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 September 30, 2001

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

          For the transition period from ____________ to _____________

                         Commission file number: 0-30535

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


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

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

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


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

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

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



<PAGE>

                            GRAYSON BANKSHARES, INC.

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

         Item 1.  Financial Statements

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

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

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

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

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

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

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


Part II.    Other Information

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

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

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

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

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

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

Signatures

</TABLE>


                                       2
<PAGE>

                          Part I: Financial Information

Item 1:  Financial Statements

================================================================================
                     Grayson Bankshares, Inc. and Subsidiary
                           Consolidated Balance Sheets
                    September 30, 2001 and December 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                 September 30,      December 31,
Assets                                                               2001               2000
                                                                 -------------      -------------
                                                                   (Unaudited)          (Audited)
<S>                                                              <C>                <C>
Cash and due from banks                                          $   6,588,538      $   4,993,526
Interest-bearing deposits with banks                                         -                  -
Federal funds sold                                                  10,945,910          7,820,438
Investment securities available for sale                            23,427,664         18,718,706
Investment securities held to maturity                               7,296,916          9,965,781
Restricted equity securities                                            81,750             81,750
Loans, net of allowance for loan losses of $1,742,283
  at September 30, 2001 and $1,760,999 at December 31, 2000        140,211,714        133,071,889
Property and equipment, net                                          2,786,014          2,792,981
Accrued income                                                       1,929,733          1,681,910
Other assets                                                         1,021,938          1,190,831
                                                                 -------------      -------------
                                                                 $ 194,290,177      $ 180,317,812
                                                                 =============      =============

Liabilities and Stockholders' Equity

Liabilities
Demand deposits                                                  $  19,403,293      $  18,674,556
Interest-bearing demand deposits                                    14,525,243         14,059,974
Savings deposits                                                    29,993,273         29,837,478
Large denomination time deposits                                    29,002,640         26,580,744
Other time deposits                                                 78,853,957         70,437,348
                                                                 -------------      -------------
     Total deposits                                                171,778,406        159,590,100

Accrued interest payable                                               721,055            294,583
Other liabilities                                                      655,127            795,468
                                                                 -------------      -------------
                                                                   173,154,588        160,680,151

Commitments and contingencies

Stockholders' equity
Preferred stock, $25 par value; 500,000
   shares authorized; none issued                                            -                  -
Common stock, $1.25 par value; 5,000,000 shares
   authorized; 1,718,968 shares issued and
   outstanding in 2001 and 2000                                      2,148,710          2,148,710
Surplus                                                                521,625            521,625
Retained earnings                                                   18,045,505         16,986,754
Accumulated other comprehensive income (loss)                          419,749            (19,428)
                                                                 -------------      -------------
                                                                    21,135,589         19,637,661
                                                                 -------------      -------------
                                                                 $ 194,290,177      $ 180,317,812
                                                                 =============      =============
</TABLE>

See Notes to Consolidated Financial Statements


                                       3
<PAGE>
================================================================================
                     Grayson Bankshares, Inc. and Subsidiary
                        Consolidated Statements of Income
              For the Nine Months ended September 30, 2001 and 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                              Nine Months Ended
                                                                 September 30,
                                                            2001               2000
                                                       -------------      -------------
                                                        (Unaudited)         (Unaudited)
<S>                                                    <C>                <C>
Interest income:
   Loans and fees on loans                             $   8,921,169      $   8,283,122
   Federal funds sold                                        272,592            297,698
   Investment securities:
     Taxable                                                 844,043            756,486
     Exempt from federal income tax                          351,591            479,940
   Deposits with banks                                             -                  -
                                                       -------------      -------------
                                                          10,389,395          9,817,246

Interest expense:
   Deposits                                                5,492,367          4,953,432
   Interest on borrowings                                          -                  -
                                                       -------------      -------------
                                                           5,492,367          4,953,432
         Net interest income                               4,897,028          4,863,814

Provision for loan losses                                    205,000            200,000
                                                       -------------      -------------
   Net interest income after
     provision for loan losses                             4,692,028          4,663,814
                                                       -------------      -------------

Noninterest income:
   Service charges on deposit accounts                       247,576            138,750
   Other income                                               76,550             76,214
                                                       -------------      -------------
                                                             324,126            214,964
                                                       -------------      -------------

Noninterest expense:
   Salaries and employee benefits                          1,927,115          1,814,290
   Occupancy expense                                          98,581             79,133
   Equipment expense                                         263,158            195,256
   Other expense                                             764,255            617,130
                                                       -------------      -------------
                                                           3,053,109          2,705,809
         Income before income taxes                        1,963,045          2,172,969

