UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

              [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                  FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006

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

          For the transition period from ____________ to _____________

                         Commission File Number: 0-30535

                            GRAYSON BANKSHARES, INC.
             (Exact name of registrant as specified in its charter)


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

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

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


      Indicate  by  check mark whether the registrant  (1) has filed all reports
required to be filed  by  Section  13 or 15(d) of the Securities Exchange Act of
1934  during the preceding 12 months  (or  for  such  shorter  period  that  the
registrant  was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

      Yes    __X__      No  _____


      Indicate  by  check  mark  whether  the  registrant is a large accelerated
filer,  an accelerated filer, or a non-accelerated  filer.   See  definition  of
"accelerated  filer  and  large accelerated filer" in Rule 12b-2 of the Exchange
Act.  (Check one):

Large accelerated filer ____ Accelerated filer ____ Non-accelerated filer__X__

      Indicate by check mark  whether  the  registrant  is  a  shell company (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 April 30, 2006.




<PAGE>

PART I   FINANCIAL INFORMATION

Item 1.  Financial Statements

         Consolidated Balance Sheets-March 31, 2006
         and December 31, 2005.............................................3

         Consolidated Statements of Income-Three Months Ended
         March 31, 2006 and March 31, 2005.................................4

         Consolidated Statements of Stockholders' Equity-Three Months
         Ended March 31, 2006 and Year Ended December 31, 2005.............5

         Consolidated Statements of Cash Flows-Three Months Ended
         March 31, 2006 and March 31, 2005.................................6

         Notes to Consolidated Financial Statements........................7

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

Item 3.  Quantitative and Qualitative Disclosures about Market Risk.......12

Item 4.  Controls and Procedures..........................................13

PART II  OTHER INFORMATION

Item 1.  Legal Proceedings................................................14

Item 1A. Risk Factors.....................................................14

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds......14

Item 3.  Defaults Upon Senior Securities..................................14

Item 4.  Submission of Matters to a Vote of Security Holders..............14

Item 5.  Other Information .............................................. 14

Item 6.  Exhibits.........................................................14

Signatures................................................................15

                                       2

<PAGE>
                         PART I.  FINANCIAL INFORMATION

Item 1. Financial Statements


                    GRAYSON BANKSHARES, INC. AND SUBSIDIARY
                          CONSOLIDATED BALANCE SHEETS
                      MARCH 31, 2006 AND DECEMBER 31, 2005
<table>
                                                                                     MARCH 31,       DECEMBER 31,
ASSETS                                                                                 2006             2005
                                                                                    (Unaudited)       (Audited)
                                                                                 -------------    -------------
<S>                                                                             <C>             <C>
Cash and due from banks                                                          $  10,271,637    $   8,394,366
Federal funds sold                                                                  16,031,415       21,914,513
Investment securities available for sale                                            33,869,837       33,795,911
Investment securities held to maturity
  (fair value approximately $3,968,677 at March 31,
  2006, and $3,955,524 at December 31, 2005)                                         3,970,572        3,963,847
Restricted equity securities                                                         1,069,650        1,519,650
Loans, net of allowance for loan losses of $2,576,866
  at March 31, 2006 and $2,678,055 at December 31, 2005                            224,205,938      217,091,067
Cash value of life insurance                                                         5,202,680        5,148,180
Foreclosed assets                                                                      505,082          400,000
Property and equipment, net                                                          7,144,547        7,249,704
Accrued income                                                                       2,240,468        2,177,475
Other assets                                                                         2,780,042        2,510,504
                                                                                 -------------    -------------
                                                                                  $307,291,868     $304,165,217
                                                                                  ============     ============

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
Demand deposits                                                                  $  37,047,963    $  36,242,161
Interest-bearing demand deposits                                                    22,290,460       22,975,642
Savings deposits                                                                    44,561,943       46,569,058
Large denomination time deposits                                                    49,597,296       46,132,454
Other time deposits                                                                103,962,704       98,480,204
                                                                                 -------------    -------------
   Total deposits                                                                  257,460,366      250,399,519

Long-term debt                                                                      20,000,000       25,000,000
Accrued interest payable                                                               767,223          467,686
Other liabilities                                                                      824,598          544,670
                                                                                 -------------    -------------
                                                                                   279,052,187      276,411,875
                                                                                  ============     ============

