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 JUNE 30, 2004

                                      OR

            [   ] 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)


<TABLE>
<CAPTION>
                        VIRGINIA                    54-1647596
            (State or other jurisdiction of      (I.R.S. Employer
             incorporation or organization)     Identification No.)
<S>                                      <C>

                  113 WEST MAIN STREET
                 INDEPENDENCE, VIRGINIA                24348
        (Address of principal executive offices)    (Zip Code)
</TABLE>

                                (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 an accelerated filer (as
defined in Rule 12b-2 of the Exchange 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 August 11, 2004.




<PAGE>

PART I     FINANCIAL INFORMATION

Item 1.  Financial Statements

         Consolidated Balance Sheets-June 30, 2004
           and December 31, 2003..............................................3

         Consolidated Statements of Income-Six Months Ended
           June 30, 2004 and June 30, 2003 ...................................4

         Consolidated Statements of Income-Three Months Ended
           June 30, 2004 and June 30, 2003 ...................................5

         Consolidated Statements of Stockholders' Equity-Six Months
           Ended June 30, 2004 and Year Ended December 31, 2003...............6

         Consolidated Statements of Cash Flows-Six Months Ended
           June 30, 2004 and June 30, 2003....................................7

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

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

Item 3.  Quantitative and Qualitative Disclosures about Market Risk..........13

Item 4.  Controls and Procedures.............................................14

PART II    OTHER INFORMATION

Item 1.  Legal Proceedings...................................................15

Item 2.  Changes in Securities, Use of Proceeds and Issuer Purchases
           of Equity Securities..............................................15

Item 3.  Defaults Upon Senior Securities.....................................15

Item 4.  Submission of Matters to a Vote of Security Holders.................15

Item 5.  Other Information...................................................15

Item 6.  Exhibits and Reports on Form 8-K....................................15

Signatures...................................................................16
                                       2

<PAGE>
                        Part I:  Financial Information

Item 1:  Financial Statements
--------------------------------------------------------------------------------
                    GRAYSON BANKSHARES, INC. AND SUBSIDIARY
                          CONSOLIDATED BALANCE SHEETS
                      JUNE 30, 2004 AND DECEMBER 31, 2003
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                         JUNE 30,    DECEMBER 31,
ASSETS                                                    2004           2003
                                                       -----------   -------------
                                                       (Unaudited)     (Audited)
<S>                                                   <C>           <C>
Cash and due from banks                                  $7,909,919   $11,748,140
Federal funds sold                                        4,347,202    15,305,544
Investment securities available for sale                 43,911,947    41,239,131
Investment securities held to maturity                    3,745,795     3,960,887
Restricted equity securities                                952,150     1,081,750
Loans, net of allowance for loan losses of $2,488,574
  at June 30, 2004 and $2,395,387 at December 31, 2003  188,398,071   176,154,730
Cash value of life insurance                              4,797,731     4,677,731
Property and equipment, net                               6,456,906     6,228,192
Accrued income                                            2,118,693     1,891,116
Other assets                                              2,461,030     1,577,707
                                                        -----------   -----------
                                                       $265,099,444  $263,864,928
                                                       ============  ============

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
Demand deposits                                         $27,300,565   $26,708,360
Interest-bearing demand deposits                         19,903,420    19,359,587
Savings deposits                                         50,317,321    53,415,745
Large denomination time deposits                         34,795,374    34,695,733
Other time deposits                                      91,844,973    94,039,723
                                                        -----------   -----------
   Total deposits                                       224,161,653   228,219,148

FHLB advances                                            15,000,000    10,000,000
Accrued interest payable                                    253,123       264,640
Other liabilities                                           644,228       780,344
                                                        -----------   -----------
                                                        240,059,004   239,264,132
                                                        -----------   -----------

