| Virginia(State or other jurisdiction ofincorporation or organization)                    | 54-1647596(I.R.S. EmployerIdentification No.) |
|------------------------------------------------------------------------------------------|-----------------------------------------------|
|  113 West Main StreetIndependence, Virginia(Address of principal executive offices) |   24348(Zip Code)                   |

----

| PART I     | FINANCIAL INFORMATION                                                             |   |
|------------|-----------------------------------------------------------------------------------|--------|
|       |                                                                              |   |
| Item 1.    | Financial Statements                                                              |   |
|       |                                                                              |   |
|       | Consolidated Balance Sheets—June 30, 2010 (Unaudited)                       |   |
|       | and December 31, 2009 (Audited)                                                   | 3      |
|       |                                                                              |   |
|       | Unaudited Consolidated Statements of Income—Six Months Ended                |   |
|       | June 30, 2010 and June 30, 2009                                                   | 4      |
|       |                                                                              |   |
|       | Unaudited Consolidated Statements of Income—Three Months Ended              | 5      |
|       | June 30, 2010 and June 30, 2009                                                   |   |
|       |                                                                              |   |
|       | Consolidated Statements of Changes in Stockholders’ Equity—Six Months |   |
|       | Ended June 30, 2010 (Unaudited) and Year Ended December 31, 2009 (Audited)        | 6      |
|       |                                                                              |   |
|       | Unaudited Consolidated Statements of Cash Flows—Six Months Ended            |   |
|       | June 30, 2010 and June 30, 2009                                                   | 7      |
|       |                                                                              |   |
|       | Notes to Consolidated Financial Statements                                        | 8      |
|       |                                                                              |   |
| Item 2.    | Management’s Discussion and Analysis of Financial Condition                 |   |
|       | and Results of Operations                                                         | 18     |
|       |                                                                              |   |
| Item 3.    | Quantitative and Qualitative Disclosures about Market Risk                        | 21     |
|       |                                                                              |   |
| Item 4.    | Controls and Procedures                                                           | 22     |
|       |                                                                              |   |
| PART II    | OTHER INFORMATION                                                                 |   |
|       |                                                                              |   |
| Item 1.    | Legal Proceedings                                                                 | 23     |
|       |                                                                              |   |
| Item 1A.   | Risk Factors                                                                      | 23     |
|       |                                                                              |   |
| Item 2.    | Unregistered Sales of Equity Securities and Use of Proceeds                       | 23     |
|       |                                                                              |   |
| Item 3.    | Defaults Upon Senior Securities                                                   | 23     |
|       |                                                                              |   |
| Item 4.    | Removed and Reserved                                                              | 23     |
|       |                                                                              |   |
| Item 5.    | Other Information                                                                 | 23     |
|       |                                                                              |   |
| Item 6.    | Exhibits                                                                          | 23     |
|       |                                                                              |   |
| Signatures |                                                                              | 24     |

----

|                                                     |   | June 30,    |        |   | December 31, |   |
|----------------------------------------------------------|--------|-------------|-------------|--------|--------------|--------|
|                                                     |   | 2010        |        |   | 2009         |   |
| Assets                                                   |   | (Unaudited) |        |   | (Audited)    |   |
|                                                     |   |        |        |   |         |   |
| Cash and due from banks                                  |   | $           | 10,014,653  |   |         | $      | 8,637,123 |   |
| Interest-bearing deposits with banks                     |   |        | 300,307     |   |         |   | 300,000 |   |
| Federal funds sold                                       |   |        | 19,283,671  |   |         |   | 19,356,999 |   |
| Investment securities available for sale                 |   |        | 40,427,323  |   |         |   | 39,859,119 |   |
| Investment securities held to maturity                   |   |        |        |   |         |   |   |   |
| (fair value approximately $2,288,946 at June 30, 2010,   |   |        |        |   |         |   |   |   |
| and $2,254,196 at December 31,  2009)          |   |        | 2,198,019   |   |         |   | 2,174,882 |   |
| Restricted equity securities                             |   |        | 1,783,700   |   |         |   | 1,783,700 |   |
| Loans, net of allowance for loan losses of $3,891,028 at |   |        |        |   |         |   |   |   |
| June 30, 2010 and $3,555,273 at December 31, 2009        |   |        | 262,406,535 |   |         |   | 266,628,050 |   |
| Cash value of life insurance                             |   |        | 8,248,134   |   |         |   | 8,098,134 |   |
| Foreclosed assets                                        |   |        | 3,092,726   |   |         |   | 2,808,885 |   |
| Property and equipment, net                              |   |        | 10,901,106  |   |         |   | 11,133,834 |   |
| Accrued interest receivable                              |   |        | 2,443,533   |   |         |   | 2,626,164 |   |
| Other assets                                             |   |        | 6,407,669   |   |         |   | 6,195,031 |   |
|                                                     |   | $           | 367,507,376 |   |         | $      | 369,601,921 |   |
| Liabilities and Stockholders’ Equity               |   |
|                                                     |   |        |        |   |         |   |   |   |
| Liabilities                                              |   |        |        |   |         |   |   |   |
| Deposits                                                 |   |        |        |   |         |   |   |   |
| Noninterest-bearing                                      |   | $           | 42,584,738  |   |         | $      | 44,924,699 |   |
| Interest-bearing                                         |   |        | 267,851,226 |   |         |   | 268,558,517 |   |
| Total deposits                                           |   |        | 310,435,964 |   |         |   | 313,483,216 |   |
|                                                     |   |        |        |   |         |   |   |   |
| Long-term debt                                           |   |        | 25,000,000  |   |         |   | 25,000,000 |   |
| Accrued interest payable                                 |   |        | 344,261     |   |         |   | 382,653 |   |
| Other liabilities                                        |   |        | 528,617     |   |         |   | 196,107 |   |
|                                                     |   |        | 336,308,842 |   |         |   | 339,061,976 |   |
|                                                     |   |        |        |   |         |   |   |   |
| 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                      |   |        |        |   |         |   |   |   |
| in 2010 and 2009, respectively                           |   |        | 2,148,710   |   |         |   | 2,148,710 |   |
| Surplus                                                  |   |        | 521,625     |   |         |   | 521,625 |   |
| Retained earnings                                        |   |        | 28,706,144  |   |         |   | 28,497,214 |   |
| Accumulated other comprehensive income (loss)            |   |        | (177,945    | )      |         |   | (627,604 | ) |
|                                                     |   |        | 31,198,534  |   |         |   | 30,539,945 |   |
|                                                     |   | $           | 367,507,376 |   |         | $      | 369,601,921 |   |

