UNITED STATES
                       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 March 31, 2008

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

          For the transition period from ____________ to _____________

                         Commission File Number: 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)

                                 (276) 773-2811
              (Registrant's telephone number, including area code)


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


     Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated  filer, a non-accelerated  filer or a smaller reporting  company.
See definition of "large accelerated  filer,"  "accelerated  filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.

   Large accelerated filer  [ ]                 Accelerated filer  [ ]
   Non-accelerated filer  [ ]                   Smaller reporting company  |X|
(Do not check if smaller reporting company)

     Indicate  by check mark  whether  the  registrant  is a shell  company  (as
defined in Rule 12b-2 of the Act). Yes [ ] No |X|


     Indicate the number of shares  outstanding of each of the issuer's  classes
of common stock, as of the latest practicable date:

                   1,718,968 shares of Common Stock, par value
                $1.25 per share, outstanding as of May 13, 2008.


                                       1
<PAGE>



PART I   FINANCIAL INFORMATION

Item 1.  Financial Statements

         Consolidated Balance Sheets-March 31, 2008 (Unaudited)
          and December 31, 2007 (Audited)                                      3

         Unaudited Consolidated Statements of Income-Three Months Ended
          March 31, 2008 and March 31, 2007                                    4

         Consolidated Statements of Changes in Stockholders' Equity-Three Months
          Ended March 31, 2008 (Unaudited) and Year Ended December 31, 2007
          (Audited)                                                            5

         Unaudited Consolidated Statements of Cash Flows-Three Months Ended
          March 31, 2008 and March 31, 2007                                    6

         Notes to Consolidated Financial Statements                            7

Item 2.  Management's Discussion and Analysis of Financial Condition
          and Results of Operations                                           12

Item 3.  Quantitative and Qualitative Disclosures about Market Risk           15

Item 4T. Controls and Procedures                                              16

PART II    OTHER INFORMATION

Item 1.  Legal Proceedings                                                    17

Item 1A. Risk Factors                                                         17

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds          17

Item 3.  Defaults Upon Senior Securities                                      17

Item 4.  Submission of Matters to a Vote of Security Holders                  17

Item 5.  Other Information                                                    17

Item 6.  Exhibits                                                             17

Signatures                                                                    18

                                       2
<PAGE>

                          Part I. Financial Information

Item 1.  Financial Statements

<TABLE>

                                 Grayson Bankshares, Inc. and Subsidiary
                                       Consolidated Balance Sheets
                                   March 31, 2008 and December 31, 2007
----------------------------------------------------------------------------------------------------------
<CAPTION>

                                                                                    March 31,          December 31,
Assets                                                                                2008                 2007
------                                                                                ----                 ----
                                                                                   (Unaudited)          (Audited)
<S>                                                                            <C>                <C>

Cash and due from banks                                                         $    11,167,886    $     10,746,139
Federal funds sold                                                                   24,417,231          24,637,131
Investment securities available for sale                                             37,626,335          38,429,328
Investment securities held to maturity
  (fair value approximately $3,113,352 at March 31, 2008,
  and $3,064,241 at December 31, 2007)                                                3,019,825           3,014,048
Restricted equity securities                                                          1,129,850           1,129,850
Loans, net of allowance for loan losses of $2,758,136
  at March 31, 2008 and $2,757,745 at December 31, 2007                             263,126,191         263,729,116
Cash value of life insurance                                                          7,679,853           5,598,853
Foreclosed assets                                                                       235,000             160,000
Property and equipment, net                                                           8,706,826           8,485,058
Accrued income                                                                        3,036,917           2,996,261
Other assets                                                                          2,230,320           2,560,615
                                                                                      ---------           ---------
                                                                                $   362,376,234    $    361,486,399
                                                                                ===============    ================

Liabilities and Stockholders' Equity

Liabilities
Deposits
   Noninterest-bearing                                                          $    44,507,209    $     44,630,854
   Interest-bearing                                                                 265,391,906         264,542,840
                                                                                    -----------         -----------
     Total deposits                                                                 309,899,115         309,173,694