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                                                                         2,148,710        2,148,710
Surplus                                                                                521,625          521,625
Retained earnings                                                                   26,231,338       25,736,698
Accumulated other comprehensive income (loss)                                         (661,992)        (653,691)
                                                                                 -------------    -------------
                                                                                    28,239,681       27,753,342
                                                                                 -------------    -------------
                                                                                  $307,291,868     $304,165,217
                                                                                  ============     ============

</table>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                       3

<PAGE>

                    GRAYSON BANKSHARES, INC. AND SUBSIDIARY
                       CONSOLIDATED STATEMENTS OF INCOME
               FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005


                                           THREE MONTHS ENDED MARCH 31,
                                                 2006        2005
                                            ----------   ----------
INTEREST INCOME:                            (Unaudited)  (Unaudited)
 Loans and fees on loans                    $4,128,953   $3,494,437
 Federal funds sold                            204,047       50,160
 Investment securities:
   Taxable                                     354,486      300,312
   Exempt from federal income tax               75,531      100,357
                                            ----------   ----------
                                             4,763,017    3,945,266
                                            ----------   ----------
INTEREST EXPENSE:
 Deposits                                    1,597,468    1,026,048
 Interest on borrowings                        240,000      124,000
                                            ----------   ----------
                                             1,837,468    1,150,048
                                            ----------   ----------
      Net interest income                    2,925,549    2,795,218

PROVISION FOR LOAN LOSSES                      112,500      105,000
                                            ----------   ----------
 Net interest income after
   provision for loan losses                 2,813,049    2,690,218
                                            ----------   ----------

NONINTEREST INCOME:
 Service charges on deposit accounts           135,592      106,040
 Increase in cash value of life insurance       54,500       57,000
 Net realized gains on securities               11,969            -
 Other income                                  202,799      122,196
                                            ----------   ----------
                                               404,860      285,236
                                            ----------   ----------

NONINTEREST EXPENSE:
 Salaries and employee benefits              1,258,512    1,214,972
 Occupancy expense                              69,913       69,490
 Equipment expense                             203,030      192,397
 Other expense                                 484,018      466,473
                                            ----------   ----------
                                             2,015,473    1,943,332
                                            ----------   ----------
      Income before income taxes             1,202,436    1,032,122

INCOME TAX EXPENSE                             364,000      280,000
                                            ----------   ----------
      Net income                            $  838,436   $  752,122
                                            ==========   ==========

BASIC EARNINGS PER SHARE                    $      .49   $      .44
                                            ==========   ==========
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 STOCKHOLDERS' EQUITY
    FOR THE THREE MONTHS ENDED MARCH 31, 2006 (UNAUDITED) AND THE YEAR ENDED
                          DECEMBER 31, 2005 (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, 2004               1,718,968       $2,148,710      $521,625        $23,797,289     $(290,578)   $ 26,177,046

 COMPREHENSIVE INCOME
 Net income                                      -                -             -          3,108,307             -       3,108,307
 Net change in unrealized
   depreciation on investment
   securities available for
   sale, net of taxes of $(185,666)              -                -             -                  -      (360,411)
 Reclassification adjustment,
   net of taxes of $(1,392)                      -                -             -                  -        (2,702)         (2,702)
   TOTAL COMPREHENSIVE INCOME                                           2,745,194

 Dividends paid
   ($.68 per share)                              -                -             -         (1,168,898)            -      (1,168,898)

                                         ---------       ----------     ---------        -----------     ---------    ------------
BALANCE, DECEMBER 31, 2005               1,718,968        2,148,710       521,625         25,736,698      (653,691)     27,753,342

 COMPREHENSIVE INCOME
 Net income                                      -                -             -            838,436             -         838,436
 Net change in unrealized
   depreciation on investment
   securities available for
   sale, net of taxes of $(207)                  -                -             -                  -          (401)           (401)
 Reclassification adjustment,
   net of taxes of $(4,069)                      -                -             -                  -        (7,900)         (7,900)
                                                                                                                      ------------
   TOTAL COMPREHENSIVE INCOME                                             830,135

 Dividends paid
     ($.20 per share)                            -                -             -           (343,796)            -        (343,796)
                                         ---------       ----------     ---------        -----------     ---------    ------------
BALANCE, MARCH 31, 2006                  1,718,968       $2,148,710     $ 521,625        $26,231,338     $(661,992)   $ 28,239,681