----

|                                     |   | Six Months Ended |      |
|------------------------------------------|--------|------------------|-----------|
|                                     |   | June 30,         |      |
|                                     |   | 2010             |      |   | 2009 |   |
|                                     |   | (Unaudited)      |      |   | (Unaudited) |   |
| Interest income                          |   |             |      |   |   |   |
| Loans and fees on loans                  |   | $                | 8,475,970 |   |   | $ | 8,939,865 |   |
| Interest-bearing deposits in banks       |   |             | 329       |   |   |   | - |   |
| Federal funds sold                       |   |             | 19,959    |   |   |   | 18,756 |   |
| Investment securities:                   |   |             |      |   |   |   |   |   |
| Taxable                                  |   |             | 682,087   |   |   |   | 864,494 |   |
| Exempt from federal income tax           |   |             | 185,968   |   |   |   | 212,668 |   |
|                                     |   |             | 9,364,313 |   |   |   | 10,035,783 |   |
|                                     |   |             |      |   |   |   |   |   |
|                                     |   |             |      |   |   |   |   |   |
| Interest expense                         |   |             |      |   |   |   |   |   |
| Deposits                                 |   |             | 2,877,082 |   |   |   | 3,901,651 |   |
| Interest on borrowings                   |   |             | 523,820   |   |   |   | 611,245 |   |
|                                     |   |             | 3,400,902 |   |   |   | 4,512,896 |   |
| Net interest income                      |   |             | 5,963,411 |   |   |   | 5,522,887 |   |
|                                     |   |             |      |   |   |   |   |   |
| Provision for loan losses                |   |             | 849,759   |   |   |   | 581,637 |   |
| Net interest income after                |   |             |      |   |   |   |   |   |
|                                     |   |             | 5,113,652 |   |   |   | 4,941,250 |   |
|                                     |   |             |      |   |   |   |   |   |
| Noninterest income                       |   |             |      |   |   |   |   |   |
| Service charges on deposit accounts      |   |             | 504,782   |   |   |   | 461,326 |   |
| Increase in cash value of life insurance |   |             | 150,000   |   |   |   | 156,000 |   |
| Net realized gains on securities         |   |             | 32,967    |   |   |   | 164,181 |   |
| Other income                             |   |             | 314,181   |   |   |   | 321,083 |   |
|                                     |   |             | 1,001,930 |   |   |   | 1,102,590 |   |
|                                     |   |             |      |   |   |   |   |   |
| Noninterest expense                      |   |             |      |   |   |   |   |   |
| Salaries and employee benefits           |   |             | 3,154,829 |   |   |   | 3,290,727 |   |
| Occupancy expense                        |   |             | 244,774   |   |   |   | 238,105 |   |
| Equipment expense                        |   |             | 395,991   |   |   |   | 421,932 |   |
| Other expense                            |   |             | 1,662,264 |   |   |   | 1,534,421 |   |
|                                     |   |             | 5,457,858 |   |   |   | 5,485,185 |   |
| Income before income taxes               |   |             | 657,724   |   |   |   | 558,655 |   |
|                                     |   |             |      |   |   |   |   |   |
| Income tax expense                       |   |             | 105,000   |   |   |   | 73,000 |   |
| Net income                               |   | $                | 552,724   |   |   | $ | 485,655 |   |
|                                     |   |             |      |   |   |   |   |   |
| Basic earnings  per share      |   | $                | 0.32      |   |   | $ | 0.28 |   |
| Weighted average shares outstanding      |   |             | 1,718,968 |   |   |   | 1,718,968 |   |
| Dividends declared per share             |   | $                | 0.20      |   |   | $ | 0.20 |   |

