------------  ---------------  ----------------
<S>                                      <C>             <C>             <C>              <C>

U.S. Treasury                            $   198            $  2               0            $   200

U.S. Government agencies                  16,034              44              (7)            16,071

Mortgage-backed securities                 5,759              48              (1)             5,806

Collateralized Mortgage obligations        3,968               7             (10)             3,965

States and political subdivisions          8,454             129             (17)             8,566

Corporate debt securities                  1,408              11              (2)             1,417

Equity securities                            200               0              (1)               199

                                           1,260               0               0              1,260
Restricted equity securities             -------            ----            ----            -------
                                         $37,281            $241            $(38)           $37,484
                                         =======            ====            ====            =======
  Total securities available for sale
</TABLE>

(4)  Allowance for Loan Losses

       The following table summarizes the loan loss experience for the three-
     month periods ended March 31, 2001 and 2000.

                           Allowance for Loan Losses
                            (dollars in thousands)


                                                 2001          2000
                                                ------        ------
                 Balance at January 1           $1,190         $ 910
                 Provision for loan losses          37            64
                 Recoveries                          0             0
                 Charged off loans                   0             0
                                                ------         -----
                 Balance at March 31            $1,227         $ 974
                                                ======         =====

                                       7
<PAGE>

(5)  Earnings Per Share

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

     Weighted Average Shares Outstanding
     -----------------------------------

     Three months ending March 31:      Basic        Diluted
                                        -----        -------

                    2001             1,213,207     1,247,854
                                     =========     =========

                    2000             1,013,207     1,058,913
                                     =========     =========

(6)  Comprehensive Income

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

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

       The adoption of Statement 130 on January 1, 1998 did not have any effect
     on the consolidated financial position, results of operations or liquidity
     of the Company. However, Statement 130 does have an effect on financial
     statement displays presented by the Company since the Company has net
     unrealized gains (losses) on available-for-sale securities, an item of
     other comprehensive income (loss). For the three months ended March 31,
     2001 and 2000, total comprehensive income was $517 and $313, respectively.

                                       8
<PAGE>

       The information that follows discloses the reclassification adjustments
     and the income taxes related to securities available-for-sale that are
     included in other comprehensive income (loss), net of income taxes for the
     three month periods ended March 31, 2001 and 2000.

                                  For the Three Months  For the Three Months
                                  Ended March 31, 2001  Ended March 31, 2000
                                  --------------------  --------------------

Net unrealized gains (losses) on
 securities available-for-sale:
Net unrealized holding gains
 (losses) during the year                 $ 265                 $ (16)
 Plus reclassification adjustments
  for losses included in net income           5                     -
Income tax benefit (expense)                (92)                    5
                                           ----                  ----
   Other comprehensive income (loss),
    net of income taxes                   $ 178                 $ (11)
                                          =====                 =====

Item 2.  Management's Discussion and Analysis.

  The following is management's discussion and analysis of the financial
condition and results of operations of the Company as of and for the three
months ended March 31, 2001 and 2000.  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 March 31, 2001 were $167.8 million, up 4.7% from $160.2
million at December 31, 2000.  The principal components of the Company's assets
at the end of the period were $37.5 million in securities available-for-sale,
including restricted equity securities, and $121.8 million in gross loans.

  Total liabilities at March 31, 2001 were $152.6 million, up 4.9% from $145.5
million at December 31, 2000 with the increase represented by a $1.7 million
growth in deposits, a $2.3 million growth in securities sold under agreements to
repurchase, and a $5.0 million advance from the Federal Home Bank of Atlanta
finalized in the first quarter, all offset by a decrease of $1.8 million in
short-term borrowings.

  Total shareholders' equity at March 31, 2001 was $15.2 million consisting of
$9.1 million in net proceeds from the Company's initial public offering, $3.2
million in net proceeds from the Company's secondary offering, $10,000 in
proceeds from the exercise of stock options, increased by accumulated retained
earnings of $2.7 million and $133,000 of net unrealized gains on securities
available-for-sale, net of related deferred tax liability.  At December 31, 2000
total shareholders' equity was $14.7 million. Exclusive of unrealized gains
(losses) on investment securities, shareholders' equity was $15.0 million at
March 31, 2001 and $14.7 million at December 31, 2000.

