SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

              [X] Quarterly Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934

                  For the quarterly period ended June 30, 2001

              [ ] Transition Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934

          For the transition period from ____________ to _____________

                         Commission file number: 0-30535

                            GRAYSON BANKSHARES, INC.
             (Exact Name of Registrant as Specified in its Charter)


                Virginia                                          54-1647596
     (State or Other Jurisdiction of                           (I.R.S. Employer
     Incorporation or Organization)                          Identification No.)

          113 West Main Street
         Independence, Virginia                                     24348
(Address of Principal Executive Offices)                          (Zip Code)

Registrant's telephone number, including area code  (540) 773-2811


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

         Indicate  the  number of  shares  outstanding  of each of the  issuer's
classes of common stock, as of June 30, 2001.

          1,718,968 shares of common stock, par value $1.25 per share



<PAGE>

                            GRAYSON BANKSHARES, INC.

                                TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                                             Page No.
<S>                                                                                            <C>
Part I.       Financial Information

         Item 1.  Financial Statements

                  Consolidated Balance Sheets
                  June 30, 2001 and December 31, 2000...........................................3

                  Consolidated Statements of Income
                  For the Six Months Ended June 30, 2001 and 2000 and
                  For the Three Months Ended June 30, 2001 and 2000.............................4

                  Consolidated Statements of Stockholders' Equity
                  For the Six Months Ended June 30, 2001 and
                  the Year Ended December 31, 2000..............................................6

                  Consolidated Statements of Cash Flows
                  For the Six Months Ended June 30, 2001 and 2000...............................7

                  Notes to Consolidated Financial Statements....................................8

         Item 2.  Management's Discussion and Analysis of Financial Condition
                  and Results of Operations....................................................10

         Item 3.  Quantitative and Qualitative Disclosures About Market Risk...................11


Part II.      Other Information

         Item 1.  Legal Proceedings............................................................13

         Item 2.  Changes in Securities and Use of Proceeds....................................13

         Item 3.  Defaults Upon Senior Securities..............................................13

         Item 4.  Submission of Matters to a Vote of Security Holders..........................13

         Item 5.  Other Information............................................................13

         Item 6.  Exhibits and Reports on Form 8-K.............................................13

Signatures

</TABLE>




                                       2
<PAGE>

                          Part I: Financial Information

Item 1:  Financial Statements

================================================================================

                     Grayson Bankshares, Inc. and Subsidiary
                           Consolidated Balance Sheets
                       June 30, 2001 and December 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                         June 30,        December 31,
Assets                                                                     2001              2000
                                                                       ------------      ------------
                                                                        (Unaudited)        (Audited)
<S>                                                                    <C>               <C>
Cash and due from banks                                                $  6,943,404      $  4,993,526
Interest-bearing deposits with banks                                              -                 -
Federal funds sold                                                        7,955,649         7,820,438
Investment securities available for sale                                 21,216,277        18,718,706
Investment securities held to maturity                                    8,805,702         9,965,781
Restricted equity securities                                                 81,750            81,750
Loans, net of allowance for loan losses of $1,833,283
  at June 30, 2001 and $1,760,999 at December 31, 2000                  137,444,391       133,071,889
Property and equipment, net                                               2,788,089         2,792,981
Accrued income                                                            1,856,520         1,681,910
Other assets                                                              1,056,852         1,190,831
                                                                       ------------      ------------
                                                                       $188,148,634      $180,317,812
                                                                       ============      ============

Liabilities and Stockholders' Equity

Liabilities
Demand deposits                                                        $ 19,787,273      $ 18,674,556
Interest-bearing demand deposits                                         13,167,650        14,059,974
Savings deposits                                                         29,383,037        29,837,478
Large denomination time deposits                                         27,678,166        26,580,744
Other time deposits                                                      76,821,350        70,437,348
                                                                       ------------      ------------
     Total deposits                                                     166,837,476       159,590,100

Accrued interest payable                                                    292,041           294,583
Other liabilities                                                           605,154           795,468
                                                                       ------------      ------------
                                                                        167,734,671       160,680,151