Commitments and contingencies

STOCKHOLDERS' EQUITY
Preferred stock, $25 par value; 500,000
  shares authorized; none issued                                  -             -
Common stock, $1.25 par value; 5,000,000 shares
  authorized; 1,718,968 shares issued and
  outstanding in 2004 and 2003                            2,148,710     2,148,710
Surplus                                                     521,625       521,625
Retained earnings                                        22,789,067    21,587,202
Accumulated other comprehensive income (loss)              (418,962)      343,259
                                                        -----------   -----------
                                                         25,040,440    24,600,796
                                                        -----------   -----------
                                                       $265,099,444  $263,864,928
                                                       ============  ============
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                       3
<PAGE>
--------------------------------------------------------------------------------
                    GRAYSON BANKSHARES, INC. AND SUBSIDIARY
                       CONSOLIDATED STATEMENTS OF INCOME
                FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
--------------------------------------------------------------------------------

                                                            SIX MONTHS ENDED
                                                                JUNE 30,
                                                            2004        2003
                                                         ----------- ----------
INTEREST INCOME:                                         (Unaudited) (Unaudited)
  Loans and fees on loans                                $6,222,293  $5,730,743
  Federal funds sold                                         59,767     140,682
  Investment securities:
   Taxable                                                  696,633     862,264
   Exempt from federal income tax                           233,896     220,909
                                                          ---------   ---------
                                                          7,212,589   6,954,598
                                                          ---------   ---------

INTEREST EXPENSE:
  Deposits                                                2,000,055   2,770,793
  Interest on borrowings                                    260,885     243,851
                                                          ---------   ---------
                                                          2,260,940   3,014,644
                                                          ---------   ---------
      Net interest income                                 4,951,649   3,939,954

PROVISION FOR LOAN LOSSES                                   180,000     180,000
                                                          ---------   ---------
  Net interest income after
   provision for loan losses                              4,771,649   3,759,954
                                                          ---------   ---------
NONINTEREST INCOME:
  Service charges on deposit accounts                       252,704     201,292
  Other income                                              554,874   1,196,411
                                                          ---------   ---------
                                                            807,578   1,397,703
                                                          ---------   ---------

NONINTEREST EXPENSE:
  Salaries and employee benefits                          2,124,520   1,763,157
  Occupancy expense                                         109,734      70,803
  Equipment expense                                         305,160     210,305
  Other expense                                             782,016     664,759
                                                          ---------   ---------
                                                          3,321,430   2,709,024
                                                          ---------   ---------
      Income before income taxes                          2,257,797   2,448,633

INCOME TAX EXPENSE                                          609,000     690,000
                                                          ---------   ---------
      Net income                                         $1,648,797  $1,758,633
                                                          =========   =========

BASIC EARNINGS PER SHARE                                  $     .96   $    1.02
                                                          =========   =========
WEIGHTED AVERAGE SHARES OUTSTANDING                       1,718,968   1,718,968
                                                          =========   =========

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                        4
<PAGE>
--------------------------------------------------------------------------------
                    GRAYSON BANKSHARES, INC. AND SUBSIDIARY
                       CONSOLIDATED STATEMENTS OF INCOME
               FOR THE THREE MONTHS ENDED JUNE 30, 2004 AND 2003
--------------------------------------------------------------------------------

                                                           THREE MONTHS ENDED
                                                                JUNE 30,
                                                            2004        2003
                                                          ----------  ---------
INTEREST INCOME:                                         (Unaudited) (Unaudited)
  Loans and fees on loans                                $3,147,194  $2,915,509
  Federal funds sold                                         26,724      70,603
  Investment securities:
   Taxable                                                  347,025     392,594
   Exempt from federal income tax                           114,997     106,112
                                                          ----------  ---------
                                                          3,635,940   3,484,818
                                                          ----------  ---------
INTEREST EXPENSE:
  Deposits                                                  963,523   1,354,616
  Interest on borrowings                                    145,617     129,850
                                                          ----------  ---------
                                                          1,109,140   1,484,466
                                                          ----------  ---------
      Net interest income                                 2,526,800   2,000,352

PROVISION FOR LOAN LOSSES                                    90,000      90,000
                                                          ----------  ---------
  Net interest income after
   provision for loan losses                              2,436,800   1,910,352
                                                          ----------  ---------

NONINTEREST INCOME:
  Service charges on deposit accounts                       136,085     110,262
  Other income                                              397,278     183,106
                                                          ----------  ---------
                                                            533,363     293,368
                                                          ----------  ---------