Long-term debt                                                                       20,000,000          20,000,000
Accrued interest payable                                                                995,538             536,393
Other liabilities                                                                       584,419           1,485,439
                                                                                        -------           ---------
                                                                                    331,479,072         331,195,526
                                                                                    -----------         -----------

Commitments and contingencies                                                                 -                   -

Stockholders' equity
Preferred stock, $25 par value; 500,000
   shares authorized; none issued                                                             -                   -
Common stock, $1.25 par value; 2,000,000 shares
   authorized; 1,718,968 shares issued and
   outstanding                                                                        2,148,710           2,148,710
Surplus                                                                                 521,625             521,625
Retained earnings                                                                    29,356,353          29,026,036
Accumulated other comprehensive loss                                                 (1,129,526)         (1,405,498)
                                                                                     ----------          ----------
                                                                                     30,897,162          30,290,873
                                                                                     ----------          ----------
                                                                                $   362,376,234    $    361,486,399
                                                                                ===============    ================

</TABLE>

See Notes to Consolidated Financial Statements.


                                       3
<PAGE>

<TABLE>

                                 Grayson Bankshares, Inc. and Subsidiary
                                    Consolidated Statements of Income
                            For the Three Months ended March 31, 2008 and 2007
----------------------------------------------------------------------------------------------------------
<CAPTION>


                                                                                         Three Months Ended
                                                                                              March 31,
                                                                                        2008              2007
                                                                                        ----              ----
Interest income:                                                                     (Unaudited)       (Unaudited)
<S>                                                                                <C>              <C>

   Loans and fees on loans                                                          $   5,089,085    $    4,888,810
   Federal funds sold                                                                     173,453           178,202
   Investment securities:
     Taxable                                                                              354,338           336,220
     Exempt from federal income tax                                                       122,640            94,289
                                                                                          -------            ------
                                                                                        5,739,516         5,497,521
                                                                                        ---------         ---------

Interest expense:
   Deposits                                                                             2,634,434         2,480,351
   Interest on borrowings                                                                 213,000           140,774
                                                                                          -------           -------
                                                                                        2,847,434         2,621,125
                                                                                        ---------         ---------
         Net interest income                                                            2,892,082         2,876,396

Provision for loan losses                                                                  75,000            60,000
                                                                                           ------            ------
   Net interest income after
     provision for loan losses                                                          2,817,082         2,816,396
                                                                                        ---------         ---------

Noninterest income:
   Service charges on deposit accounts                                                    217,524           118,180
   Increase in cash value of life insurance                                                81,000            55,500
   Net realized gains (losses) on securities                                               15,847              (223)
   Other income                                                                           168,057           400,232
                                                                                          -------           -------
                                                                                          482,428           573,689
                                                                                          -------           -------

Noninterest expense:
   Salaries and employee benefits                                                       1,432,077         1,379,043
   Occupancy expense                                                                       88,707            87,328
   Equipment expense                                                                      210,962           200,444
   Other expense                                                                          605,464           516,808
                                                                                          -------           -------
                                                                                        2,337,210         2,183,623
                                                                                        ---------         ---------
         Income before income taxes                                                       962,300         1,206,462

Income tax expense                                                                        271,000           362,500
                                                                                          -------           -------
         Net income                                                                 $     691,300    $      843,962
                                                                                    -------------    --------------

Basic earnings per share                                                            $        0.40    $         0.49
                                                                                    -------------    --------------
Weighted average shares outstanding                                                     1,718,968         1,718,968
                                                                                        ---------         ---------
Dividends declared per share                                                        $        0.21    $         0.20
                                                                                    =============    ==============

</TABLE>




See Notes to Consolidated Financial Statements.