----

|                                      |   | Three Months Ended |      |
|-------------------------------------------|--------|--------------------|-----------|
|                                      |   | June 30,           |      |
|                                      |   | 2010               |      |   | 2009 |   |
|                                      |   | (Unaudited)        |      |   | (Unaudited) |   |
| Interest income                           |   |               |      |   |   |   |
| Loans and fees on loans                   |   | $                  | 4,170,528 |   |   | $ | 4,365,826 |   |
| Interest-bearing deposits in banks        |   |               | 119       |   |   |   | - |   |
| Federal funds sold                        |   |               | 10,668    |   |   |   | 8,123 |   |
| Investment securities:                    |   |               |      |   |   |   |   |   |
| Taxable                                   |   |               | 345,810   |   |   |   | 429,472 |   |
| Exempt from federal income tax            |   |               | 92,228    |   |   |   | 101,589 |   |
|                                      |   |               | 4,619,353 |   |   |   | 4,905,010 |   |
|                                      |   |               |      |   |   |   |   |   |
| Interest expense                          |   |               |      |   |   |   |   |   |
| Deposits                                  |   |               | 1,409,173 |   |   |   | 1,874,450 |   |
| Interest on borrowings                    |   |               | 263,357   |   |   |   | 300,346 |   |
|                                      |   |               | 1,672,530 |   |   |   | 2,174,796 |   |
| Net interest income                       |   |               | 2,946,823 |   |   |   | 2,730,214 |   |
|                                      |   |               |      |   |   |   |   |   |
| Provision for loan losses                 |   |               | 563,251   |   |   |   | 446,803 |   |
| Net interest income after                 |   |               |      |   |   |   |   |   |
| Provision for loan losses                 |   |               | 2,383,572 |   |   |   | 2,283,411 |   |
|                                      |   |               |      |   |   |   |   |   |
| Noninterest income                        |   |               |      |   |   |   |   |   |
| Service charges on deposit accounts       |   |               | 272,044   |   |   |   | 252,176 |   |
| Increase in cash value of life insurance  |   |               | 75,000    |   |   |   | 78,000 |   |
| Net realized gains (losses) on securities |   |               | (2,990    | ) |   |   | 138,714 |   |
| Other income                              |   |               | 149,212   |   |   |   | 160,268 |   |
|                                      |   |               | 493,266   |   |   |   | 629,158 |   |
|                                      |   |               |      |   |   |   |   |   |
| Noninterest expense                       |   |               |      |   |   |   |   |   |
| Salaries and employee benefits            |   |               | 1,589,044 |   |   |   | 1,649,014 |   |
| Occupancy expense                         |   |               | 108,646   |   |   |   | 117,890 |   |
| Equipment expense                         |   |               | 200,253   |   |   |   | 214,995 |   |
| Other expense                             |   |               | 849,255   |   |   |   | 1,002,433 |   |
|                                      |   |               | 2,747,198 |   |   |   | 2,984,332 |   |
| Income (loss) before income taxes         |   |               | 129,640   |   |   |   | (71,763 | ) |
|                                      |   |               |      |   |   |   |   |   |
| Income tax benefit                        |   |               | (14,000   | ) |   |   | (94,000 | ) |
| Net income                                |   | $                  | 143,640   |   |   | $ | 22,237 |   |
|                                      |   |               |      |   |   |   |   |   |
| Basic earnings per share                  |   | $                  | 0.08      |   |   | $ | 0.01 |   |
| Weighted average shares outstanding       |   |               | 1,718,968 |   |   |   | 1,718,968 |   |
| Dividends declared per share              |   | $                  | 0.10      |   |   | $ | 0.10 |   |