Income tax expense                                           560,500            521,000
                                                       -------------      -------------
         Net income                                    $   1,402,545      $   1,651,969
                                                       =============      =============

Basic earnings per share                               $         .82      $         .96
                                                       =============      =============
Weighted average shares outstanding                        1,718,968          1,718,968
                                                       =============      =============
</TABLE>





See Notes to Consolidated Financial Statements


                                       4
<PAGE>

================================================================================
                     Grayson Bankshares, Inc. and Subsidiary
                        Consolidated Statements of Income
             For the Three Months ended September 30, 2001 and 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                        Three Months Ended
                                                           September 30,
                                                       2001             2000
                                                   -------------   -------------
                                                    (Unaudited)     (Unaudited)
<S>                                                <C>             <C>
Interest income:
   Loans and fees on loans                         $   2,988,478   $   2,937,195
   Federal funds sold                                     71,580          68,240
   Investment securities:
     Taxable                                             294,072         253,826
     Exempt from federal income tax                      114,883         149,411
   Deposits with banks                                         -               -
                                                   -------------   -------------
                                                       3,469,013       3,408,672

Interest expense:
   Deposits                                            1,804,636       1,747,280
   Interest on borrowings                                      -               -
                                                   -------------   -------------
                                                       1,804,636       1,747,280
         Net interest income                           1,664,377       1,661,392

Provision for loan losses                                 70,000          80,000
                                                   -------------   -------------
   Net interest income after
     provision for loan losses                         1,594,377       1,581,392
                                                   -------------   -------------

Noninterest income:
   Service charges on deposit accounts                    83,717          60,691
   Other income                                           27,545          27,086
                                                   -------------   -------------
                                                         111,262          87,777
                                                   -------------   -------------

Noninterest expense:
   Salaries and employee benefits                        637,905         599,443
   Occupancy expense                                      33,128          26,691
   Equipment expense                                      90,669          59,294
   Other expense                                         230,562         219,304
                                                   -------------   -------------
                                                         992,264         904,732
                                                   -------------   -------------
         Income before income taxes                      713,375         764,437

Income tax expense                                       203,500         214,000
                                                   -------------   -------------
         Net income                                $     509,875   $     550,437
                                                   =============   =============

Basic earnings per share                           $         .30   $         .32
                                                   =============   =============
Weighted average shares outstanding                    1,718,968       1,718,968
                                                   =============   =============

</TABLE>





See Notes to Consolidated Financial Statements


                                       5
<PAGE>

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

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

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

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

   Comprehensive income
   Net income                                 -            -            -      1,402,545              -     1,402,545
   Net change in unrealized
     depreciation on investment
     securities available for
     sale, net of taxes of $226,243           -            -            -              -        439,177       439,177
                                                                                                         ------------
   Total comprehensive income                                                                               1,841,722

   Dividends paid
       ($.20 per share)                       -            -            -       (343,794)             -      (343,794)
                                     ----------   ----------   ----------  -------------  -------------  ------------
Balance, September 30, 2001           1,718,968   $2,148,710   $  521,625  $  18,045,505  $     419,749  $ 21,135,589
                                     ==========   ==========   ==========  =============  =============  ============

</TABLE>











See Notes to Consolidated Financial Statements


                                       6
<PAGE>

================================================================================
                     Grayson Bankshares, Inc. and Subsidiary
                      Consolidated Statements of Cash Flows
              For the Nine Months ended September 30, 2001 and 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                 Nine Months Ended
                                                                                    September 30,
                                                                                2001              2000
                                                                            -------------    -------------
                                                                             (Unaudited)       (Unaudited)
<S>                                                                         <C>              <C>
Cash flows from operating activities:
   Net income                                                               $   1,402,545    $   1,651,969
   Adjustments to reconcile net income
     to net cash provided by operations:
       Depreciation and amortization                                              223,200          170,400
       Provision for loan losses                                                  205,000          200,000
       Deferred income taxes                                                       36,500          (67,000)
       Net realized gains on securities                                            (2,792)          (4,738)
       Accretion of discount on securities, net of
         amortization of premiums                                                  24,444            7,086
       Deferred compensation                                                        7,547           44,848
       Changes in assets and liabilities:
         Accrued income                                                          (247,823)        (470,923)
         Other assets                                                             (93,850)         (51,536)
         Accrued interest payable                                                 426,472          441,559
         Other liabilities                                                       (147,888)         (18,009)
                                                                            -------------    -------------
           Net cash provided by operating activities                            1,833,355        1,903,656
                                                                            -------------    -------------