NONINTEREST EXPENSE:
  Salaries and employee benefits                          1,102,525     922,715
  Occupancy expense                                          51,257      35,634
  Equipment expense                                         150,047     102,864
  Other expense                                             419,594     327,290
                                                          ----------  ---------
                                                          1,723,423   1,388,503
                                                          ----------  ---------
      Income before income taxes                          1,246,740     815,217

INCOME TAX EXPENSE                                          347,000     203,000
                                                          ----------  ---------
      Net income                                          $ 899,740   $ 612,217
                                                          ==========  =========

BASIC EARNINGS PER SHARE                                  $     .52   $     .36
                                                          ==========  =========
WEIGHTED AVERAGE SHARES OUTSTANDING                       1,718,968   1,718,968
                                                          ==========  =========

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                       5
<PAGE>
--------------------------------------------------------------------------------
                    GRAYSON BANKSHARES, INC. AND SUBSIDIARY
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
               FOR THE SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED)
                 AND THE YEAR ENDED DECEMBER 31, 2003 (AUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                          ACCUMULATED
                                                                                             OTHER
                                  COMMON STOCK                             RETAINED       COMPREHENSIVE
                               SHARES      AMOUNT          SURPLUS         EARNINGS       INCOME (LOSS)     TOTAL
                               ------      ------          -------         --------       -------------     -----
<S>                        <C>          <C>             <C>             <C>             <C>               <C>
BALANCE, DECEMBER 31, 2002  1,718,968   $2,148,710       $521,625        $19,967,611     $591,571          $23,229,517

  COMPREHENSIVE INCOME
  Net income                        -            -              -          3,338,559            -            3,338,559
  Net change in unrealized
   appreciation on investment
   securities available for
   sale, net of taxes of $(127,918) -            -              -                  -     (248,312)            (248,312)
                                                                                                             ---------
   TOTAL COMPREHENSIVE INCOME                                                                                3,090,247

  Dividends paid
   ($1.00 per share)                -            -              -         (1,718,968)           -            (1,718,968)
                            ---------    ---------        -------         ----------      -------            ----------
BALANCE, DECEMBER 31, 2003  1,718,968    2,148,710        521,625         21,587,202      343,259            24,600,796

   COMPREHENSIVE INCOME
  Net income                        -            -              -          1,648,797            -             1,648,797
  Net change in unrealized
   appreciation on investment
   securities available for
   sale, net of taxes of $(392,659) -            -              -                  -     (762,221)             (762,221)
                                                                                                              ---------
  TOTAL COMPREHENSIVE INCOME                                                                                    886,576

  Dividends paid
      ($.26 per share)              -            -              -           (446,932)           -              (446,932)
                            ---------    ---------        -------         ----------      -------            ----------
BALANCE, JUNE 30, 2004      1,718,968   $2,148,710      $ 521,625        $22,789,067    $(418,962)          $25,040,440
                            =========   ==========      =========        ===========    =========           ===========
</table>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                       6
<PAGE>
--------------------------------------------------------------------------------
                    GRAYSON BANKSHARES, INC. AND SUBSIDIARY
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                           SIX MONTHS ENDED
                                                                JUNE 30,
                                                            2004        2003
                                                         ----------- -----------
                                                         (Unaudited) (Unaudited)
<S>                                                     <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                              $1,648,797  $1,758,633
  Adjustments to reconcile net income
   to net cash provided by operations:
     Depreciation and amortization                          275,000      180,000
     Provision for loan losses                              180,000      180,000
     Deferred income taxes                                  254,000       69,000
     Net realized gains on securities                       (60,129)    (905,810)
     Accretion of discount on securities, net of
      amortization of premiums                              132,730      107,797
     Deferred compensation                                    4,152        5,738
     Changes in assets and liabilities:
      Cash value of life insurance                         (120,000)    (120,000)
      Accrued income                                       (227,577)    (360,030)
      Other assets                                         (744,664)       8,818
      Accrued interest payable                              (11,517)         503
      Other liabilities                                    (140,268)    (341,343)
                                                          ---------   ----------
        Net cash provided by operating activities         1,190,524     583,306
                                                          ---------   ----------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Net (increase) decrease in federal funds sold           10,958,342 (11,712,476)
  Purchases of investment securities                    (11,630,629) (18,365,453)
  Sales of investment securities                          4,426,299   11,449,464
  Maturities of investment securities                     3,519,125    6,457,326
  (Purchases) sales of restricted equity securities         129,600     (236,300)
  Net increase in loans                                 (12,423,341)  (6,251,403)
  Purchases of property and equipment, net of sales        (503,714)  (1,437,780)
                                                         ----------   ----------