                                       4
<PAGE>

<TABLE>


                                 Grayson Bankshares, Inc. and Subsidiary
                        Consolidated Statements of Changes in Stockholders' Equity
   For the Three Months ended March 31, 2008 (unaudited) and the Year ended December 31, 2007 (audited)
----------------------------------------------------------------------------------------------------------
<CAPTION>


                                                                                           Accumulated
                                                                                              Other
                                       Common Stock                         Retained      Comprehensive
                                    Shares       Amount       Surplus       Earnings      Income (Loss)       Total
<S>                               <C>         <C>          <C>          <C>            <C>                  <C>


Balance, December 31, 2006         1,718,968   $ 2,148,710  $   521,625  $  27,336,848  $     (1,703,014)  $ 28,304,169

Comprehensive income
  Net income                               -             -            -      3,167,501                 -      3,167,501
  Net change in pension reserve
   net of income taxes of $156,273         -             -            -              -           303,354        303,354
  Net change in unrealized
   gain (loss) on investment
   securities available for
   sale, net of taxes of ($6,191)          -             -            -              -           (12,018)       (12,018)
  Reclassification adjustment,
   net of income taxes of $3,184           -             -            -              -             6,180          6,180
                                                                                                                 ------
Total comprehensive income                                                                                    3,465,017

  Dividends paid
   ($.86 per share)                        -             -            -     (1,478,313)                -     (1,478,313)
                                   ---------   -----------  -----------  -------------  ----------------   ------------
Balance, December 31, 2007         1,718,968   $ 2,148,710  $   521,625  $  29,026,036  $     (1,405,498)  $ 30,290,873

Comprehensive income
  Net income                               -             -            -        691,300                 -        691,300
  Net change in unrealized
   gain (loss) on investment
   securities available for
   sale, net of taxes of  $136,779         -             -            -              -           265,513        265,513
  Reclassification adjustment,
   net of income taxes of $5,388           -             -            -              -            10,459         10,459
Total comprehensive income                                                                                      967,272

  Dividends paid
   ($.21 per share)                        -             -            -       (360,983)                -       (360,983)
                                   ---------   -----------  -----------  -------------  ----------------   ------------
Balance, March 31, 2008            1,718,968   $ 2,148,710  $   521,625  $  29,356,353  $     (1,129,526)   $ 30,897,162
               === ====            =========   ===========  ===========  =============  ================    ============



</TABLE>







See Notes to Consolidated Financial Statements.


                                       5
<PAGE>

<TABLE>

                                 Grayson Bankshares, Inc. and Subsidiary
                                  Consolidated Statements of Cash Flows
                            For the Three Months ended March 31, 2008 and 2007
----------------------------------------------------------------------------------------------------------
<CAPTION>

                                                                                         Three Months Ended
                                                                                              March 31,
                                                                                        2008              2007
                                                                                        ----              ----
                                                                                     (Unaudited)       (Unaudited)
<S>                                                                                <C>              <C>

Cash flows from operating activities:
   Net income                                                                       $     691,300    $      843,962
   Adjustments to reconcile net income
     to net cash provided by operations:
       Depreciation and amortization                                                      193,500           187,500
       Provision for loan losses                                                           75,000            60,000
       Deferred income taxes                                                              302,000           (16,000)
       Net realized (gains) losses on securities                                          (15,847)              223
       Accretion of discount on securities, net of
         amortization of premiums                                                         (10,894)          (13,415)
       Deferred compensation                                                              (11,842)           (1,718)
       Net realized gain on foreclosed assets                                                   -           (48,722)
       Changes in assets and liabilities:
         Cash value of life insurance                                                     (81,000)          (55,500)
         Accrued income                                                                   (40,656)          112,363
         Other assets                                                                    (113,872)         (241,695)
         Accrued interest payable                                                         459,145           337,127
         Other liabilities                                                               (889,178)          572,514
                                                                                         --------           -------
           Net cash provided by operating activities                                      557,656         1,736,639
                                                                                          -------         ---------