Commitments and contingencies

Stockholders' equity
Preferred stock, $25 par value; 500,000
   shares authorized; none issued                                                 -                 -
Common stock, $1.25 par value; 5,000,000 shares
   authorized; 1,718,968 shares issued and
   outstanding in 2001 and 2000                                           2,148,710         2,148,710
Surplus                                                                     521,625           521,625
Retained earnings                                                        17,535,630        16,986,754
Accumulated other comprehensive income (loss)                               207,998           (19,428)
                                                                       ------------      ------------
                                                                         20,413,963        19,637,661
                                                                       ------------      ------------
                                                                       $188,148,634      $180,317,812
                                                                       ============      ============
</TABLE>


See Notes to Consolidated Financial Statements



                                       3
<PAGE>

================================================================================
                     Grayson Bankshares, Inc. and Subsidiary
                        Consolidated Statements of Income
                 For the Six Months ended June 30, 2001 and 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                             Six Months Ended
                                                                                  June 30,
                                                                           2001              2000
                                                                       ------------      ------------
<S>                                                                    <C>               <C>
Interest income:                                                        (Unaudited)       (Unaudited)
   Loans and fees on loans                                             $  5,932,691      $  5,345,927
   Federal funds sold                                                       201,012           229,458
   Investment securities:
     Taxable                                                                549,971           502,660
     Exempt from federal income tax                                         236,708           330,529
   Deposits with banks                                                            -                 -
                                                                       ------------      ------------
                                                                          6,920,382         6,408,574

Interest expense:
   Deposits                                                               3,687,731         3,206,152
   Interest on borrowings                                                         -                 -
                                                                       ------------      ------------
                                                                          3,687,731         3,206,152
         Net interest income                                              3,232,651         3,202,422

Provision for loan losses                                                   135,000           120,000
                                                                       ------------      ------------
   Net interest income after
     provision for loan losses                                            3,097,651         3,082,422
                                                                       ------------      ------------

Noninterest income:
   Service charges on deposit accounts                                      163,859            78,059
   Other income                                                              49,005            49,128
                                                                       ------------      ------------
                                                                            212,864           127,187
                                                                       ------------      ------------

Noninterest expense:
   Salaries and employee benefits                                         1,289,210         1,214,847
   Occupancy expense                                                         65,453            52,442
   Equipment expense                                                        172,489           135,962
   Other expense                                                            533,693           397,826
                                                                       ------------      ------------
                                                                          2,060,845         1,801,077
                                                                       ------------      ------------
         Income before income taxes                                       1,249,670         1,408,532

Income tax expense                                                          357,000           307,000
                                                                       ------------      ------------
         Net income                                                    $    892,670      $  1,101,532
                                                                       ============      ============

Basic earnings per share                                               $        .52      $        .64
                                                                       ============      ============
Weighted average shares outstanding                                       1,718,968         1,718,968
                                                                       ============      ============
</TABLE>







See Notes to Consolidated Financial Statements


                                       4
<PAGE>

================================================================================
                     Grayson Bankshares, Inc. and Subsidiary
                        Consolidated Statements of Income
                For the Three Months ended June 30, 2001 and 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                             Six Months Ended
                                                                                  June 30,
                                                                           2001              2000
                                                                       ------------      ------------
<S>                                                                    <C>               <C>
Interest income:                                                        (Unaudited)       (Unaudited)
   Loans and fees on loans                                             $  2,954,331      $  2,757,187
   Federal funds sold                                                        97,169           114,911
   Investment securities:
     Taxable                                                                275,804           257,036
     Exempt from federal income tax                                         115,161           156,319
   Deposits with banks                                                            -                 -
                                                                       ------------      ------------
                                                                          3,442,465         3,285,453

Interest expense:
   Deposits                                                               1,844,924         1,629,137
   Interest on borrowings                                                         -                 -
                                                                       ------------      ------------
                                                                          1,844,924         1,629,137
         Net interest income                                              1,597,541         1,656,316

Provision for loan losses                                                    60,000            60,000
                                                                       ------------      ------------
   Net interest income after
     provision for loan losses                                            1,537,541         1,596,316
                                                                       ------------      ------------

Noninterest income:
   Service charges on deposit accounts                                       85,468            44,235
   Other income                                                              20,476            25,676
                                                                       ------------      ------------
                                                                            105,944            69,911
                                                                       ------------      ------------

Noninterest expense:
   Salaries and employee benefits                                           663,531           625,253
   Occupancy expense                                                         32,447            27,206
   Equipment expense                                                         87,553            68,926
   Other expense                                                            301,017           210,788
                                                                       ------------      ------------
                                                                          1,084,548           932,173
                                                                       ------------      ------------
         Income before income taxes                                         558,937           734,054