                                       9
<PAGE>

  The Company had net income of $339,000 for the three months ended March 31,
2001 compared with $324,000 recorded for the three months ended March 31, 2000,
a 4.6% increase.  An improvement in net interest income and noninterest income,
offset by increases in noninterest expenses in all categories, contributed to
the increase in net income.

  Profitability as measured by the Company's return on average assets ("ROA")
was .84% for the three months ended March 31, 2001 compared to .95% for the same
period in 2000.  Return on average equity ("ROE") was 9.25% for the three months
ended March 31, 2001 compared to 12.70% for the same period in 2000.  The
calculation of ROE excludes the effect of any unrealized gains or losses on
investment securities.

Net Interest Income

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

  Net interest income was $1.4 million for the three months ended March 31, 2001
and is attributable to interest income from loans and securities exceeding the
cost of interest paid on deposits and borrowed funds.  Net interest income for
the first three months of 2001 increased 7.7% from $1.3 million for the same
period in 2000. The net interest margin on a fully taxable equivalent ("FTE ")
basis was 3.72% for the first three months of 2001, a decrease of 40 basis
points from the 4.12% reported for the same period in 2000.  Recent Federal
Reserve rate decreases totaling two full percentage points have caused our
variable rate asset yields to decrease faster than our ability to reprice our
funding sources.

Noninterest Income

  Noninterest income of $105,000 in the three months ended March 31, 2001
consisted of service charges and fees on accounts and other miscellaneous
income, and represented an increase of $21,000 or 25.0% over the $84,000
reported for the same period one year earlier.  Future levels of noninterest
income are expected to increase as a direct result of business growth and
expansion.

Noninterest Expense

  Noninterest expense for the first three months of 2001 was $1.0 million, an
increase of $135,000 or 15.5% over the same period in 2000.  Two large
contributors to the increase in noninterest expense are expenses associated with
the opening of the Bank's fifth full-service branch on May 7, 2001 and $30,000
in a rezoning request denied in connection with an attempted acquisition of a
parcel of property for a future branch site.  Noninterest expenses are expected
to increase in future years as a direct result of business growth and expansion.

                                       10
<PAGE>

Income Taxes

  To reflect the Company's anticipated federal income tax liability, an expense
of $110,000 and $125,000 at an effective tax rate of 24.5% and 27.8% was
recognized in the three months ended March 31, 2001 and March 31, 2000,
respectively.  The Company recorded a $16,000 favorable tax adjustment in the
first quarter of 2001 in connection with the 2000 annual audit.

Investment Securities

  The Company's investment portfolio is used both for investment income and
liquidity purposes.  Funds not used for capital expenditures or lending
activities are invested in securities of the U.S. Government and its agencies,
mortgage-backed securities, municipal bonds, corporate bonds and equity
securities.  Obligations of the U.S. Government and its agencies include
treasury notes and callable or noncallable agency bonds.  Mortgage-backed
securities and collateralized mortgage obligations include pools issued by
government agencies.  Municipal bonds include taxable and tax-exempt general
obligation and revenue issues. Corporate bonds are investment grade issue.
Equity securities include shares of the Federal Reserve Bank of Richmond,
Federal Home Loan Bank of Atlanta, 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, including restricted equity securities, at March 31,
2001 were $37.5 million, a decrease of $400,000 or 1.1% from their level of
$37.9 million on December 31, 2000. The decrease of $400,000 is primarily due to
principal repayments on existing securities.  For more information on the
investment portfolio, see Note 3 to the Consolidated Financial Statements.

Loan Portfolio

  The Company's total loans were $121.8 million at March 31, 2001, an increase
of $7.3 million or 6.4% from the $114.5 million reported at December 31, 2000.
The Company's ratio of total loans to total deposits stood at 92.6% at March 31,
2001 and 88.1% at December 31, 2000.  The ratio clearly reflects stronger loan
growth than deposit growth during the calendar quarter.  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.