Cash flows from investing activities:
   (Increase) decrease in interest-bearing deposits with banks                          -                -
   Net (increase) decrease in federal funds sold                               (3,125,472)       3,541,752
   Purchases of investment securities                                         (10,573,226)      (1,904,605)
   Sales of investment securities                                               2,401,407          380,500
   Maturities of investment securities                                          6,775,494        2,712,392
   Net increase in loans                                                       (7,344,825)     (13,563,036)
   Purchases of property and equipment, net of sales                             (216,233)        (708,080)
                                                                            -------------    -------------
           Net cash used in investing activities                              (12,082,855)      (9,541,077)
                                                                            -------------    -------------

Cash flows from financing activities:
   Net increase (decrease) in demand,
     savings and NOW deposits                                                   1,349,801         (147,581)
   Net increase in time deposits                                               10,838,505        5,919,256
   Dividends paid                                                                (343,794)        (309,414)
   Net increase (decrease) in short-term debt                                           -                -
                                                                            -------------    -------------
           Net cash provided by financing activities                           11,844,512        5,462,261
                                                                            -------------    -------------
           Net increase (decrease) in cash and cash equivalents                 1,595,012       (2,175,160)

Cash and cash equivalents, beginning                                            4,993,526        7,773,049
                                                                            -------------    -------------
Cash and cash equivalents, ending                                           $   6,588,538    $   5,597,889
                                                                            =============    =============

Supplemental disclosure of cash flow information:
   Interest paid                                                            $   5,065,895    $   4,511,873
                                                                            =============    =============
   Taxes paid                                                               $     507,290    $     580,500
                                                                            =============    =============
</TABLE>


See Notes to Consolidated Financial Statements


                                       7
<PAGE>

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

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

Note 1.  Organization and Summary of Significant Accounting Policies

Organization

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

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

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

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

Principles of Consolidation

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

Note 2.  Allowance for Loan Losses

The  following  is an  analysis  of the  allowance  for loan losses for the nine
months ended September 30.

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

Balance, beginning                               $   1,760,999    $   1,731,096
Provision charged to expense                           205,000          200,000
Recoveries of amounts charged off                       58,612           43,402
Amounts charged off                                   (282,328)        (101,747)
                                                 -------------    -------------
Balance, ending                                  $   1,742,283    $   1,872,751
                                                 =============    =============




                                       8
<PAGE>

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

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

Note 3.  Income Taxes

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

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

Tax at statutory federal rate                    $     667,435    $     738,809
Tax exempt interest income                            (119,541)        (163,180)
Alternative minimum tax credit                               -          (77,064)
Other                                                   12,606           22,435
                                                 -------------    -------------
                                                 $     560,500    $     521,000
                                                 =============    =============


Note 4.  Commitments and Contingencies

Financial Instruments with Off-Balance-Sheet Risk

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

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

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

Commitments to extend credit                     $   5,421,965    $   3,930,983
Standby letters of credit                                    -                -
                                                 -------------    -------------
                                                 $   5,421,965    $   3,930,983
                                                 =============    =============

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

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



                                       9
<PAGE>

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

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

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

General

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

Results of Operations

Total interest  income  increased by $60,341 for the quarter ended September 30,
2001 compared to the quarter ended September 30, 2000, while interest expense on
deposits increased by $57,356 over the same period. This resulted in an increase
in net  interest  income of only $2,985 or 0.18%.  This was due to the lower net
interest margins  resulting from the rapid decline in interest rates in 2001, as
well as an increase in the percentage of higher yielding time deposits.

Other income was up $23,485,  or 26.76% in the third quarter of 2001 compared to
the third  quarter of 2000.  This is a result of increases  in service  charges,
which were implemented midway through the third quarter of 2000.

The provision for credit losses was $70,000 for the quarter ended  September 30,
2001 and $80,000 for the quarter ended September 30, 2000.  Management  believes
that the provision and the resulting allowance for loan losses are adequate.

Other  expenses  increased by $87,532 for the quarter  ended  September 30, 2001
compared to the quarter ended September 30, 2000. This increase is due primarily
to increased  operating costs associated with the opening of a new branch in the
4th quarter of 2000.

The decrease in net interest  income combined with an increase in other expenses
resulted in a decrease in net income before tax of $51,062 for the third quarter
of 2001, compared to the same quarter in 2000.

For the nine months ended September 30, 2001, total interest income increased by
$572,149  compared to the  nine-month  period ended  September  30, 2000,  while
interest  expense on deposits  increased by $538,935 over the same period.  This
resulted in an increase in net interest  income of only  $33,214,  or 0.68%.  As
stated above,  net interest  margins were compressed due to the rapid decline in
interest rates experienced during the first nine months of 2001.