----

|                                      |   |         |      |   |   |    |      |     |   |    |          |   |   | Accumulated   |       |   |   |    |
|-------------------------------------------|--------|--------------|-----------|--------|--------|---------|-----------|----------|--------|---------|---------------|--------|--------|---------------|------------|--------|--------|---------|
|                                      |   |         |      |   |   |    |      |     |   |    |          |   |   | Other         |       |   |   |    |
|                                      |   | Common Stock |      |   |   |    |      | Retained |   |    | Comprehensive |   |   |          |       |
|                                      |   | Shares       |      |   | Amount |    |      | Surplus  |   |    | Earnings      |   |   | Income (Loss) |       |   | Total  |    |
|                                      |   |         |      |   |   |    |      |     |   |    |          |   |   |          |       |   |   |    |
| Balance, December 31, 2008                |   |         | 1,718,968 |   |   | $       | 2,148,710 |     |   |  $ | 521,625       |   |   | $             | 28,302,082 |   |   |  $ | (1,955,722 | ) |   | $ | 29,016,695 |   |
|                                      |   |         |      |   |   |    |      |     |   |    |          |   |   |          |       |   |   |    |   |   |   |   |   |   |
| Comprehensive income                      |   |         |      |   |   |    |      |     |   |    |          |   |   |          |       |   |   |    |   |   |   |   |   |   |
| Net income                                |   |         | -         |   |   |    | -         |     |   |    | -             |   |   |          | 882,719    |   |   |    | - |   |   |   | 882,719 |   |
| Net change in pension reserve             |   |         |      |   |   |    |      |     |   |    |          |   |   |          |       |   |   |    |   |   |   |   |   |   |
| net of income taxes of $555,893           |   |         | -         |   |   |    | -         |     |   |    | -             |   |   |          | -          |   |   |    | 1,079,087 |   |   |   | 1,079,087 |   |
| Net change in unrealized                  |   |         |      |   |   |    |      |     |   |    |          |   |   |          |       |   |   |    |   |   |   |   |   |   |
| gain on investment                        |   |         |      |   |   |    |      |     |   |    |          |   |   |          |       |   |   |    |   |   |   |   |   |   |
| securities available for                  |   |         |      |   |   |    |      |     |   |    |          |   |   |          |       |   |   |    |   |   |   |   |   |   |
| sale, net of taxes of $203,119            |   |         | -         |   |   |    | -         |     |   |    | -             |   |   |          | -          |   |   |    | 394,290 |   |   |   | 394,290 |   |
| Reclassification adjustment,              |   |         |      |   |   |    |      |     |   |    |          |   |   |          |       |   |   |    |   |   |   |   |   |   |
| net of income taxes of ($74,830)          |   |         | -         |   |   |    | -         |     |   |    | -             |   |   |          | -          |   |   |    | (145,259 | ) |   |   | (145,259 | ) |
| Total comprehensive income                |   |         |      |   |   |    |      |     |   |    |          |   |   |          |       |   |   |    |   |   |   |  $ | 2,210,837 |   |
|                                      |   |         |      |   |   |    |      |     |   |    |          |   |   |          |       |   |   |    |   |   |   |   |   |   |
| Dividends paid                            |   |         |      |   |   |    |      |     |   |    |          |   |   |          |       |   |   |    |   |   |   |   |   |   |
| ($.40 per share)                          |   |         | -         |   |   |    | -         |     |   |    | -             |   |   |          | (687,587   | )      |   |    | - |   |   |   | (687,587 | ) |
| Balance, December 31, 2009                |   |         | 1,718,968 |   |   | $       | 2,148,710 |     |   |  $ | 521,625       |   |   | $             | 28,497,214 |   |   |  $ | (627,604 | ) |   | $ | 30,539,945 |   |
|                                      |   |         |      |   |   |    |      |     |   |    |          |   |   |          |       |   |   |    |   |   |   |   |   |   |
| Comprehensive income                      |   |         |      |   |   |    |      |     |   |    |          |   |   |          |       |   |   |    |   |   |   |   |   |   |
| Net income                                |   |         | -         |   |   |    | -         |     |   |    | -             |   |   |          | 552,724    |   |   |    | - |   |   |   | 552,724 |   |
| Net change in unrealized                  |   |         |      |   |   |    |      |     |   |    |          |   |   |          |       |   |   |    |   |   |   |   |   |   |
| loss on investment                        |   |         |      |   |   |    |      |     |   |    |          |   |   |          |       |   |   |    |   |   |   |   |   |   |
| securities available for                  |   |         |      |   |   |    |      |     |   |    |          |   |   |          |       |   |   |    |   |   |   |   |   |   |
| sale, net of taxes of  $242,851 |   |         | -         |   |   |    | -         |     |   |    | -             |   |   |          | -          |   |   |    | 471,417 |   |   |   | 471,417 |   |
| Reclassification adjustment,              |   |         |      |   |   |    |      |     |   |    |          |   |   |          |       |   |   |    |   |   |   |   |   |   |
| net of income taxes of ($11,209)          |   |         | -         |   |   |    | -         |     |   |    | -             |   |   |          | -          |   |   |    | (21,758 | ) |   |   | (21,758 | ) |
| Total comprehensive income                |   |         |      |   |   |    |      |     |   |    |          |   |   |          |       |   |   |    |   |   |   |   | 1,002,383 |   |
|                                      |   |         |      |   |   |    |      |     |   |    |          |   |   |          |       |   |   |    |   |   |   |   |   |   |
| Dividends paid                            |   |         |      |   |   |    |      |     |   |    |          |   |   |          |       |   |   |    |   |   |   |   |   |   |
| ($.20 per share)                          |   |         | -         |   |   |    | -         |     |   |    | -             |   |   |          | (343,794   | )      |   |    | - |   |   |   | (343,794 | ) |
| Balance, June 30, 2010                    |   |         | 1,718,968 |   |   |  $ | 2,148,710 |     |   |  $ | 521,625       |   |   |  $       | 28,706,144 |   |   |  $ | (177,945 | ) |   |  $ | 31,198,534 |   |

----

|                                                                  |   | Six Months Ended |        |
|-----------------------------------------------------------------------|--------|------------------|-------------|
|                                                                  |   | June 30,         |        |
|                                                                  |   | 2010             |        |   | 2009 |   |
| Cash flows from operating activities                                  |   | (Unaudited)      |        |   | (Unaudited) |   |
| Net income                                                            |   | $                | 552,724     |   |   | $ | 485,655 |   |
| Adjustments to reconcile net income                                   |   |             |        |   |   |   |   |   |
| to net cash provided by operations:                                   |   |             |        |   |   |   |   |   |
| Depreciation and amortization                                         |   |             | 381,000     |   |   |   | 411,000 |   |
| Provision for loan losses                                             |   |             | 849,759     |   |   |   | 581,637 |   |
| Deferred income taxes                                                 |   |             | 118,000     |   |   |   | 609,000 |   |
| Net realized gains on securities                                      |   |             | (32,967     | ) |   |   | (164,181 | ) |
| Accretion of discount on securities, net of                           |   |             |        |   |   |   |   |   |
| amortization of premiums                                              |   |             | 104,492     |   |   |   | 42,534 |   |
| Deferred compensation                                                 |   |             | (14,879     | ) |   |   | (9,318 | ) |
| Net realized loss on foreclosed assets                                |   |             | 1,070       |   |   |   | 2,073 |   |
| Changes in assets and liabilities:                                    |   |             |        |   |   |   |   |   |
| Cash value of life insurance                                          |   |             | (150,000    | ) |   |   | (156,000 | ) |
| Accrued income                                                        |   |             | 182,631     |   |   |   | 416,523 |   |
| Other assets                                                          |   |             | (562,281    | ) |   |   | 16,148 |   |
| Accrued interest payable                                              |   |             | (38,392     | ) |   |   | (84,700 | ) |
| Other liabilities                                                     |   |             | 347,389     |   |   |   | (2,593,217 | ) |
| Net cash provided by (used in) operating activities                   |   |             | 1,738,546   |   |   |   | (442,846 | ) |
|                                                                  |   |             |        |   |   |   |   |   |
| Cash flows from investing activities                                  |   |             |        |   |   |   |   |   |
| Net increase in interest-bearing deposits                             |   |             | (307        | ) |   |   | - |   |
| Net decrease in federal funds sold                                    |   |             | 73,328      |   |   |   | 2,167,967 |   |
| Purchases of available-for-sale investment securities                 |   |             | (17,417,695 | ) |   |   | (13,980,295 | ) |
| Sales of available-for-sale investment securities                     |   |             | 2,138,794   |   |   |   | 5,657,100 |   |
| Maturities/calls/paydowns of available-for-sale investment securities |   |             | 15,297,337  |   |   |   | 11,803,775 |   |
| Maturities/calls/paydowns of held-to-maturity investment securities   |   |             | -           |   |   |   | 500,000 |   |
| Purchases of restricted equity securities                             |   |             | -           |   |   |   | (12,900 | ) |
| Net (increase) decrease in loans                                      |   |             | 2,948,756   |   |   |   | (631,646 | ) |
| Proceeds from the sale of foreclosed assets                           |   |             | 138,089     |   |   |   | 29,427 |   |
| Purchases of property and equipment, net of sales                     |   |             | (148,272    | ) |   |   | (635,323 | ) |
| Net cash provided by investing activities                             |   |             | 3,030,030   |   |   |   | 4,898,105 |   |
|                                                                  |   |             |        |   |   |   |   |   |
| Cash flows from financing activities                                  |   |             |        |   |   |   |   |   |
| Net increase (decrease) in deposits                                   |   |             | (3,047,252  | ) |   |   | 2,989,139 |   |
| Dividends paid                                                        |   |             | (343,794    | ) |   |   | (343,793 | ) |
| Net decrease in long-term debt                                        |   |             | -           |   |   |   | (5,000,000 | ) |
| Net cash used in financing activities                                 |   |             | (3,391,046  | ) |   |   | (2,354,654  | ) |
| Net increase in cash and due from banks                               |   |             | 1,377,530   |   |   |   | 2,100,605  |   |
|                                                                  |   |             |        |   |   |   |   |   |
| Cash and due from banks, beginning                                    |   |             | 8,637,123   |   |   |   | 9,536,772 |   |
| Cash and due from banks, ending                                       |   | $                | 10,014,653  |   |   | $ | 11,637,377 |   |
|                                                                  |   |             |        |   |   |   |   |   |
| Supplemental disclosure of cash flow information                      |   |             |        |   |   |   |   |   |
| Interest paid                                                         |   | $                | 3,439,294   |   |   | $ | 4,597,596 |   |
| Taxes paid                                                            |   | $                | -           |   |   | $ | 190,000 |   |
| Transfers of loans to foreclosed properties                           |   | $                | 423,000     |   |   | $ | 435,000 |   |