                                       11
<PAGE>

  The following table summarizes the loan portfolio by category as of the three-
month periods ended March 31, 2001 and 2000 and the year ended December 31,
2000.

                            Loan Portfolio Summary
                            (dollars in thousands)

                                  March 31,     December 31,      March 31,
                                    2001            2000            2000
                                  --------        --------         -------
Commercial and industrial         $ 31,244        $ 30,070         $26,694
Commercial real estate              42,750          43,146          35,992
Real estate construction             7,097           5,879           6,258
Residential real estate             22,904          18,926          15,452
Loans to individuals                17,760          16,467          14,349
                                  --------        --------         -------
Total loans                       $121,755        $114,488         $98,745
                                  ========        ========         =======

Loan Category Analysis

  Commercial Loans.  Commercial and industrial loans accounted for 25.7% of the
loan portfolio as of March 31, 2001 and stood at $31.2 million versus $30.1
million three months earlier.  Such loans generally are made to provide
operating lines of credit, to finance the purchase of inventory or equipment,
and for other business purposes.  The credit worthiness of the borrower is
analyzed and re-evaluated on a periodic basis.  Most commercial loans are
collateralized with business assets such as accounts receivable, inventory and
equipment.  Even with substantial collateral such as all the assets of the
business and personal guarantees, commercial lending involves considerable risk
of loss in the event of a business downturn or failure of the business.

  Commercial Real Estate Loans.  Commercial real estate mortgages represent
financing of commercial properties that are secured by real estate, and were
35.1% of total loans at March 31, 2001.   Outstanding loans in this category
equaled $42.8 million and $43.1 million at March 31, 2001 and December 31, 2000,
respectively.  The Company prefers to make commercial real estate loans secured
by owner-occupied properties.  These borrowers are engaged in business
activities other than real estate, and the primary source of repayment is not
solely dependent on conditions in the real estate market.

  Real Estate Construction Loans.  Real estate construction loans represent
interim financing on residential and commercial properties under construction,
and are secured by real estate.  Once construction is completed and the loan
becomes permanent, the loans are reclassified as commercial real estate loans
which are secured by commercial property or residential real estate loans which
are secured by first deeds of trust.  Outstanding loans in this category totaled
$7.1 million (5.8% of total loans) at March 31, 2001 as compared to $5.9 million
at December 31, 2000.

  Residential Real Estate Loans.  Residential real estate loans are secured by
first deeds of trust on 1-4 family residential properties.  This category had
$22.9 million in loans (18.8% of total loans) at March 31, 2001 and $18.9
million in such loans at December 31, 2000.  To

                                       12
<PAGE>

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 $17.8 million (14.6% of total loans) at March 31, 2001
compared to $16.5 million at December 31, 2000.

Summary of Allowance for Loan Losses

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

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

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

  A provision for loan losses of $37,000 was provided during the three months
ended March 31, 2001, a decrease of $27,000 or 42.2% over the same period in
2000, in recognition of management's estimate of inherent risks associated with
lending activities.  The allowance for loan losses was $1.2 million as of March
31, 2001 and represented approximately 1.0% of net loans outstanding versus 1.1%
of net loans at December 31, 2000 (see Note 4 to the Consolidated Financial
Statements).  A total of $30,000 in specific reserves, accrued on one commercial
loan customer placed on nonaccrual status in April 1999, is included in the
balance of the allowance for loan losses as of March 31, 2001.  During the first
quarter of 2001, $25,000 of specific reserves accrued during 2000 on a second
commercial loan customer were reversed.

                                       13
<PAGE>

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.  Since the Bank opened in May of 1995,
restructured loans have never been a component of the loan portfolio.  The
entire balance of restructured loans as disclosed below is comprised of one loan
customer.  Due to a good loan to value ratio, a timely and proper review of
credit quality and restructuring of the loans, the Company believes at the
present time that all amounts of principal and interest will be collected.
However, the Company cannot give assurance that unforeseen economic conditions
or other circumstances will not result in impairment.