Income tax expense                                                          160,000           197,000
                                                                       ------------      ------------
         Net income                                                    $    398,937      $    537,054
                                                                       ============      ============

Basic earnings per share                                               $        .23      $        .31
                                                                       ============      ============
Weighted average shares outstanding                                       1,718,968         1,718,968
                                                                       ============      ============
</TABLE>






See Notes to Consolidated Financial Statements


                                       5
<PAGE>

================================================================================
                     Grayson Bankshares, Inc. and Subsidiary
                 Consolidated Statements of Stockholders' Equity
               For the Six Months ended June 30, 2001 (unaudited)
                 and the Year ended December 31, 2000 (audited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                          Accumulated
                                                                                             Other
                                           Common Stock                      Retained    Comprehensive
                                        Shares       Amount     Surplus      Earnings    Income (Loss)      Total
                                       ---------   ----------   --------   ------------  -------------  ------------
<S>                                    <C>         <C>          <C>        <C>             <C>          <C>
Balance, December 31, 1999             1,718,968   $2,148,710   $521,625   $ 15,559,063    $(339,326)   $ 17,890,072

   Comprehensive income
   Net income                                  -            -          -      2,063,709            -       2,063,709
   Net change in unrealized
     depreciation on investment
     securities available for
     sale, net of taxes of $164,796            -            -          -              -      319,898         319,898
                                                                                                        ------------
     Total comprehensive income                                                                            2,383,607

   Dividends paid
     ($.37 per share)                          -            -          -       (636,018)           -        (636,018)

                                       ---------   ----------   --------   ------------    ---------    ------------
Balance, December 31, 2000             1,718,968    2,148,710    521,625     16,986,754      (19,428)     19,637,661

   Comprehensive income
   Net income                                  -            -          -        892,670            -         892,670
   Net change in unrealized
     depreciation on investment
     securities available for
     sale, net of taxes of $117,160            -            -          -              -      227,426         227,426
                                                                                                        ------------
   Total comprehensive income                                                                              1,120,096

   Dividends paid
       ($.20 per share)                        -            -          -       (343,794)           -        (343,794)

                                       ---------   ----------   --------   ------------    ---------    ------------
Balance, June 30, 2001                 1,718,968   $2,148,710   $521,625   $ 17,535,630    $ 207,998    $ 20,413,963
                                       =========   ==========   ========   ============    =========    ============

</TABLE>









See Notes to Consolidated Financial Statements


                                       6
<PAGE>

================================================================================
                     Grayson Bankshares, Inc. and Subsidiary
                      Consolidated Statements of Cash Flows
                 For the Six Months ended June 30, 2001 and 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                             Six Months Ended
                                                                                  June 30,
                                                                           2001              2000
                                                                       ------------      ------------
                                                                        (Unaudited)       (Unaudited)
<S>                                                                    <C>               <C>
Cash flows from operating activities:
   Net income                                                          $    892,670      $  1,101,532
   Adjustments to reconcile net income
     to net cash provided by operations:
       Depreciation and amortization                                        148,800           111,600
       Provision for loan losses                                            135,000           120,000
       Deferred income taxes                                                 31,000           (38,000)
       Net realized gains on securities                                      (2,407)           (4,738)
       Accretion of discount on securities, net of
         amortization of premiums                                            13,072             5,739
       Deferred compensation                                                  5,508            30,281
       Changes in assets and liabilities:
         Accrued income                                                    (174,610)         (270,271)
         Other assets                                                       (14,181)          (34,658)
         Accrued interest payable                                            (2,542)           (2,604)
         Other liabilities                                                 (195,822)            8,494
                                                                       ------------      ------------
           Net cash provided by operating activities                        836,488         1,027,375
                                                                       ------------      ------------

Cash flows from investing activities:
   (Increase) decrease in interest-bearing deposits with banks                    -                 -
   Net (increase) decrease in federal funds sold                           (135,211)        2,962,211
   Purchases of investment securities                                    (7,553,437)       (1,444,547)
   Sales of investment securities                                         2,401,407           380,500
   Maturities of investment securities                                    4,148,459         1,446,536
   Net increase in loans                                                 (4,507,502)      (10,344,554)
   Purchases of property and equipment, net of sales                       (143,908)         (402,692)
                                                                       ------------      ------------
           Net cash used in investing activities                         (5,790,192)       (7,402,546)
                                                                       ------------      ------------