        Net cash used in investing activities            (5,524,318) (20,096,622)
                                                         ----------   ----------


CASH FLOWS FROM FINANCING ACTIVITIES:
  Net increase (decrease) in demand,
   savings and NOW deposits                                 592,205    3,602,910
  Net increase (decrease) in time deposits               (4,649,700)   2,940,982
  Dividends paid                                           (446,932)    (412,552)
  Net increase in other borrowings                        5,000,000   10,000,000
                                                         ----------   ----------
        Net cash provided by financing activities           495,573   16,131,340
                                                         ----------   ----------
        Net increase (decrease) in cash and
          cash equivalents                               (3,838,221)  (3,381,976)

CASH AND CASH EQUIVALENTS, BEGINNING                     11,748,140   11,265,444
                                                         ----------   ----------

CASH AND CASH EQUIVALENTS, ENDING                        $7,909,919   $7,883,468
                                                         ==========   ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Interest paid                                          $2,272,457   $3,014,141
                                                         ==========   ==========
  Taxes paid                                              $ 257,175    $ 748,001
                                                         ==========   ==========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                       7
<PAGE>
--------------------------------------------------------------------------------
                    GRAYSON BANKSHARES, INC. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

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

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

The consolidated financial statements at June 30, 2004 and for the periods ended
June 30, 2004 and 2003  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, 2003, included in the Company's Annual Report on Form
10-K for the year ended December 31, 2003. The results of operations for the six
month and three month periods  ended June 30, 2004 and 2003 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.  ALLOWANCE FOR LOAN LOSSES

The following is an analysis  of  the  allowance  for  loan  losses for the six
months ended June 30, 2004 and 2003.

                                                            2004        2003
                                                         ----------   ----------
Balance, beginning                                       $2,395,387  $2,189,028
Provision charged to expense                                180,000     180,000
Recoveries of amounts charged off                            64,657      25,390
Amounts charged off                                        (151,470)   (209,408)
                                                         ----------   ----------
Balance, ending                                          $2,488,574  $2,185,010
                                                         ==========   ==========


NOTE 3.  INCOME TAXES

A reconciliation of income tax expense computed at the statutory federal income
tax rate to income tax expense included in the statements of income for the six
months ended June 30, 2004 and 2003 follows:

                                                            2004        2003
                                                         ----------   ----------
Tax at statutory federal rate                             $ 767,651   $ 832,535
Tax exempt interest income                                  (92,677)    (92,379)
Other tax exempt income                                     (84,107)    (61,200)
Other                                                        18,133      11,044
                                                         ----------   ----------
                                                          $ 609,000   $ 690,000
                                                         ==========   ==========
                                       8
<PAGE>
--------------------------------------------------------------------------------
                    GRAYSON BANKSHARES, INC. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 4.  COMMITMENTS AND CONTINGENCIES

FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

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

The Bank's exposure to credit loss in the event of nonperformance  by the other
party to the financial instrument for commitments to extend credit and  standby
letters   of   credit  is  represented  by  the  contractual  amount  of  those
instruments.  The  Bank uses the same credit policies in making commitments and
conditional obligations  as for on-balance-sheet instruments.  A summary of the
Bank's commitments at June 30, 2004 and 2003 is as follows:

                                                            2004        2003
                                                         ----------   ----------
Commitments to extend credit                             $9,630,828   $7,724,747
Standby letters of credit                                         -            -
                                                         ----------   ----------
                                                         $9,630,828   $7,724,747
                                                         ==========   ==========

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

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


















                                       9
<PAGE>


                        PART I:  FINANCIAL INFORMATION

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


GENERAL

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

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, 2003.