</table>







SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                       5

<PAGE>

                    GRAYSON BANKSHARES, INC. AND SUBSIDIARY
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
               FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
<table>
                                                                      THREE MONTHS ENDED
                                                                             MARCH 31,
                                                                 2006                        2005
                                                              (Unaudited)                 (Unaudited)
                                                              ------------               ------------

                                                         <c>                        <c>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net income                                                   $    838,436               $    752,122
 Adjustments to reconcile net income
   to net cash provided by operations:
    Depreciation and amortization                                  183,000                    174,000
    Provision for loan losses                                      112,500                    105,000
    Deferred income taxes                                           82,000                     65,000
    Net realized gains on securities                               (11,969)                         -
    Accretion of discount on securities, net of
      amortization of premiums                                      (7,213)                    23,288
    Deferred compensation                                            1,363                      2,100
    Changes in assets and liabilities:
      Cash value of life insurance                                 (54,500)                   (57,000)
      Accrued income                                               (62,993)                     5,816
      Other assets                                                (347,262)                  (326,234)
      Accrued interest payable                                     299,537                    282,681
      Other liabilities                                            278,565                    216,319
                                                              ------------               ------------
       Net cash provided by operating activities                 1,311,464                  1,243,092
                                                              ------------               ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
 Net decrease in federal funds sold                              5,883,098                    160,250
 Purchases of investment securities                             (4,441,808)                  (500,000)
 Sales of investment securities                                  4,012,000                          -
 Maturities of investment securities                               355,762                  1,135,137
 (Purchases) sales of restricted equity securities                 450,000                    (12,600)
 Net increase in loans                                          (7,227,371)                (6,987,873)
 Net (increase) decrease in foreclosed assets                     (105,082)                    65,000
 Purchases of property and equipment, net of sales                 (77,843)                   (96,054)
                                                              ------------               ------------
       Net cash used in investing activities                    (1,151,244)                (6,236,140)
                                                              ------------               ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
 Net increase in deposits                                        7,060,847                  2,543,170
 Dividends paid                                                   (343,796)                  (257,845)
 Net decrease in long-term debt                                 (5,000,000)                         -
                                                              ------------               ------------
       Net cash provided by financing activities                 1,717,051                  2,285,325
                                                              ------------               ------------
       Net increase (decrease) in cash and cash equivalents      1,877,271                 (2,707,723)

CASH AND CASH EQUIVALENTS, BEGINNING                             8,394,366                 10,032,399
                                                              ------------               ------------
CASH AND CASH EQUIVALENTS, ENDING                             $ 10,271,637               $  7,324,676
                                                              ============               ============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 Interest paid                                                $  1,537,931               $    867,367
                                                              ============               ============
 Taxes paid                                                   $          -               $          -
                                                              ============               ============
</table>




SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                       6

<PAGE>

                    GRAYSON BANKSHARES, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

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

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

The  consolidated  financial statements as of March 31, 2006 and for the periods
ended March 31, 2006  and 2005 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, 2005, included in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2005.  The results of operations for
the  three-month  period ended March 31, 2006 are not necessarily indicative  of
the results to be expected for the full year.

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

PRINCIPLES OF CONSOLIDATION

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

NOTE 2.  RESTRICTIONS ON CASH

To comply with  banking  regulations,  the Bank is required to maintain  certain
average cash reserve  balances.  The daily average cash reserve  requirement was
approximately $2,148,000 and $2,162,000 for the periods including March 31, 2006
and December 31, 2005, respectively

NOTE 3.  ALLOWANCE FOR LOAN LOSSES

The following  is  an  analysis  of  the allowance for loan losses for the three
months ended March 31, 2006 and 2005.

                                                         2006          2005
                                                       ----------   ----------

Balance, beginning                                     $2,678,055   $2,609,759
Provision charged to expense                              112,500      105,000
Recoveries of amounts charged off                          22,178        8,950
Amounts charged off                                      (235,867)     (36,851)
                                                       ----------   ----------
Balance, ending                                        $2,576,866   $2,686,858
                                                       ==========   ==========

                                       7

<PAGE>

                    GRAYSON BANKSHARES, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4.  INCOME TAXES

A reconciliation of income tax expense  computed at the statutory federal income
tax rate to income tax expense included in  the  statements  of  income  for the
three months ended March 31, 2006 and 2005 follows:

                                                         2006          2005
                                                       ----------   ----------

Tax at statutory federal rate                          $  408,828   $  350,921
Tax exempt interest income                                (32,122)     (41,891)
Other tax exempt income                                   (27,663)     (34,601)
Other                                                      14,957        5,571
                                                       ----------   ----------
                                                       $  364,000   $  280,000
                                                       ==========   ==========


NOTE 5.  EMPLOYEE BENEFIT PLAN

The  Bank  has  a  qualified  noncontributory  defined benefit pension plan that
covers substantially all of its employees.  The  benefits are primarily based on
years  of  service and earnings.  The following is a  summary  of  net  periodic
pension costs for the quarters ended March 31, 2006 and 2005.