Cash flows from financing activities:
   Net increase (decrease) in demand,
     savings and NOW deposits                                              (234,048)           30,575
   Net increase in time deposits                                          7,481,424         3,411,414
   Dividends paid                                                          (343,794)         (309,414)
   Net increase (decrease) in short-term debt                                     -                 -
                                                                       ------------      ------------
           Net cash provided by financing activities                      6,903,582         3,132,575
                                                                       ------------      ------------
           Net increase (decrease) in cash and cash equivalents           1,949,878        (3,242,596)

Cash and cash equivalents, beginning                                      4,993,526         7,773,049
                                                                       ------------      ------------
Cash and cash equivalents, ending                                      $  6,943,404      $  4,530,453
                                                                       ============      ============

Supplemental disclosure of cash flow information:
   Interest paid                                                       $  3,690,273      $  3,208,756
                                                                       ============      ============
   Taxes paid                                                          $    335,680      $    289,000
                                                                       ============      ============
</TABLE>



See Notes to Consolidated Financial Statements



                                       7
<PAGE>

================================================================================
                     Grayson Bankshares, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements

--------------------------------------------------------------------------------


Note 1.  Organization and Summary of Significant Accounting Policies

Organization

Grayson   Bankshares,   Inc.  (the  Company)  was  incorporated  as  a  Virginia
corporation  on February  3, 1992 to acquire  the stock of The Grayson  National
Bank (the Bank). The Bank was acquired by the Company on July 1, 1992.

The Bank was organized under the laws of the United States in 1900 and currently
serves  Grayson  County,  Virginia  and  surrounding  areas  through six banking
offices. As an FDIC insured,  National Banking Association,  the Bank is subject
to regulation by the  Comptroller  of the Currency.  The Company is regulated by
the Federal Reserve.

The  consolidated  financial  statements as of June 30, 2001 and for the periods
ended June 30, 2001 and 2000 included herein, have been prepared by the Company,
without  audit,  pursuant to the rules and  regulations  of the  Securities  and
Exchange Commission. In the opinion of management,  the information furnished in
the interim consolidated financial statements reflects all adjustments necessary
to present  fairly the Company's  consolidated  financial  position,  results of
operations,  changes in  stockholders'  equity  and cash flows for such  interim
periods. Management believes that all interim period adjustments are of a normal
recurring  nature.  These  consolidated  financial  statements should be read in
conjunction  with the  Company's  audited  financial  statements  and the  notes
thereto as of December 31, 2000, included in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2000.

The  accounting  and  reporting  policies  of the  Company  and the Bank  follow
generally  accepted  accounting  principles  and  general  practices  within the
financial services industry.

Principles of Consolidation

The consolidated  financial  statements  include the accounts of the Company and
the Bank, which is wholly owned. All significant,  intercompany transactions and
balances have been eliminated in consolidation.

Note 2.  Allowance for Loan Losses

The following is an analysis of the allowance for loan losses for the six months
ended June 30.

                                                      2001             2000
                                                 -------------    -------------

Balance, beginning                               $   1,760,999    $   1,731,096
Provision charged to expense                           135,000          120,000
Recoveries of amounts charged off                       37,021           35,631
Amounts charged off                                    (99,737)         (48,954)
                                                 -------------    -------------
Balance, ending                                  $   1,833,283    $   1,837,773
                                                 =============    =============







                                       8
<PAGE>

================================================================================
                     Grayson Bankshares, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements

--------------------------------------------------------------------------------

Note 3.  Income Taxes

A reconciliation  of income tax expense computed at the statutory federal income
tax rate to income tax expense  included in the statements of income for the six
months ended June 30, 2001 and 2000 follows:

                                                     2001              2000
                                                -------------     -------------

Tax at statutory federal rate                   $     424,888     $     478,901
Tax exempt interest income                            (81,841)         (112,380)
Alternative minimum tax credit                              -           (77,064)
Other                                                  13,953            17,543
                                                -------------     -------------
                                                $     357,000     $     307,000
                                                =============     =============


Note 4.  Commitments and Contingencies

Financial Instruments with Off-Balance-Sheet Risk

The Bank is party to financial  instruments with  off-balance-sheet  risk in the
normal course of business to meet the financing  needs of its  customers.  These
financial  instruments  include commitments to extend credit and standby letters
of credit. These instruments involve, to varying degrees,  credit risk in excess
of the amount recognized in the consolidated balance sheets.