Cash flows from investing activities:
   Net decrease in federal funds sold                                                     219,900         6,400,469
   Purchases of investment securities                                                 (15,538,660)       (6,120,254)
   Maturities of investment securities                                                 16,780,756         8,651,673
   Sales of restricted equity securities                                                        -           457,600
   Net (increase) decrease in loans                                                       452,925        (8,148,578)
   Proceeds from the sale of foreclosed assets                                                  -           108,722
   Purchases of bank-owned life insurance                                              (2,000,000)                -
   Purchases of property and equipment, net of sales                                     (415,268)         (473,446)
                                                                                         --------          --------
           Net cash provided by (used in) investing activities                           (500,347)          876,186
                                                                                         --------           -------

Cash flows from financing activities:
   Net increase in deposits                                                               725,421         6,900,247
   Dividends paid                                                                        (360,983)         (343,796)
   Net decrease in long-term debt                                                               -       (10,000,000)
                                                                                           ------       -----------
           Net cash provided by (used in) by financing activities                         364,438        (3,443,549)
                                                                                          -------        ----------
           Net increase (decrease) in cash and cash equivalents                           421,747          (830,724)

Cash and cash equivalents, beginning                                                   10,746,139        10,120,984
                                                                                       ----------        ----------
Cash and cash equivalents, ending                                                   $  11,167,886    $    9,290,260
                                                                                    =============    ==============

Supplemental disclosure of cash flow information:
   Interest paid                                                                    $   2,388,289    $    2,283,998
                                                                                    =============    ==============
   Taxes paid                                                                       $           -    $            -
                                                                                    =============    ==============
Supplemental disclosure of noncash investing activities:
   Transfers of loans to foreclosed properties                                      $      75,000    $            -
                                                                                    =============    ==============

</TABLE>

See Notes to Consolidated Financial Statements.


                                       6
<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")  in a bank  holding  company  reorganization.  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 nine 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
Board of Governors of the Federal Reserve System.

The consolidated  financial  statements as of March 31, 2008 and for the periods
ended March 31, 2008 and 2007 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, 2007, included in the Company's Annual Report on Form
10-K for the fiscal year ended  December 31, 2007. The results of operations for
the three-month  period ended March 31, 2008 are not  necessarily  indicative of
the results to be expected for the full year.

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.  Restrictions on Cash

To comply with  banking  regulations,  the Bank is required to maintain  certain
average cash reserve  balances.  The daily average cash reserve  requirement was
approximately $2,825,000 and $2,775,000 for the periods including March 31, 2008
and December 31, 2007, respectively.

Note 3.  Allowance for Loan Losses

The  following  is an  analysis of the  allowance  for loan losses for the three
months ended March 31, 2008 and 2007.

                                                      2008              2007
                                                      ----              ----

Balance, beginning                                $ 2,757,745       $ 2,901,997
Provision charged to expense                           75,000            60,000
Recoveries of amounts charged off                      22,962            10,956
Amounts charged off                                   (97,571)         (111,165)
                                                      -------          --------
Balance, ending                                   $ 2,758,136       $ 2,861,788
                                                  ===========       ===========




                                       7
<PAGE>

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

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

Note 4.  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
three months ended March 31, 2008 and 2007 follows:

                                                       2008              2007
                                                       ----              ----

Tax at statutory federal rate                       $ 327,182         $ 410,197
Tax exempt interest income                            (47,089)          (39,601)
Other tax exempt income                               (31,225)          (22,554)
Other                                                  22,132            14,458
                                                       ------            ------
                                                    $ 271,000         $ 362,500
                                                    =========         =========
Note 5.  Employee Benefit Plan

The Bank has a  qualified  noncontributory  defined  benefit  pension  plan that
covers  substantially all of its employees.  The benefits are primarily based on
years of service  and  earnings.  The  following  is a summary  of net  periodic
pension costs for the three-month periods ended March 31, 2008 and 2007.