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

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

Nonperforming assets at March 31, 2001, December 31, 2000 and March 31, 2000 are
presented in the following table.

                             Nonperforming Assets
                            (dollars in thousands)

                                      March 31,    December 31,    March 31,
                                        2001           2000          2000
                                      ---------    ------------    ---------
Nonaccrual loans                        $  85          $ 102         $  83
Loans past due 90 days or more            165             54             -
Restructured loans                        208            230           832
                                        -----          -----         -----
Total nonperforming loans                 458            386           915
                                        -----          -----         -----

Foreclosed, repossessed and idled
 properties                                 -              -             -
                                        -----          -----         -----
Total nonperforming assets              $ 458          $ 386         $ 915
                                        =====          =====         =====

                                       14
<PAGE>

  If the nonaccrual loans disclosed above had performed in accordance with their
original terms, additional interest income in the amount of $2,000, $9,000, and
$2,000, respectively would have been recorded for the three month period ended
March 31, 2001, the year ended December 31, 2000 and the three month period
ended March 31, 2000.

  The total recorded investment in impaired loans was $824, $851 and $915,
respectively for the three month period ended March 31, 2001, the year ended
December 31, 2000 and the three-month period ended March 31, 2000. The loan loss
allowance related to impaired loans was $30,000, $55,000 and $10,000,
respectively for the above-referenced time periods.

Deposits

  As of March 31, 2001 total deposits were $131.6 million, an increase of $1.7
million or 1.3% from their level of $129.9 million at December 31, 2000.  The
major categories of increases were interest bearing demand deposits and money
markets in the amounts of $2.3 million and $1.9 million, respectively offset by
declines in non-interest bearing demand deposits and time deposits in the
amounts of $1.9 million and $338,000, respectively.

  At March 31, 2001 noninterest-bearing demand deposits were $15.4 million or
11.7% of total deposits. On December 31, 2000 noninterest bearing demand
deposits were $17.3 million or 13.3% of total deposits. Nonmaturity deposits
(noninterest bearing demand deposits, interest bearing demand deposits, money
market accounts and savings accounts) were $47.8 million or 36.3% of total
deposits at March 31, 2001, compared with $45.7 million or 35.2% of total
deposits at December 31, 2000.  Total interest bearing deposits stood at $116.2
million at March 31, 2001, an increase of $3.6 million or 3.2% over their level
of $112.6 million at December 31, 2000.

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

Short-Term Borrowings

  The Company placed in service a commercial sweep account program in third
quarter 1999.  The balance in the program grew by $2.3 million from its level of
$2.0 million at December 31, 2000 to a total of $4.3 million as of March 30,
2001.  The program consists of establishing a demand deposit account in which
the Bank invests available balances daily in securities on an overnight basis
subject to repurchase. On the following business day, the Bank will repurchase
from the customer the securities for an amount equal to the amount of available
balances invested in the securities.  Interest is calculated daily at the rate
applicable for each overnight period; however, it is posted to the customer
accounts only once per month.  The contractual agreement states that a
repurchase agreement is not a deposit and therefore is not insured by the
Federal Deposit Insurance

                                       15
<PAGE>

Corporation. Therefore, these repurchase balances are not reported as deposits
but as short-term borrowings.

  The Company's short-term borrowings decreased by $1.8 million during the first
three months of 2001 to a balance of $0.  See the Liquidity section of this
discussion and analysis for further information on the preceding borrowings.

Other Debt

  The Company has outstanding debt with the Federal Home Loan Bank of Atlanta in
the amount of $15.0 million, represented by three advances in the amount of $5.0
million each.  The oldest advance was drawn on December 2, 1999 with a maturity
date of December 2, 2009.  Interest payments at a fixed rate of 5.46% began on
March 2, 2000 and will continue quarterly on the second day of each anniversary
month.  The Federal Home Loan Bank of Atlanta has the option to convert in whole
this transaction to a three-month LIBOR-based floating rate advance effective
December 4, 2000.  The second outstanding advance was drawn on May 24, 2000 with
a maturity date of May 24, 2010.  Interest payments at a fixed rate of 6.49%
began on August 24, 2000 and will continue quarterly on the twenty-fourth day of
each anniversary month.  The Federal Home Loan Bank of Atlanta also has the
option to convert this transaction in whole to a three-month LIBOR-based
floating rate advance effective May 24, 2001.  The newest outstanding advance
was drawn on February 9, 2001 with a maturity date of February 9, 2011.
Interest payments at a fixed rate of 4.97% will begin on May 9, 2001 and will
continue quarterly on the ninth day of each anniversary month.  The Federal Home
Loan Bank of Atlanta also has the option to convert in whole this transaction to
a three-month LIBOR-based floating rate advance effective February 9, 2004.