RESULTS OF OPERATIONS

Total interest income increased by $151,122 for the quarter ended June 30, 2004
compared to the quarter ended June 30, 2003, while interest expense on deposits
and  other borrowings decreased by $375,326 over the same period.  The increase
in interest  income  is  primarily attributable to an increase in average loans
outstanding while the decrease  in  interest  expense  came  as a result of the
general decreases in interest rates that have occurred over the past year.  The
result was an increase in net interest income of $526,448 or 26.32%.

Non-interest  income was up $239,995 in the second  quarter of 2004  compared to
the second  quarter of 2003.  This increase was due to a  non-recurring  gain of
approximately  $220,000 that was realized in the termination of an interest rate
swap.

The provision for credit losses was $90,000 for each of the quarters  ended June
30,  2004  and  2003.  The  reserve  for  loan  losses  at  June  30,  2004  was
approximately  1.30% of total loans.  Management  believes the provision and the
resulting allowance for loan losses are adequate.

Non-interest  expense  increased by $334,920,  or 24.12%,  for the quarter ended
June 30, 2004 compared to the quarter ended June 30, 2003. Increases in salaries
and  employee  benefits  came as a result of employee  additions as well as cost
increases for employee medical benefits and  defined-benefit  retirement  plans.
Increases  in  occupancy,  equipment  and  other  expenses  came as a result  of
branching activity in 2003.

The  increases  in net  interest  income  and other  income,  combined  with the
increase in other  expenses,  resulted in an increase in net income before taxes
of $431,523,  or 52.93%,  for the quarter  ended June 30, 2004,  compared to the
same quarter in 2003. Income tax expense increased by $144,000,  resulting in an
increase  in net income of  $287,523,  or  46.96%,  to  $899,740  for the second
quarter of 2004 compared to net income of $612,217 for the same period in 2003.

For  the  six  months ended June 30, 2004, total interest income  increased  by
$257,991 compared  to  the six-month period ended June 30, 2003, while interest
expense decreased by $753,704  over  the  same  period.   This  resulted  in an
increase in net interest income of $1,011,695, or 33.56%.  As stated above, the
increase  in  interest  income  was  the result of an increase in average loans
outstanding while the decrease in interest  expense came as a result of general
decreases in interest rates.

Non-interest  income was down $590,125 for the  six-month  period ended June 30,
2004  compared to the same period in 2003.  The decrease in other income was due
to non-recurring securities gains of approximately $870,000 that were recognized
in the first  quarter of 2003.  This  decrease  was  partially  offset by a non-
recurring gain on termination of an interest rate swap of $220,000 in the second
quarter of 2004 as  discussed  above.  Excluding  the effects of non-  recurring
transactions,  other income increased by approximately  $60,000 in the first six
months of 2004, compared to the same period in 2003.

                                       10
<PAGE>

                        PART I:  FINANCIAL INFORMATION

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


Normal cost  increases,  combined  with the  aforementioned  costs of  salaries,
benefits,   and  branching   activities  resulted  in  an  overall  increase  in
non-interest  expense of $612,406  for the first six months of 2004  compared to
the first six months of 2003.  Overall,  the increase in net interest income was
offset by the  decrease in other  income and the  increase in other  expenses to
result in a decrease  in net income of  $109,836,  or 6.25%,  for the  six-month
period ended June 30, 2004 compared to the six-month period ended June 30, 2003.

FINANCIAL CONDITION

Total assets increased by $1,234,516,  or 0.47%,  from December 31, 2003 to June
30, 2004. Net loans  increased by  $12,243,341,  federal funds sold decreased by
$10,958,342, and investment securities increased by $2,457,724.

Total deposits decreased by $4,057,495, or 1.78%, from December 31, 2003 to June
30, 2004.  Federal Home Loan Bank (the "FHLB") advances increased by $5,000,000,
to $15,000,000 at June 30, 2004 compared to $10,000,000 at December 31, 2003.

Stockholders'   equity  totaled  $25,040,440  at  June  30,  2004  compared  to
$24,600,796 at December  31,  2003.   The  $439,644  increase was the result of
earnings for the three months ended June 30, 2004 combined  with  a decrease in
the  market  value of securities classified as available for sale of  $762,221,
less the payment of dividends of $446,932.