                                                          2008           2007
                                                          ----           ----

Service cost                                           $  97,895      $  96,914
Interest cost                                             91,974         89,458
Expected return on plan assets                          (110,609)       (91,772)
Amortization of net obligation at transition                  (9)            (9)
Amortization of prior service cost                         2,516          2,516
Amortization of net (gain) or loss                        12,932         19,443
                                                          ------         ------
Net periodic benefit cost                              $  94,699      $ 116,550
                                                       =========      =========


Note 6.  Commitments and Contingencies

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 March 31, 2008 and 2007 is as follows:

                                                     2008               2007
                                                     ----               ----

Commitments to extend credit                      $19,366,161        $20,438,947
Standby letters of credit                                --                 --
                                                  -----------        -----------
                                                  $19,366,161        $20,438,947
                                                  ===========        ===========








                                       8
<PAGE>

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

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

Note 6.  Commitments and Contingencies, continued

Commitments to extend credit are agreements to lend to a customer, at a fixed or
variable  interest  rate,  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 that the Bank deems necessary.

Note 7.  Fair Value

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

Fair Value Hierarchy

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

          Level 1  -  Valuation  is  based  upon  quoted  prices  for  identical
          instruments traded in active markets.

          Level  2  -  Valuation  is  based  upon  quoted   prices  for  similar
          instruments in active markets,  quoted prices for identical or similar
          instruments in markets that are not active, and model-based  valuation
          techniques for which all significant assumptions are observable in the
          market.

          Level 3 - Valuation is generated from model-based  techniques that use
          at least one  significant  assumption  not  observable  in the market.
          These unobservable  assumptions  reflect estimates of assumptions that
          market  participants  would use in  pricing  the  asset or  liability.
          Valuation  techniques  may include the use of option  pricing  models,
          discounted cash flow models and similar techniques.

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

Investment Securities Available for Sale

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



                                       9
<PAGE>


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

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

Note 7.  Fair Value, continued

Loans

The Company does not record loans at fair value on a recurring  basis.  However,
from time to time,  a loan is  considered  impaired  and an  allowance  for loan
losses is  established.  Loans for which it is probable that payment of interest
and principal will not be made in accordance with the  contractual  terms of the
loan  agreement  are  considered   impaired.   Once  a  loan  is  identified  as
individually  impaired,  management  measures impairment in accordance with SFAS
114,  "Accounting  by Creditors for Impairment of a Loan, " (SFAS 114). The fair
value of impaired  loans is estimated  using one of several  methods,  including
collateral value,  market value of similar debt,  enterprise value,  liquidation
value and discounted cash flows. Those impaired loans not requiring an allowance
represent  loans  for  which  the  fair  value  of the  expected  repayments  or
collateral  exceed the recorded  investments  in such loans.  At March 31, 2008,
substantially  all of the total impaired loans were evaluated  based on the fair
value of the collateral.  In accordance  with SFAS 157,  impaired loans where an
allowance  is  established  based  on  the  fair  value  of  collateral  require
classification  in  the  fair  value  hierarchy.  When  the  fair  value  of the
collateral is based on an observable  market price or a current appraised value,
the Company records the impaired loan as nonrecurring Level 2. When an appraised
value is not available or management determines the fair value of the collateral
is further impaired below the appraised value and there is no observable  market
price, the Company records the impaired loan as nonrecurring Level 3.

Derivative Assets and Liabilities

Derivative  instruments  held or  issued  by the  Company  for  risk  management
purposes are traded in  over-the-counter  markets where quoted market prices are
not  readily  available.   Management  engages  third-party   intermediaries  to
determine the fair market value of these  derivative  instruments and classifies
these  instruments as Level 2. Examples of Level 2 derivatives are interest rate
swaps,  caps and floors.  No  derivative  instruments  were held as of March 31,
2008, or December 31, 2007.