                                                          2006        2005
                                                        ---------   --------

Service cost                                            $  97,405   $ 74,839
Interest cost                                              81,846     70,691
Expected return on plan assets                            (84,103)   (68,097)
Amortization of net obligation at transition                   (9)        (9)
Amortization of prior service cost                          2,516      2,516
Amortization of net (gain) or loss                         22,973     21,508
                                                        ---------   --------
Net periodic benefit cost                               $ 120,628   $101,448
                                                        =========   ========


NOTE 6.  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 March 31, 2006 and 2005 is as follows:

                                                            2006        2005
                                                        ----------- -----------

Commitments to extend credit                            $16,437,665 $15,236,461
Standby letters of credit                                         -           -
                                                        ----------- -----------
                                                        $16,437,665 $15,236,461
                                                        =========== ===========

                                       8
<PAGE>


                    GRAYSON BANKSHARES, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6.  COMMITMENTS AND CONTINGENCIES, Continued

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

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







                                       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, 2005.

RESULTS OF OPERATIONS

Total interest income increased by $817,751 for the quarter ended March 31, 2006
compared to the quarter ended March 31, 2005, while interest expense on deposits
and other borrowings increased by $687,420 over the same period.   The  increase
in  interest income was attributable to an increase in average loans outstanding
combined  with  recent  increases  in  interest  rates. The increase in interest
expense was due to increases in interest rates and  to  the  migration  of funds
from lower-yielding transaction accounts to higher-yielding time deposits.   The
result  was an increase in net interest income of $130,331 or 4.66% in the first
quarter of 2006 compared to the same period last year.

The provision  for loan losses was $112,500 for the quarter ended March 31, 2006
and $105,000 for  the same period in 2005.  The reserve for loan losses at March
31, 2006 was approximately  1.14%  of  total  loans.   Management  believes  the
provision and the resulting allowance for loan losses are adequate.

Noninterest  income  was  $404,860  in  the  first  quarter  of 2006 compared to
$285,236  in  the  first  quarter  of  2005.  The increase was due primarily  to
increases in service charges and a gain  of  $60,000  that  was  realized in the
first quarter of 2006 upon termination of an interest rate swap.

Noninterest expenses increased by $72,141, or 3.71%, for the quarter ended March
31, 2006 compared to the quarter ended March 31, 2005.  The slight increase came
as a result of normal increases in salaries, benefits and other expenses.

The increases in net interest income and noninterest income, combined  with  the
increase  in  noninterest expenses, resulted in an increase in net income before
taxes of $170,314,  for  the  quarter ended March 31, 2006, compared to the same
quarter in 2005.  Income tax expense  increased from $280,000 to $364,000 due to
the  increase in taxable income combined  with  an  increase  in  the  Company's
effective  tax  rate that resulted from decreases in the average balance of tax-
exempt investments.   Net  income  increased  by $86,314, or 11.48%, to $838,436
compared to $752,122 last year.

FINANCIAL CONDITION

Total assets increased by $3,126,651, or 1.03%,  from December 31, 2005 to March
31, 2006.  Net loans increased by $7,114,871, federal  funds  sold  decreased by
$5,883,098  and  investment  securities  increased by $80,651.  The decrease  in
federal funds sold came as a result of the prepayment of long-term debt.

Total deposits increased by $7,060,847, or  2.82%,  from  December  31,  2005 to
March  31,  2006.   Most  of  the growth in deposits came from increases in time
deposits, or certificates of deposit,  as  noted  above  in  the comments on net
interest  income.   Long-term  debt decreased from $25,000,000 at  December  31,
2005, to $20,000,000 at March 31, 2006.