----

----

|                              |   | Amortized |       |   | Unrealized |   |      | Unrealized |   |   | Fair    |   |
|-----------------------------------|--------|-----------|------------|--------|------------|--------|-----------|------------|--------|--------|---------|--------|
|                              |   | Cost      |       |   | Gains      |   |      | Losses     |   |   | Value   |   |
|                              |   |      |       |   |       |   |      |       |   |   |    |   |
| June 30, 2010                     |   |      |       |   |       |   |      |       |   |   |    |   |
| Available for sale:               |   |      |       |   |       |   |      |       |   |   |    |   |
| U.S. Government agency securities |   | $         | 1,368,502  |   |       | $      | 74,853    |       |   | $      | -       |   |   | $ | 1,443,355 |   |
| Government sponsored enterprises  |   |      | 15,568,718 |   |       |   | 309,104   |       |   |   | 42,558  |   |   |   | 15,835,264 |   |
| Mortgage-backed securities        |   |      | 15,463,394 |   |       |   | 736,916   |       |   |   | -       |   |   |   | 16,200,310 |   |
| State and municipal securities    |   |      | 6,765,795  |   |       |   | 186,409   |       |   |   | 3,810   |   |   |   | 6,948,394 |   |
|                              |   | $         | 39,166,409 |   |       | $      | 1,307,282 |       |   | $      | 46,368  |   |   | $ | 40,427,323 |   |
| Held to maturity:                 |   |      |       |   |       |   |      |       |   |   |    |   |   |   |   |   |
| State and municipal securities    |   | $         | 2,198,019  |   |       | $      | 94,618    |       |   | $      | 3,691   |   |   | $ | 2,288,946 |   |
|                              |   |      |       |   |       |   |      |       |   |   |    |   |   |   |   |   |
| December 31, 2009                 |   |      |       |   |       |   |      |       |   |   |    |   |   |   |   |   |
| Available for sale:               |   |      |       |   |       |   |      |       |   |   |    |   |   |   |   |   |
| U.S. Government agency securities |   | $         | 1,629,026  |   |       | $      | 81,689    |       |   | $      | -       |   |   | $ | 1,710,715 |   |
| Government sponsored enterprises  |   |      | 13,067,890 |   |       |   | 38,375    |       |   |   | 204,195 |   |   |   | 12,902,070 |   |
| Mortgage-backed securities        |   |      | 17,295,436 |   |       |   | 560,310   |       |   |   | -       |   |   |   | 17,855,746 |   |
| State and municipal securities    |   |      | 7,287,155  |   |       |   | 162,768   |       |   |   | 59,335  |   |   |   | 7,390,588 |   |
|                              |   | $         | 39,279,507 |   |       | $      | 843,142   |       |   | $      | 263,530 |   |   | $ | 39,859,119 |   |
| Held to maturity:                 |   |      |       |   |       |   |      |       |   |   |    |   |   |   |   |   |
| State and municipal securities    |   | $         | 2,174,882  |   |       | $      | 86,889    |       |   | $      | 7,575   |   |   | $ | 2,254,196 |   |