Foreclosed Assets

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

Assets and Liabilities Recorded at Fair Value on a Recurring Basis
<TABLE>
<CAPTION>
March 31, 2008                                      Total            Level 1          Level 2           Level 3
--------------                                      -----            -------          -------           -------
  <S>                                         <C>              <C>               <C>              <C>

   Investment securities available for sale    $    37,626,335  $              -  $    37,626,335  $              -
   Derivative assets                                         -                 -                -                 -
                                               ---------------  ----------------  ---------------  ----------------
          Total assets at fair value           $    37,626,335  $              -  $    37,626,335  $              -
                                               ===============  ================  ===============  ================

   Derivative liabilities                                    -                 -                -                 -
                                               ---------------  ----------------  ---------------  ----------------
         Total liabilities at fair value       $             -  $              -  $             -  $              -
                                               ===============  ================  ===============  ================

</TABLE>




                                       10
<PAGE>


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

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

Note 7.  Fair Value, continued

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

The Company may be required,  from time to time, to measure  certain  assets and
liabilities  at fair  value on a  nonrecurring  basis in  accordance  with  U.S.
generally accepted accounting  principals.  These include assets and liabilities
that are  measured at the lower of cost or market that were  recognized  at fair
value below cost at the end of the period.  Assets and  liabilities  measured at
fair value on a nonrecurring basis are included in the table below.
<TABLE>
<CAPTION>
March 31, 2008                                      Total            Level 1          Level 2           Level 3
                                               ---------------  ----------------  ---------------  ----------------
  <S>                                         <C>              <C>               <C>              <C>

   Loans                                       $     1,092,752  $              -  $     1,092,752  $              -
   Foreclosed assets                                   235,000                 -          235,000                 -
                                               ---------------  ----------------  ---------------  ----------------
          Total assets at fair value           $     1,327,752  $              -  $     1,327,752  $              -
                                               ===============  ================  ===============  ================

          Total liabilities at fair value      $             -  $              -  $             -  $              -
                                               ===============  ================  ===============  ================
</TABLE>

Note 8.  Emerging Issues Task Force (EITF) 06-10

In March  2007,  the FASB  ratified  the  consensuses  reached by the  Financial
Accounting  Standards  Board's  (FASB's)  Emerging Issues Task Force relating to
EITF 06-10,  "Accounting for Collateral  Assignment  Split-Dollar Life Insurance
Arrangements"  (EITF 06-10).  EITF 06-10 states that  entities  with  collateral
split-dollar  life insurance  arrangements that provide a benefit to an employee
that extends to  postretirement  periods should recognize a liability for future
benefits  in  accordance   with  SFAS  No.  106,   "Employers'   Accounting  for
Postretirement Benefits Other Than Pensions",  (if in substance a postretirement
benefit plan exists). The Company evaluated the impact of applying this issue as
a change in  accounting  principle  through a  cumulative-effect  adjustment  to
retained  earnings.  Because the Bank has a limited number of split-dollar  life
insurance  arrangements  in  effect,  all of which are  term-based  arrangements
expiring  between  the years  2009 and 2013,  the  Company  determined  that the
liability for future benefits was not significant.
























                                       11
<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.

Critical Accounting Policies

For a discussion of the Company's critical  accounting  policies,  including its
allowance for loan losses,  see the Company's Annual Report on Form 10-K for the
year ended December 31, 2007.

Results of Operations

Total interest income increased by $241,995 for the quarter ended March 31, 2008
compared to the quarter ended March 31, 2007, while interest expense on deposits
and other borrowings increased by $226,309 over the same period. The increase in
interest  income was  attributable  primarily  to an increase  in average  loans
outstanding.  Growth in  interest-earning  assets was partially offset by recent
reductions in interest  rates which led to immediate  decreases in federal funds
interest as well as interest on loans  indexed to the prime  lending  rate.  The
increase in interest  expense was due to growth in deposits and to the migration
of   funds  by   customers   from   lower-yielding   transaction   accounts   to
higher-yielding time deposits. The aforementioned decrease in interest rates did
not have as great an impact on interest expense as deposits have not repriced as
quickly as loans and  federal  funds  sold,  thus  leading to a decrease  in the
bank's net  interest  margin.  The result was a slight  increase in net interest
income of $15,686 or 0.55% in the first  quarter  of 2008  compared  to the same
period last year.