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

Federal fund lines  available  from  correspondent banks totaled $10,146,000 at
June 30, 2004.  No balances were outstanding  on  these lines at June 30, 2004,
or December 31, 2003.  Borrowings from the FHLB totaled $10,000,000 at December
31, 2003 and $15,000,000 at June 30, 2004.  The remaining  unused  credit  line
from the FHLB as of June 30, 2004 is approximately $24,700,000.

The  liquidity ratio (the level of liquid assets divided by total deposits plus
short-term  liabilities)  was  22.6% at June 30, 2004 and 28.9% at December 31,
2003.  These ratios are considered to be adequate by management.

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
significant 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.



                                       11
<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
(the   "Exchange  Act").   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, 2003.



























                                       12
<PAGE>


                        PART I:  FINANCIAL INFORMATION

Item 3:  Quantitative and Qualitative Disclosures about Market Risk
--------------------------------------------------------------------------------


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

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

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

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

The earnings  simulation  model  forecasts annual net income under a variety of
scenarios that incorporate changes  in  the  absolute  level of interest rates,
changes  in  the  shape  of  the  yield  curve  and  changes  in interest  rate
relationships.   Management  evaluates the effect on net interest  income  from
gradual changes in the Prime Rate  of  up to 300 basis points up or down over a
12-month period.  The current model indicates  that an increase in rates of 300
basis points over the next twelve months would result  in  a  decrease  in  net
interest  income of $441,000, or 4.18%, while a similar decrease in rates would
result in an  increase in net interest income of $338,000, or 3.19%.  The model
also incorporates  Management's forecasts for balance sheet growth, noninterest
income and noninterest  expense.   The  interest  rate  scenarios  are used for
analytical  purposes  and  do not represent Management's view of future  market
movements.  Rather, these are  intended  to  provide a measure of the degree of
volatility interest rate movements may apply to  the  earnings  of the Company.
Modeling the sensitivity of earnings to interest rate risk is highly  dependent
on  numerous  assumptions embedded in the simulation model.  While the earnings
sensitivity analysis  incorporates  Management's best estimate of interest rate
and balance sheet dynamics under various  market  rate  movements,  the  actual
behavior and resulting earnings impact likely will differ from that projected.













                                       13
<PAGE>


                        PART I:  FINANCIAL INFORMATION

Item 4:  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
the Chief Financial Officer, of the effectiveness of the design and operation of
our  disclosure  controls and  procedures  pursuant to Exchange Act Rule 13a-15.
Based upon that evaluation,  the Company's President and Chief Executive Officer
and the Chief  Financial  Officer  concluded  that our  disclosure  controls and
procedures  are  effective  in  timely  alerting  them to  material  information
relating  to the Company  and the Bank  required to be included in our  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.




































                                       14
<PAGE>

                          PART II:  OTHER INFORMATION

================================================================================
                    GRAYSON BANKSHARES, INC. AND SUBSIDIARY

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

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 2.  CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
         SECURITIES

      Not applicable

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

      Not applicable

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     (a)    The Company's Annual Meeting of Shareholders was held on April 13,
            2004.

     (b)    Not applicable.

     (c)    At the Annual Meeting of Shareholders, the shareholders of the
            Company were asked to vote on the election of three of the Company's
            directors to serve until the third annual meeting following their
            election or until their successors have been elected and qualified:

            The votes cast for or withheld for the election of directors were as
            follows:

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

            Dr. Julian L. Givens         1,316,037               3,822
            Jean W. Lindsey              1,316,037               3,822
            Carl J. Richardson           1,315,837               4,022

      (d)   Not applicable.

ITEM 5.  OTHER INFORMATION

      None

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

      (a)   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.

      (b)   Reports on Form 8-K

            The Company furnished one report on Form 8-K during the quarter
            ended June 30, 2004.  The report, dated April 13, 2004, reported
            under Item 12 the Company's consolidated financial results for the
            quarter ended March 31, 2004.

                                       15

<PAGE>
                                  SIGNATURES


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



                                           GRAYSON BANKSHARES, INC.




Date:  August 16, 2004                     By:  /s/ Jacky K. Anderson
                                                ----------------------------
                                                 Jacky K. Anderson
                                                 President and CEO



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














                                       16

<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.