----

|                                |   | Less Than 12 Months |      |   | 12 Months or More |   |    | Total  |   |
|-------------------------------------|--------|---------------------|-----------|--------|-------------------|--------|---------|--------|--------|
|                                |   | Fair                |      |   | Unrealized        |   |    | Fair   |   |   | Unrealized |   |   | Fair |   |   | Unrealized |   |
|                                |   | Value               |      |   | Losses            |   |    | Value  |   |   | Losses |   |   | Value |   |   | Losses |   |
|                                |   |                |      |   |              |   |    |   |   |   |   |   |   |   |   |   |   |   |
| June 30, 2010                       |   |                |      |   |              |   |    |   |   |   |   |   |   |   |   |   |   |   |
| Available for sale                  |   |                |      |   |              |   |    |   |   |   |   |   |   |   |   |   |   |   |
| U.S. Government agency securities   |   | $                   | -         |   |              | $      | -       |   |   | $ | - |   |   | $ | - |   |   | $ | - |   |   | $ | - |   |
| Government sponsored enterprises    |   |                | 26,642    |   |              |   | 42,558  |   |   |   | - |   |   |   | - |   |   |   | 26,642 |   |   |   | 42,558 |   |
| Mortgage-backed securities          |   |                | -         |   |              |   | -       |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| State and municipal securities      |   |                | -         |   |              |   | -       |   |   |   | 248,601 |   |   |   | 3,810 |   |   |   | 248,601 |   |   |   | 3,810 |   |
| Total securities available for sale |   | $                   | 26,642    |   |              | $      | 42,558  |   |   | $ | 248,601 |   |   | $ | 3,810 |   |   | $ | 275,243 |   |   | $ | 46,368 |   |
|                                |   |                |      |   |              |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Held to maturity                    |   |                |      |   |              |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| State and municipal securities      |   | $                   | -         |   |              | $      | -       |   |   | $ | 224,008 |   |   | $ | 3,691 |   |   | $ | 224,008 |   |   | $ | 3,691 |   |
|                                |   |                |      |   |              |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| December 31, 2009                   |   |                |      |   |              |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Available for sale                  |   |                |      |   |              |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S. Government agency securities   |   | $                   | -         |   |              | $      | -       |   |   | $ | - |   |   | $ | - |   |   | $ | - |   |   | $ | - |   |
| Government sponsored enterprises    |   |                | 5,454,054 |   |              |   | 204,195 |   |   |   | - |   |   |   | - |   |   |   | 5,454,054 |   |   |   | 204,195 |   |
| Mortgage-backed securities          |   |                | -         |   |              |   | -       |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| State and municipal securities      |   |                | 1,006,692 |   |              |   | 8,439   |   |   |   | 708,900 |   |   |   | 50,896 |   |   |   | 1,715,592 |   |   |   | 59,335 |   |
| Total securities available for sale |   | $                   | 6,460,746 |   |              | $      | 212,634 |   |   | $ | 708,900 |   |   | $ | 50,896 |   |   | $ | 7,169,646 |   |   | $ | 263,530 |   |
|                                |   |                |      |   |              |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Held to maturity                    |   |                |      |   |              |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| State and municipal securities      |   | $                   | -         |   |              | $      | -       |   |   | $ | 220,031 |   |   | $ | 7,575 |   |   | $ | 220,031 |   |   | $ | 7,575 |   |

----

|            |   | Six-months ended June 30, |    |   | Three-months ended June 30, |   |
|-----------------|--------|---------------------------|---------|--------|-----------------------------|--------|
|            |   | 2010                      |    |   | 2009                        |   |   | 2010 |   |   | 2009 |   |
|            |   |                      |    |   |                        |   |   |   |   |   |   |   |
| Realized gains  |   | $                         | 72,951  |   |                        | $      | 221,706 |   |   | $ | 36,994 |   |   |   | 138,714 |   |
| Realized losses |   |                      | (39,984 | )      |                        |   | (57,525 | ) |   |   | (39,984 | ) |   |   | - |   |
|            |   | $                         | 32,967  |   |                        | $      | 164,181 |   |   | $ | (2,990 | ) |   | $ | 138,714 |   |

|                                   |   | Available for Sale |       |   | Held to Maturity |   |
|----------------------------------------|--------|--------------------|------------|--------|------------------|--------|
|                                   |   | Amortized          |       |   | Fair             |   |   | Amortized |   |   | Fair |   |
|                                   |   | Cost               |       |   | Value            |   |   | Cost |   |   | Value |   |
|                                   |   |               |       |   |             |   |   |   |   |   |   |   |
| Due in one year or less                |   | $                  | 339,174    |   |             | $      | 340,523 |   |   | $ | - |   |   |   | - |   |
| Due after one year through five years  |   |               | 1,954,607  |   |             |   | 2,054,302 |   |   |   | 1,489,643 |   |   |   | 1,559,997 |   |
| Due after five years through ten years |   |               | 13,215,389 |   |             |   | 13,759,380 |   |   |   | 227,700 |   |   |   | 224,008 |   |
| Due after ten years                    |   |               | 23,657,239 |   |             |   | 24,273,118 |   |   |   | 480,676 |   |   |   | 504,941 |   |
|                                   |   | $                  | 39,166,409 |   |             | $      | 40,427,323 |   |   | $ | 2,198,019 |   |   | $ | 2,288,946 |   |

|                              |   | 2010   |      |   | 2009   |   |
|-----------------------------------|--------|--------|-----------|--------|--------|--------|
|                              |   |   |      |   |   |   |
| Balance, beginning                |   | $      | 3,555,273 |   |   | $      | 3,359,946 |   |
| Provision charged to expense      |   |   | 849,759   |   |   |   | 581,637 |   |
| Recoveries of amounts charged off |   |   | 79,501    |   |   |   | 13,015 |   |
| Amounts charged off               |   |   | (593,505  | )      |   |   | (603,930 | ) |
| Balance, ending                   |   | $      | 3,891,028 |   |   | $      | 3,350,668 |   |