The Bank's exposure to credit loss in the event of  nonperformance  by the other
party to the financial  instrument for  commitments to extend credit and standby
letters of credit is represented by the contractual amount of those instruments.
The Bank uses the same credit  policies in making  commitments  and  conditional
obligations  as for  on-balance-sheet  instruments.  A  summary  of  the  Bank's
commitments at June 30, 2001 and 2000 is as follows:

                                                       2001             2000
                                                  -------------    -------------

Commitments to extend credit                      $   4,833,998    $   4,153,486
Standby letters of credit                                     -                -
                                                  -------------    -------------
                                                  $   4,833,998    $   4,153,486
                                                  =============    =============

Commitments  to extend  credit are  agreements  to lend to a customer as long as
there is no violation of any condition established in the contract.  Commitments
generally  have fixed  expiration  dates or other  termination  clauses  and may
require  payment of a fee. Since many of the  commitments are expected to expire
without  being  drawn  upon,  the total  commitment  amounts do not  necessarily
represent  future  cash   requirements.   The  Bank  evaluates  each  customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained,  if
deemed necessary by the Bank upon extension of credit,  is based on management's
credit evaluation of the party. Collateral held varies, but may include accounts
receivable,  inventory,  property  and  equipment,  residential  real estate and
income-producing commercial properties.

Standby  letters of credit  are  conditional  commitments  issued by the Bank to
guarantee the performance of a customer to a third party.  Those  guarantees are
primarily  issued to support  public and  private  borrowing  arrangements.  The
credit risk  involved in issuing  letters of credit is  essentially  the same as
that involved in extending loan facilities to customers.  Collateral held varies
as specified above and is required in instances which the Bank deems necessary.




                                       9
<PAGE>

================================================================================
                          Part I: Financial Information

Item 2: Management's  Discussion and Analysis of Financial Condition and Results
of Operations

--------------------------------------------------------------------------------

General

The following  discussion provides information about the major components of the
results of operations and financial  condition of the Company.  This  discussion
and  analysis  should be read in  conjunction  with the  Consolidated  Financial
Statements  and Notes to  Consolidated  Financial  Statements  included  in this
report.

Results of Operations

Total interest income  increased by $157,012 for the quarter ended June 30, 2001
compared to the quarter ended June 30, 2000,  while interest expense on deposits
increased by $215,787 over the same period.  This resulted in a slight  decrease
in net interest  income of $58,775 or 3.55%.  This  decrease is due to the lower
net interest margins resulting from the rapid decline in interest rates in 2001,
as well as an increase in the percentage of higher yielding time deposits.

Other income was up $36,033 in the second quarter of 2001 compared to the second
quarter of 2000. This was a result of increases in service  charges,  which were
implemented in the third quarter of 2000.

The provision for credit losses was $60,000 for the quarters ended June 30, 2001
and 2000. Management believes that the provision and the resulting allowance for
loan losses are adequate.

Other  expenses  increased  by  $152,375  for the  quarter  ended June 30,  2001
compared to the quarter  ended June 30, 2000.  This increase is due primarily to
increased operating costs associated with the opening of a new branch in the 4th
quarter of 2000.

The decrease in net interest  income combined with an increase in other expenses
resulted  in a decrease  in net income  before  tax of  $175,117  for the second
quarter of 2001, compared to the same quarter in 2000.

For the six months  ended June 30,  2001,  total  interest  income  increased by
$511,808  compared to the six-month  period ended June 30, 2000,  while interest
expense on deposits increased by $481,579 over the same period. This resulted in
an increase in net interest income of $30,229,  or 0.94%.  As stated above,  net
interest  margins were  compressed  due to the rapid  decline in interest  rates
experienced during the first six months of 2001.

Other  income was up  $85,677  for the  six-month  period  ended  June 30,  2001
compared to the same period in 2000.  Again, this was the result of increases in
certain service charges.

Normal cost  increases,  combined  with the  aforementioned  costs of  branching
activities,  resulted in an overall  increase in other  expenses of $259,758 for
the first six months of 2001 compared to the first six months of 2000. The lower
net interest margins and increased operating costs resulted in a decrease in net
income  before tax of  $158,862  for the  six-month  period  ended June 30, 2001
compared to the same period in 2000.

The increase in income tax expense for the six-month  period ended June 30, 2001
compared to last year, was due to the  availability  of alternative  minimum tax
credits, which were exhausted in the first quarter of 2000.