                                       10

<PAGE>


                         PART I.  FINANCIAL INFORMATION

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


Shareholders'  equity  totaled  $28,239,681   at  March  31,  2006  compared  to
$27,753,342  at December 31, 2005.  The $486,339  increase  was  the  result  of
earnings for the  three  months  combined with a decrease in the market value of
securities classified as available  for  sale  of  $8,301,  and  the  payment of
dividends of $343,796.

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

LIQUIDITY AND CAPITAL RESOURCES

Liquidity  is  the  ability  to  convert  assets  to  cash  to fund  depositors'
withdrawals  or borrowers' loans without significant loss.  Federal  fund  lines
available from  correspondent  banks  totaled $14,000,000 at March 31, 2006.  No
balances were outstanding on these lines at March 31, 2006 or December 31, 2005.
Long-term debt consists of borrowings from  the  Federal  Home Loan Bank and BNP
Paribas.  Borrowings from the Federal Home Loan Bank, which  are  secured  by  a
blanket collateral agreement on the Bank's 1 to 4 family residential real estate
loans,  totaled  $20,000,000  at  December 31, 2005 and $10,000,000 at March 31,
2006.   Borrowings from BNP Paribas,  which  are  secured  by  the  pledging  of
specific  investment  securities,  totaled  $5,000,000  at December 31, 2005 and
$10,000,000  at  March  31,  2006.  The remaining unused credit  line  from  the
Federal Home Loan Bank as of March 31, 2006 is approximately $35,900,000.

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

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

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

FORWARD-LOOKING STATEMENTS

Certain information contained in this  discussion  may  include "forward-looking
statements" within the meaning of Section 27A of the Securities  Act of 1933, as
amended,  and  Section  21E of the Securities Exchange Act of 1934, as  amended.
These forward-looking statements  are  generally  identified  by phrases such as
"the Company expects," "the Company believes" or words of similar  import.  Such
forward-looking  statements involve known and unknown risks including,  but  not
limited to, changes  in  general economic and business conditions, interest rate
fluctuations, competition  within  and  from  outside  the banking industry, new
products  and services in the banking industry, risk inherent  in  making  loans
such  as repayment  risks  and  fluctuating  collateral  values,  problems  with
technology  utilized  by  the  Company, changing trends in customer profiles and
changes in laws and regulations applicable to the Company.  Although the Company
believes that its expectations with  respect  to  the forward-looking statements
are based upon reliable assumptions within the bounds  of  its  knowledge of its
business  and  operations,  there  can  be  no  assurance  that  actual results,
performance or achievements of the Company will not differ materially  from  any
future  results,  performance  or  achievements  expressed  or  implied  by such
forward-looking  statements.   For  additional  information on known and unknown
risks,  see  the  "Caution  About  Forward Looking Statements"  section  in  the
Company's Annual Report on Form 10-K for the year ended December 31, 2005.

                                       11

<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.
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 that 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 Federal Home Loan Bank 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 a parallel increase in rates
of 300 basis points over the next 12 months  would  result  in a decrease in net
interest income of $398,000, or 3.27%, while a similar decrease  in  rates would
result  in  an  increase in net interest income of $6,000, or 0.05%.  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.




















                                       12

<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
Chief Financial Officer, of the effectiveness of the design and operation of our
disclosure  controls and procedures pursuant to Rule 13a-15 under the Securities
Exchange Act  of  1934.  Based upon that evaluation, the Company's President and
Chief  Executive  Officer   and  Chief  Financial  Officer  concluded  that  its
disclosure controls and procedures  are  effective  in  timely  alerting them to
material  information  relating  to  the  Company  (including  its  consolidated
subsidiary) required to be included in its periodic filings with the  Securities
and Exchange Commission.

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

























                                       13

<PAGE>

                           PART II.  OTHER INFORMATION



ITEM 1.   LEGAL PROCEEDINGS

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

ITEM 1A.  RISK FACTORS

      There are no material changes to the risk factors previously disclosed in
      the Company's Annual Report on Form 10-K for the year ended December 31,
      2005.

ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

      Not applicable

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

      Not applicable

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

      None

ITEM 5.   OTHER INFORMATION

      None

ITEM 6.  EXHIBITS

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

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

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














                                       14

<PAGE>


                                   SIGNATURES


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



                                         GRAYSON BANKSHARES, INC.




Date:  May 15, 2006                      By:   /s/ Jacky K. Anderson
                                               --------------------------------
                                               Jacky K. Anderson
                                               President and CEO



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



                                       15

<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.