|                          |   | 2010   |    |   | 2009   |   |
|-------------------------------|--------|--------|---------|--------|--------|--------|
|                          |   |   |    |   |   |   |
| Tax at statutory federal rate |   | $      | 223,626 |   |   | $      | 189,943 |   |
| Tax exempt interest income    |   |   | (80,695 | )      |   |   | (75,754 | ) |
| Other tax exempt income       |   |   | (51,000 | )      |   |   | (53,040 | ) |
| Other                         |   |   | 13,069  |   |   |   | 11,851 |   |
|                          |   | $      | 105,000 |   |   | $      | 73,000 |   |

----

|                                         |   | Six-months ended June 30, |     |   | Three-months ended June 30, |   |
|----------------------------------------------|--------|---------------------------|----------|--------|-----------------------------|--------|
|                                         |   | 2010                      |     |   | 2009                        |   |   | 2010 |   |   | 2009 |   |
|                                         |   |                      |     |   |                        |   |   |   |   |   |   |   |
| Service cost                                 |   | $                         | 205,920  |   |                        | $      | 195,538 |   |   | $ | 102,960 |   |   |   | 97,769 |   |
| Interest cost                                |   |                      | 208,516  |   |                        |   | 190,738 |   |   |   | 104,258 |   |   |   | 95,369 |   |
| Expected return on plan assets               |   |                      | (330,142 | )      |                        |   | (218,681 | ) |   |   | (165,071 | ) |   |   | (129,147 | ) |
| Amortization of net obligation at transition |   |                      | -        |   |                        |   | (10 | ) |   |   | - |   |   |   | (5 | ) |
| Amortization of prior service cost           |   |                      | 1,616    |   |                        |   | 5,390 |   |   |   | 808 |   |   |   | 2,695 |   |
| Amortization of net (gain) or loss           |   |                      | 19,398   |   |                        |   | 72,202 |   |   |   | 9,699 |   |   |   | 36,101 |   |
| Net periodic benefit cost                    |   | $                         | 105,308  |   |                        | $      | 245,177 |   |   | $ | 52,654 |   |   | $ | 102,782 |   |

|                         |   | 2010   |       |   | 2009   |   |
|------------------------------|--------|--------|------------|--------|--------|--------|
|                         |   |   |       |   |   |   |
| Commitments to extend credit |   | $      | 16,442,758 |   |   | $      | 16,585,231 |   |
| Standby letters of credit    |   |   | -          |   |   |   | - |   |
|                         |   | $      | 16,442,758 |   |   | $      | 16,585,231 |   |

----

----

|                                    |   | June 30, 2010 |    |   | December 31, 2009 |   |
|-----------------------------------------|--------|---------------|---------|--------|-------------------|--------|
|                                    |   | Carrying      |    |   | Fair              |   |   | Carrying |   |   | Fair |   |
|                                    |   | Amount        |    |   | Value             |   |   | Amount |   |   | Value |   |
|                                    |   |          |    |   |              |   |   |   |   |   |   |   |
| Financial assets                        |   |          |    |   |              |   |   |   |   |   |   |   |
| Cash and due from banks                 |   | $             | 10,015  |   |              | $      | 10,015 |   |   | $ | 8,637 |   |   | $ | 8,637 |   |
| Interest bearing deposits with banks    |   |          | 300     |   |              |   | 300 |   |   |   | 300 |   |   |   | 300 |   |
| Federal funds sold                      |   |          | 19,284  |   |              |   | 19,284 |   |   |   | 19,357 |   |   |   | 19,357 |   |
| Securities, available for sale          |   |          | 40,427  |   |              |   | 40,427 |   |   |   | 39,859 |   |   |   | 39,859 |   |
| Securities, held to maturity            |   |          | 2,198   |   |              |   | 2,289 |   |   |   | 2,175 |   |   |   | 2,254 |   |
| Restricted equity securities            |   |          | 1,784   |   |              |   | 1,784 |   |   |   | 1,784 |   |   |   | 1,784 |   |
| Loans, net of allowance for loan losses |   |          | 262,406 |   |              |   | 267,992 |   |   |   | 266,628 |   |   |   | 269,442 |   |
| Cash value of life insurance            |   |          | 8,248   |   |              |   | 8,248 |   |   |   | 8,098 |   |   |   | 8,098 |   |
| Accrued interest receivable             |   |          | 2,444   |   |              |   | 2,444 |   |   |   | 2,626 |   |   |   | 2,626 |   |
|                                    |   |          |    |   |              |   |   |   |   |   |   |   |   |   |   |   |
| Financial liabilities                   |   |          |    |   |              |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                                |   |          | 310,436 |   |              |   | 312,254 |   |   |   | 13,483 |   |   |   | 315,789 |   |
| Long-term debt                          |   |          | 25,000  |   |              |   | 28,012 |   |   |   | 25,000 |   |   |   | 27,511 |   |
| Accrued interest payable                |   |          | 344     |   |              |   | 344 |   |   |   | 383 |   |   |   | 383 |   |