Financial Condition

Total assets  increased by  $7,830,822,  or 4.34% from December 31, 2000 to June
30, 2001. Net loans increased by $4,372,502 and investment  securities increased
by $1,337,492.



                                       10
<PAGE>

Total deposits increased by $7,247,376,  or 4.54% from December 31, 2000 to June
30, 2001. Demand deposit and savings accounts  decreased by $234,048 during this
period while time deposits increased by $7,481,424.

Shareholders'   equity  totaled   $20,413,963  at  June  30,  2001  compared  to
$19,637,661  at December  31,  2000.  The  $776,302  increase  was the result of
earnings  for the six months  combined  with an increase in the market  value of
securities  that are  classified  as  available  for sale,  less the  payment of
dividends of $343,794.

Regulatory  guidelines  relating to capital adequacy provide minimum  risk-based
ratios at the Bank level which assess capital  adequacy while  encompassing  all
credit risks, including those related to off-balance sheet activities.  The Bank
(a wholly  owned  subsidiary  of the  Company)  exceeds all  regulatory  capital
guidelines and is considered to be well capitalized.

Forward-Looking Statements

Certain  information  contained in this discussion may include  "forward-looking
statements"  within the meaning of Section 27A of the Securities Act of 1933, as
amended,  and Section 21E of the  Securities  Exchange Act of 1934,  as amended.
These  forward-looking  statements  are generally  identified by phrases such as
"the Company expects," "the Company  believes" or words of similar import.  Such
forward-looking  statements  involve known and unknown risks including,  but not
limited to, changes in general economic and business  conditions,  interest rate
fluctuations,  competition  within and from  outside the banking  industry,  new
products and  services in the banking  industry,  risk  inherent in making loans
such as  repayment  risks  and  fluctuating  collateral  values,  problems  with
technology  utilized by the Company,  changing  trends in customer  profiles and
changes in laws and regulations applicable to the Company.  Although the Company
believes that its expectations  with respect to the  forward-looking  statements
are based upon  reliable  assumptions  within the bounds of its knowledge of its
business  and  operations,  there  can  be no  assurance  that  actual  results,
performance or achievements  of the Company will not differ  materially from any
future  results,  performance  or  achievements  expressed  or  implied  by such
forward-looking statements.


Item 3:  Quantitative and Qualitative Disclosures about Market Risk

--------------------------------------------------------------------------------

The principal  goals of the Bank's asset and liability  management  strategy are
the maintenance of adequate  liquidity and the management of interest rate risk.
Liquidity  is the  ability  to  convert  assets  to  cash  to  fund  depositors'
withdrawals or borrowers'  loans without  significant  loss.  Interest rate risk
management  balances  the effects of interest  rate  changes on assets that earn
interest or liabilities on which interest is paid, to protect the Bank from wide
fluctuations  in its net interest  income which could result from  interest rate
changes.

Management  must insure that  adequate  funds are available at all times to meet
the needs of its  customers.  On the asset side of the balance  sheet,  maturing
investments,  loan payments,  maturing loans,  federal funds sold, and unpledged
investment securities are principal sources of liquidity.  On the liability side
of the balance sheet,  liquidity  sources include core deposits,  the ability to
increase large denomination certificates,  federal fund lines from correspondent
banks,  borrowings  from the  Federal  Reserve  Bank,  as well as the ability to
generate funds through the issuance of long-term debt and equity.

Interest  rate risk is the effect that  changes in interest  rates would have on
interest  income  and  interest   expense  as   interest-sensitive   assets  and
interest-sensitive  liabilities either reprice or mature. Management attempts to
maintain  the  portfolios  of  interest-earning   assets  and   interest-bearing
liabilities  with  maturities  or  repricing  opportunities  at levels that will
afford  protection from erosion of net interest margin, to the extent practical,
from changes in interest rates.

The Bank uses a number of tools to manage  its  interest  rate  risk,  including
simulating net interest income under various  scenarios,  monitoring the present
value change in equity under the same  scenarios,  and monitoring the difference
or gap between rate sensitive assets and rate sensitive liabilities over various
time periods.




                                       11
<PAGE>

The earnings  simulation  model  forecasts  annual net income under a variety of
scenarios  that  incorporate  changes in the absolute  level of interest  rates,
changes  in  the  shape  of  the  yield  curve  and  changes  in  interest  rate
relationships.  Management  evaluates  the  effect on net  interest  income  and
present value equity from gradual  changes in rates of up to 400 basis points up
or down  over a  12-month  period.  The  following  table  presents  the  Bank's
forecasts  for  changes in net income and market  value of equity as of June 30,
2001.