Other income was up $109,162 for the nine-month  period ended September 30, 2001
compared to the same period in 2000.  Again, this was the result of increases in
certain service charges.

Normal cost  increases,  combined  with the  aforementioned  costs of  branching
activities,  resulted in an overall  increase in other  expenses of $347,300 for
the first nine months of 2001  compared  to the first nine  months of 2000.  The
lower net interest margins and increased  operating costs resulted in a decrease
in net income before tax of $209,924 for the nine-month  period ended  September
30, 2001 compared to the same period in 2000.

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

Financial Condition

Total  assets  increased  by  $13,972,365,  or 7.75% from  December  31, 2000 to
September 30, 2001. Net loans increased by $7,139,825 and investment  securities
increased by $2,040,093.



                                       10
<PAGE>

Total  deposits  increased by  $12,188,306,  or 7.64% from  December 31, 2000 to
September 30, 2001. Demand deposit and savings accounts  increased by $1,349,801
during this period while time deposits increased by $10,838,505.

Shareholders'  equity  totaled  $21,135,589  at September  30, 2001  compared to
$19,637,661  at December 31,  2000.  The  $1,497,928  increase was the result of
earnings  for the nine months  combined  with an increase in the market value of
securities  that are  classified  as  available  for sale,  less the  payment of
dividends of $343,794.

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

Forward-Looking Statements

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


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

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

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

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

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

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



                                       11
<PAGE>

The earnings  simulation  model  forecasts  annual net income under a variety of
scenarios  that  incorporate  changes in the absolute  level of interest  rates,
changes  in  the  shape  of  the  yield  curve  and  changes  in  interest  rate
relationships.  Management  evaluates  the  effect on net  interest  income  and
present value equity from gradual  changes in rates of up to 200 basis points up
or down  over a  12-month  period.  The  following  table  presents  the  Bank's
forecasts  for changes in net income and market  value of equity as of September
30, 2001.

Table:  Interest Rate Risk (dollars in thousands)

             Rate Shocked Interest Margin and Market Value of Equity
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------

          Rate Change               -200bp      150bp     -100bp     -50bp        0bp       +50bp      +100bp     +150bp    +200bp
                                    ------     ------     ------     -----        ---       -----      ------     ------    ------
<S>                                <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
Interest Income:
Federal funds sold                 $    245   $    275   $    304   $    334   $    364   $    393   $    423   $    452   $    482
Investments                           1,898      1,905      1,912      1,918      1,924      1,929      1,935      1,940      1,940
Loans                                11,376     11,531     11,680     11,824     11,963     12,100     12,236     12,372     12,507
                                   -------------------------------------------------------------------------------------------------
  Total interest income              13,519     13,711     13,896     14,076     14,251     14,422     14,594     14,764     14,929

Interest Expense:
Deposits                              6,926      7,027      7,127      7,228      7,328      7,461      7,594      7,727      7,861
Federal funds purchased                   -          -          -          -          -          -          -          -          -
Other borrowings                          -          -          -          -          -          -          -          -          -
                                   -------------------------------------------------------------------------------------------------
  Total interest expense              6,926      7,027      7,127      7,228      7,328      7,461      7,594      7,727      7,861

Interest Margin                    $  6,593   $  6,684   $  6,769   $  6,848   $  6,923   $  6,961   $  7,000   $  7,037   $  7,068
Actual Dollars at Risk             $    330   $    239   $    154   $     75   $      -   $      -   $      -   $      -   $      -

Market value of assets             $199,246   $197,981   $196,666   $195,291   $193,884   $192,452   $191,014   $189,583   $188,034
Market value of liabilities         180,148    179,347    178,546    177,746    176,945    176,144    175,344    174,543    173,742
                                   -------------------------------------------------------------------------------------------------

Market Value of Equity             $ 19,098   $ 18,634   $ 18,120   $ 17,545   $ 16,939   $ 16,308   $ 15,670   $ 15,040   $ 14,292

</TABLE>













                                       12
<PAGE>

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

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

Item 1.  Legal Proceedings

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

Item 2.  Changes in Securities and Use of Proceeds

         Not applicable

Item 3.  Defaults Upon Senior Securities

         Not applicable

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

         None

Item 5.  Other Information

         None

Item 6.  Exhibits and Reports on Form 8-K

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













                                       13
<PAGE>

                                   SIGNATURES

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

                                       GRAYSON BANKSHARES, INC.



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



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