----

----

| June 30, 2010                            |   | Total  |       |   | Level 1 |   |   | Level 2 |   |   | Level 3    |   |
|------------------------------------------|--------|--------|------------|--------|---------|--------|--------|---------|--------|--------|------------|--------|
|                                     |   |   |       |   |    |   |   |    |   |   |       |   |
| Investment securities available for sale |   |   |       |   |    |   |   |    |   |   |       |   |
| U.S. Government agency securities        |   | $      | 1,443,355  |   |    | $      | -      |    |   | $      | 1,443,355  |   |   | $ | - |   |
| Government sponsored enterprises         |   |   | 15,835,264 |   |    |   | -      |    |   |   | 15,835,264 |   |   |   | - |   |
| Mortgage-backed securities               |   |   | 16,200,310 |   |    |   | -      |    |   |   | 16,200,310 |   |   |   | - |   |
| State and municipal securities           |   |   | 6,948,394  |   |    |   | -      |    |   |   | 6,948,394  |   |   |   | - |   |
| Total investment securities              |   |   |       |   |    |   |   |    |   |   |       |   |   |   |   |   |
| available for sale                       |   | $      | 40,427,323 |   |    | $      | -      |    |   | $      | 40,427,323 |   |   | $ | - |   |
| Total assets at fair value               |   | $      | 40,427,323 |   |    | $      | -      |    |   | $      | 40,427,323 |   |   | $ | - |   |
|                                     |   |   |       |   |    |   |   |    |   |   |       |   |   |   |   |   |
| Total liabilities at fair value          |   | $      | -          |   |    | $      | -      |    |   | $      | -          |   |   | $ | - |   |

| December 31, 2009                        |   | Total  |       |   | Level 1 |   |   | Level 2 |   |   | Level 3    |   |
|------------------------------------------|--------|--------|------------|--------|---------|--------|--------|---------|--------|--------|------------|--------|
|                                     |   |   |       |   |    |   |   |    |   |   |       |   |
| Investment securities available for sale |   |   |       |   |    |   |   |    |   |   |       |   |
| U.S. Government agency securities        |   | $      | 1,710,715  |   |    | $      | -      |    |   | $      | 1,710,715  |   |   |   |   |
| Government sponsored enterprises         |   |   | 12,902,070 |   |    |   | -      |    |   |   | 12,902,070 |   |   |   |   |
| Mortgage-backed securities               |   |   | 17,855,746 |   |    |   | -      |    |   |   | 17,855,746 |   |   |   |   |
| State and municipal securities           |   |   | 7,390,588  |   |    |   | -      |    |   |   | 7,390,588  |   |   |   |   |
| Total investment securities              |   |   |       |   |    |   |   |    |   |   |       |   |   |   |   |
| available for sale                       |   | $      | 39,859,119 |   |    | $      | -      |    |   | $      | 39,859,119 |   |   | $ | - |   |
| Total assets at fair value               |   | $      | 39,859,119 |   |    | $      | -      |    |   | $      | 39,859,119 |   |   | $ | - |   |
|                                     |   |   |       |   |    |   |   |    |   |   |       |   |   |   |   |   |
| Total liabilities at fair value          |   | $      | -          |   |    | $      | -      |    |   | $      | -          |   |   | $ | - |   |

| June 30, 2010                   |   | Total  |      |   | Level 1 |   |   | Level 2 |   |   | Level 3 |   |
|---------------------------------|--------|--------|-----------|--------|---------|--------|--------|---------|--------|--------|---------|--------|
|                            |   |   |      |   |    |   |   |    |   |   |    |   |
| Loans                           |   | $      | 2,355,062 |   |    | $      | -      |    |   | $      | 287,300 |   |   | $ | 2,067,762 |   |
| Foreclosed assets               |   |   | 615,000   |   |    |   | -      |    |   |   | --      |   |   |   | 615,000 |   |
| Total assets at fair value      |   | $      | 2,970,062 |   |    | $      | -      |    |   | $      | 287,300 |   |   | $ | 2,682,762 |   |
|                            |   |   |      |   |    |   |   |    |   |   |    |   |   |   |   |   |
| Total liabilities at fair value |   | $      | -         |   |    | $      | -      |    |   | $      | -       |   |   | $ | - |   |

----

| December 31, 2009               |   | Total  |      |   | Level 1 |   |   | Level 2 |   |   | Level 3 |   |
|---------------------------------|--------|--------|-----------|--------|---------|--------|--------|---------|--------|--------|---------|--------|
|                            |   |   |      |   |    |   |   |    |   |   |    |   |
| Loans                           |   | $      | 1,365,896 |   |    | $      | -      |    |   | $      | 637,004 |   |   | $ | 728,892 |   |
| Foreclosed assets               |   |   | 331,159   |   |    |   | -      |    |   |   | 67,159  |   |   |   | 264,000 |   |
| Total assets at fair value      |   | $      | 1,697,055 |   |    | $      | -      |    |   |   | 704,163 |   |   | $ | 992,892 |   |
|                            |   |   |      |   |    |   |   |    |   |   |    |   |   |   |   |   |
| Total liabilities at fair value |   | $      | -         |   |    | $      | -      |    |   | $      | -       |   |   | $ | - |   |

----

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

----

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

----

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

----

----

----

|  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. |
|                   |                                                                                                 |   |   |

----

|                  | GRAYSON BANKSHARES, INC. |
|-----------------------|--------------------------|
|                  |                     |   |   |
|                  |                     |   |   |
|                  |                     |   |   |
| Date: August 13, 2010 | By:                      | /s/ Jacky K. Anderson |   |
|                  |                     | Jacky K. Anderson |   |
|                  |                     | President and Chief Executive Officer |   |
|                  |                     |   |   |
|                  |                     |   |   |
|                  | By:                      | /s/ Blake M. Edwards |   |
|                  |                     | Blake M. Edwards |   |
|                  |                     | Chief Financial Officer |   |

----

| 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. |
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