Table:  Interest Rate Risk (dollars in thousands)
<TABLE>
<CAPTION>
                                      Rate Shocked Interest Margin and Market Value of Equity
------------------------------------------------------------------------------------------------------------------------------------

         Rate Change                         -400bp    -300bp    -200bp    -100bp     0bp      +100bp    +200bp    +300bp    +400bp
                                             ------    ------    ------    ------     ---      ------    ------    ------    ------
<S>                                         <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>
Interest Income:
Federal funds sold                          $    183  $    226  $    269  $    312  $    355  $    398  $    441  $    484  $    527
Investments                                    1,802     1,817     1,832     1,847     1,860     1,872     1,880     1,890     1,900
Loans                                         10,699    11,004    11,309    11,613    11,898    12,172    12,444    12,717    12,987
                                            ----------------------------------------------------------------------------------------
  Total interest income                       12,684    13,047    13,410    13,772    14,113    14,442    14,765    15,091    15,414

Interest Expense:
Deposits                                       6,712     6,905     7,097     7,290     7,482     7,719     7,955     8,191     8,427
Federal funds purchased                            -         -         -         -         -         -         -         -         -
Other borrowings                                   -         -         -         -         -         -         -         -         -
                                            ----------------------------------------------------------------------------------------
  Total interest expense                       6,712     6,905     7,097     7,290     7,482     7,719     7,955     8,191     8,427

Interest Margin                             $  5,972  $  6,142  $  6,313  $  6,482  $  6,631  $  6,723  $  6,810  $  6,900  $  6,987
Actual Dollars at Risk                      $    659  $    489  $    318  $    149       $ -       $ -       $ -       $ -       $ -

Market value of assets                      $198,212  $195,716  $193,280  $190,918  $188,347  $185,672  $182,915  $180,245  $177,574
Market value of liabilities                  177,862   176,278   174,695   173,111   171,528   169,945   168,361   166,778   165,194
                                            ----------------------------------------------------------------------------------------

Market Value of Equity                      $ 20,350  $ 19,438  $ 18,585  $ 17,807  $ 16,819  $ 15,727  $ 14,554  $ 13,467  $ 12,380

</TABLE>













                                       12
<PAGE>

                           Part II: Other Information
================================================================================
                     Grayson Bankshares, Inc. and Subsidiary

--------------------------------------------------------------------------------

Item 1.  Legal Proceedings

         There are no material pending legal proceedings to which the Company or
         its  subsidiary  is a party or of which  any of their  property  is the
         subject.

Item 2.  Changes in Securities and Use of Proceeds

         Not applicable

Item 3.  Defaults Upon Senior Securities

         Not applicable

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

         At the Company's Annual Meeting of Shareholders held on April 10, 2001,
         the  shareholders of the Company voted upon the following  matters with
         the following results:

         (1)   The election of the following persons as directors of the Company
               to serve until the third annual meeting  following their election
               and therefore  until their  successors have been elected and have
               qualified:

               Name                         Votes For             Votes Withheld
               --------------------         ---------             --------------

               Dr. Julian L. Givens         1,267,566                   26
               Carl J. Richardson           1,267,472                  120
               Jean W. Lindsey              1,267,592                    0

         (2)   The election of the  following  person as director of the Company
               to serve until the second annual  meeting  following his election
               and  therefore  until  his  successor  has been  elected  and has
               qualified:

                                            Votes For             Votes Withheld
                                            ---------             --------------


               Dennis B. Gambill            1,266,754                  838

Item 5.  Other Information

         None

Item 6.  Exhibits and Reports on Form 8-K

         (a)   Exhibits
               None
         (b)   Reports on 8-K
               None







                                       13
<PAGE>

                                   SIGNATURES

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

                                       GRAYSON BANKSHARES, INC.



Date:  August 14, 2001                 By: /s/ Jacky K. Anderson
                                          --------------------------------------
                                           Jacky K. Anderson
                                           President and Chief Executive Officer



Date:  August 14, 2001                 By: /s/ Blake M. Edwards, Jr.
                                          --------------------------------------
                                           Blake M. Edwards, Jr.
                                           Chief Financial Officer



















                                       14