The  provision  for loan losses was $75,000 for the quarter ended March 31, 2008
and $60,000  for the same  period in 2007.  The reserve for loan losses at March
31,  2008 was  approximately  1.04%  of total  loans.  Management  believes  the
provision and the resulting allowance for loan losses are adequate.

Noninterest  income  was  $482,428  in the first  quarter  of 2008  compared  to
$573,689  in the first  quarter of 2007.  Service  charges  on deposit  accounts
increased  by  $99,344,  or  84.06%  due to  the  introduction  of an  overdraft
privilege program in the second quarter of 2007. However, other income decreased
by $232,175 due to the  recognition  in March 2007 of earnings of  approximately
$191,000 from the Bank's investment in a Small Business Investment Company.

Noninterest  expenses  increased by $153,587,  or 7.03%,  for the quarter  ended
March 31, 2008 compared to the quarter  ended March 31, 2007.  The increase came
as a result  of normal  increases  in  salaries,  benefits  and other  operating
expenses.

The decreases in net interest  margin and  noninterest  income combined with the
increase in noninterest expenses led to a decrease in net income before taxes of
$244,162,  for the quarter ended March 31, 2008, compared to the same quarter in
2007.  Income tax expense  decreased  accordingly  from  $362,500  for the first
quarter  of 2007 to  $271,000  for the  first  quarter  of 2008  resulting  in a
decrease in net income of  $152,662,  to $691,300,  for the quarter  compared to
$843,962 for the same period last year.

Financial Condition

Total assets  increased by $889,835,  or 0.25%,  from December 31, 2007 to March
31,  2008.  Net loans  decreased by $602,925,  federal  funds sold  decreased by
$219,900 and investment securities decreased by $797,216. The cash value of life
insurance  increased as the Bank made an additional  investment of $2,000,000 in
bank-owned life insurance during the quarter.




                                       12
<PAGE>


                          Part I. Financial Information

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

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

Total deposits increased by $725,421,  or 0.23%, from December 31, 2007 to March
31, 2008. The slower  deposit growth came as management  sought to lower deposit
rates in  conjunction  with the  decreases  in rates on loans and federal  funds
sold.  The  decrease  in  other  liabilities  was  attributable  to  the  Bank's
contribution of $949,743 to the employee defined benefit pension plan.

Shareholders'   equity  totaled  $30,897,162  at  March  31,  2008  compared  to
$30,290,873  at December  31,  2007.  The  $606,289  increase  was the result of
earnings for the three months  combined  with an increase in the market value of
securities  classified  as available  for sale of $275,972,  less the payment of
dividends of $360,983.

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
exceeds  all   regulatory   capital   guidelines   and  is   considered   to  be
well-capitalized.

Liquidity and Capital Resources

Liquidity  is the  ability  to  convert  assets  to  cash  to  fund  depositors'
withdrawals or borrowers'  loans without  significant  loss.  Federal fund lines
available  from  correspondent  banks totaled  $18,400,000 at March 31, 2008. No
balances were outstanding on these lines at March 31, 2008 or December 31, 2007.
Long-term  debt  consists  of  borrowings  from the  Federal  Home Loan Bank and
Deutsche Bank.  Borrowings from the Federal Home Loan Bank, which are secured by
a blanket  collateral  agreement  on the Bank's 1 to 4 family  residential  real
estate  loans,  totaled  $10,000,000  at March 31, 2008 and  December  31, 2007.
Borrowings  from  Deutsche  Bank,  which are secured by the pledging of specific
investment  securities,  totaled  $10,000,000  at each of March  31,  2008,  and
December 31, 2007.  The unused credit line from the Federal Home Loan Bank as of
March 31, 2008 is approximately $44,100,000.