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).

  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 a given 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.

                                       16
<PAGE>

  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 Bank's "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.

Capital Adequacy

  The Company's financial position at March 31, 2001 reflects liquidity and
capital levels currently adequate to fund anticipated near-term business
expansion.  Capital ratios are in excess of required regulatory minimums for a
well-capitalized institution.  The adequacy of the Company's capital is reviewed
by management on an ongoing basis.  Management seeks to maintain a capital
structure adequate to support anticipated asset growth and serve as a cushion to
absorb potential losses.

  Total shareholders' equity was $15.2 million at March 31, 2001 compared with
$14.7 million at December 31, 2000, an increase of $500,000 or 3.4%.  The
increase is attributable to net income for the first three months of $339,000
and a $178,000 increase in accumulated other comprehensive income.  Exclusive of
unrealized gains (losses) on investment securities, shareholders' equity was
$15.0 million at March 31, 2001 and $14.7 million at December 31, 2000.

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

                                 Capital Ratios

Ratio              3/31/01     12/31/00      3/31/00    Minimum
------             -------     --------      -------    -------

Tier 1              11.5%        11.7%         9.5%        4%

Total               12.4%        12.6%        10.4%        8%

Leverage             9.2%         9.3%         7.5%        4%

                                       17
<PAGE>

Liquidity

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

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

  The Company's asset liquidity is provided by cash and due from banks, federal
funds sold, investments available for sale, and through management of investment
maturities/prepayments and loan repayments.  The Company's ratio of liquid
assets to deposits and short-term borrowings was 31.3% at March 31, 2001 and
31.4% at December 31, 2000.  The Company sells excess funds as overnight federal
funds sold to provide an immediate source of liquidity.  The Company had federal
funds sold of $1.3 million and $0 at March 31, 2001 and December 31, 2000,
respectively.  During the first three months of 2001, deposit growth and
securities sold under agreements to repurchase growth in the amounts of $1.7
million and $2.3 million, respectively have not kept pace with loan growth in
the amount of $7.3 million.  In order to fund the Company's growth, an
additional Federal Home Loan advance in the amount of $5.0 was drawn during the
first quarter of 2001.  The excess Federal Home Loan Bank funds not needed to
fund loan growth were invested as federal funds sold at the end of the first
quarter.

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

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

                                       18
<PAGE>

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.

Recent and Future Accounting Considerations

  In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities.  Statement 133 established standards for accounting and
reporting for derivative instruments, including certain instruments embedded in
other contracts and for hedging activities.  It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value.  Statement 133
was issued to establish guidelines over the accounting and reporting of
derivative instruments and hedging activities.

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

                                       19
<PAGE>

PART II.  OTHER INFORMATION

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

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

Item 5.  Other Information.

None.

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

(a)  The Company filed the following exhibits for the quarter ended March 31,
     2001:

     None.

(b)  The Company filed one report on Form 8-K during the quarter ended March 31,
     2001. The report, dated February 6, 2001, reported the Company's
     consolidated financial results for the year ended December 31, 2000.

                                       20
<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



May 14, 2001                              /s/ Ellis L. Gutshall
--------------                           ---------------------------------
Date                                     Ellis L. Gutshall, President
                                         and Chief Executive Officer



May 14, 2001                             /s/ A. Wayne Lewis
--------------                           ---------------------------------
Date                                     A. Wayne Lewis, Executive
                                         Vice President and Chief
                                         Financial Officer

                                       21