The Bank uses cash and federal  funds sold to meet its daily funding  needs.  If
funding needs are met through  holdings of excess cash and federal  funds,  then
profits might be sacrificed as  higher-yielding  investments are foregone in the
interest of liquidity.  Therefore management determines,  based on such items as
loan demand and deposit activity, an appropriate level of cash and federal funds
and seeks to maintain that level.

The Bank's investment  security  portfolio also serves as a source of liquidity.
The primary  goals of the  investment  portfolio are  liquidity  management  and
maturity gap  management.  As  investment  securities  mature,  the proceeds are
reinvested  in  federal  funds  sold if the  federal  funds  level  needs  to be
increased;   otherwise  the  proceeds  are  reinvested  in  similar   investment
securities.   The  majority  of  investment  security  transactions  consist  of
replacing  securities that have been called or matured. The Bank keeps a portion
of its investment  portfolio in unpledged assets that are less than 24 months to
maturity.  These investments are a preferred source of funds in that they can be
disposed of in any interest rate environment  without causing significant damage
to that quarter's profits.

As a result of the steps described above,  management  believes that the Company
maintains overall liquidity  sufficient to satisfy its depositors'  requirements
and meet its customers' credit needs.












                                       13
<PAGE>


                          Part I. Financial Information

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

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

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.  For  additional  information  on known and unknown
risks,  see the  "Caution  About  Forward  Looking  Statements"  section  in the
Company's Annual Report on Form 10-K for the year ended December 31, 2007.




































                                       14
<PAGE>


                          Part I. Financial Information

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

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

Not applicable to smaller reporting companies.









































                                       15
<PAGE>

                          Part I. Financial Information

Item 4T.  Controls and Procedures

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

As of  the  end of  the  period  covered  by  this  report,  we  carried  out an
evaluation,  under the supervision and with the  participation  of the Company's
management,  including the Company's  President and Chief Executive  Officer and
Chief Financial Officer, of the effectiveness of the design and operation of our
disclosure  controls and procedures pursuant to Rule 13a-15 under the Securities
Exchange Act of 1934.  Based upon that evaluation,  the Company's  President and
Chief  Executive   Officer  and  Chief  Financial  Officer  concluded  that  its
disclosure  controls and  procedures  are  effective in timely  alerting them to
material  information  relating  to  the  Company  (including  its  consolidated
subsidiary)  required to be included in its periodic filings with the Securities
and Exchange Commission.

The Company's  management is also  responsible for  establishing and maintaining
adequate internal control over financial reporting. There were no changes in the
Company's  internal  control over financial  reporting  identified in connection
with the evaluation of it that occurred during the Company's last fiscal quarter
that  materially  affected,  or are  reasonably  likely  to  materially  affect,
internal control over financial reporting.































                                       16
<PAGE>


                           Part II. Other Information

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


Item 1.  Legal Proceedings

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

Item 1A. Risk Factors

         Not applicable to smaller reporting companies.

Item 2.  Unregistered Sales of Equity 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

         None

Item 5.  Other Information

         None

Item 6.  Exhibits

         31.1   Rule 13(a)-14(a) Certification of Chief Executive Officer.

         31.2   Rule 13(a)-14(a) Certification of Chief Financial Officer.

         32.1   Statement of Chief Executive Officer and Chief Financial Officer
                Pursuant to 18 U.S.C. Section 1350.


























                                       17
<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.



                                     GRAYSON BANKSHARES, INC.




Date: May 15, 2008                   By:  /s/ Jacky K. Anderson
                                          Jacky K. Anderson
                                          President and Chief Executive Officer



                                     By:  /s/ Blake M. Edwards
                                          Blake M. Edwards
                                          Chief Financial Officer




                                       18
<PAGE>


                                  Exhibit Index


         Exhibit No.       Description

           31.1    Rule 13(a)-14(a) Certification of Chief Executive Officer.

           31.2    Rule 13(a)-14(a) Certification of Chief Financial Officer.

           32.1    Statement of Chief Executive  Officer and Chief Financial
                   Officer  Pursuant to 18 U.S.C. Section 1350.