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

                                    FORM 10-Q

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

                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 August 11, 2006.

================================================================================
<PAGE>

PART I   FINANCIAL INFORMATION

Item 1.  Financial Statements

         Consolidated Balance Sheets-June 30, 2006
         and December 31, 2005.................................................3

         Consolidated Statements of Income-Six Months Ended
         June 30, 2006 and June 30, 2005.......................................4

         Consolidated Statements of Income-Three Months Ended
         June 30, 2006 and June 30, 2005.......................................5

         Consolidated Statements of Stockholders' Equity-Six Months
         Ended June 30, 2006 and Year Ended December 31, 2005..................6

         Consolidated Statements of Cash Flows-Six Months Ended
         June 30, 2006 and June 30, 2005.......................................7

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

Item 2.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations............................................11

Item 3.  Quantitative and Qualitative Disclosures about Market Risk...........14

Item 4.  Controls and Procedures..............................................15

PART II  OTHER INFORMATION

Item 1.  Legal Proceedings....................................................16

Item 1A. Risk Factors.........................................................16

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds..........16

Item 3.  Defaults Upon Senior Securities......................................16

Item 4.  Submission of Matters to a Vote of Security Holders..................16

Item 5.  Other Information....................................................16

Item 6.  Exhibits.............................................................16

Signatures....................................................................17

                                       2

<PAGE>
                          PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

================================================================================

                    GRAYSON BANKSHARES, INC. AND SUBSIDIARY
                          CONSOLIDATED BALANCE SHEETS
                      JUNE 30, 2006 AND DECEMBER 31, 2005
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                            JUNE 30,       DECEMBER 31,
                                                             2006             2005
                                                             ----             ----
                                                          (Unaudited)        (Audited)
<S>                                                     <C>             <C>
ASSETS
------
Cash and due from banks                                   $ 6,853,268      $ 8,394,366
Federal funds sold                                          9,993,211       21,914,513
Investment securities available for sale                   34,164,086       33,795,911
Investment securities held to maturity
  (fair value approximately $3,935,426 at June 30,
  2006, and $3,955,524 at December 31, 2005)                3,977,376        3,963,847
Restricted equity securities                                1,137,450        1,519,650
Loans, net of allowance for loan losses of $2,725,424
  at June 30, 2006 and $2,678,055 at December 31, 2005    232,649,687      217,091,067
Cash value of life insurance                                5,253,680        5,148,180
Foreclosed assets                                             487,282          400,000
Property and equipment, net                                 7,204,047        7,249,704
Accrued income                                              2,588,415        2,177,475
Other assets                                                2,799,083        2,510,504
                                                          -----------       ----------
                                                         $307,107,585     $304,165,217
                                                         ============     ============

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
Demand deposits                                           $38,785,015      $36,242,161
Interest-bearing demand deposits                           20,823,850       22,975,642
Savings deposits                                           40,773,161       46,569,058
Large denomination time deposits                           51,643,951       46,132,454
Other time deposits                                       110,533,116       98,480,204
                                                          -----------       ----------
   Total deposits                                         262,559,093      250,399,519

Long-term debt                                             15,000,000       25,000,000
Accrued interest payable                                      395,622          467,686
Other liabilities                                             590,121          544,670
                                                          -----------      -----------
                                                          278,544,836      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                                          26,759,228       25,736,698
Accumulated other comprehensive income (loss)                (866,814)        (653,691)
                                                          -----------       ----------
                                                           28,562,749       27,753,342
                                                          -----------       ----------
                                                         $307,107,585     $304,165,217
                                                         ============     ============

</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                       3

<PAGE>

================================================================================

                    GRAYSON BANKSHARES, INC. AND SUBSIDIARY
                       CONSOLIDATED STATEMENTS OF INCOME
                FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005
--------------------------------------------------------------------------------


                                                           SIX MONTHS ENDED
                                                                JUNE 30,
                                                           2006          2005
                                                           ----          ----
INTEREST INCOME:                                       (Unaudited)   (Unaudited)
  Loans and fees on loans                              $8,617,793    $7,180,054
  Federal funds sold                                      344,601       115,496
  Investment securities:
   Taxable                                                730,078       600,556
   Exempt from federal income tax                         151,725       204,930
                                                        ---------     ---------
                                                        9,844,197     8,101,036
                                                        ---------     ---------

INTEREST EXPENSE:
  Deposits                                              3,374,458     2,139,675
  Interest on borrowings                                  432,000       342,000
                                                        ---------     ---------
                                                        3,806,458     2,481,675
                                                        ---------     ---------
      Net interest income                               6,037,739     5,619,361
                                                        ---------     ---------

PROVISION FOR LOAN LOSSES                                 250,000       210,000
                                                        ---------     ---------
  Net interest income after
   provision for loan losses                            5,787,739     5,409,361
                                                        ---------     ---------

NONINTEREST INCOME:
  Service charges on deposit accounts                     278,451       240,054
  Increase in cash value of life insurance                105,500       114,000
  Net realized gains (losses) on securities                11,969        (3,763)
  Other income                                            416,673       236,669
                                                        ---------     ---------
                                                          812,593       586,960
                                                        ---------     ---------

NONINTEREST EXPENSE:
  Salaries and employee benefits                        2,585,776     2,465,869
  Occupancy expense                                       144,834       136,770
  Equipment expense                                       407,786       392,737
  Other expense                                         1,015,819       952,919
                                                        ---------     ---------
                                                        4,154,215     3,948,295
                                                        ---------     ---------
      Income before income taxes                        2,446,117     2,048,026

INCOME TAX EXPENSE                                        736,000       566,000
                                                        ---------     ---------
      Net income                                       $1,710,117    $1,482,026
                                                       ==========    ==========

BASIC EARNINGS PER SHARE                               $      .99     $     .86
                                                       ==========    ==========
WEIGHTED AVERAGE SHARES OUTSTANDING                     1,718,968     1,718,968
                                                       ==========    ==========





SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                       4

<PAGE>


================================================================================

                    GRAYSON BANKSHARES, INC. AND SUBSIDIARY
                       CONSOLIDATED STATEMENTS OF INCOME
               FOR THE THREE MONTHS ENDED JUNE 30, 2006 AND 2005
--------------------------------------------------------------------------------


                                                          THREE MONTHS ENDED
                                                               JUNE 30,
                                                          2006          2005
                                                          ----          ----
INTEREST INCOME:                                      (Unaudited)    (Unaudited)

  Loans and fees on loans                              $4,488,840    $3,685,617
  Federal funds sold                                      140,554        65,336
  Investment securities:
   Taxable                                                375,592       300,244
   Exempt from federal income tax                          76,194       104,573
                                                        ---------     ---------
                                                        5,081,180     4,155,770
                                                        ---------     ---------

INTEREST EXPENSE:
  Deposits                                              1,776,990     1,113,627
  Interest on borrowings                                  192,000       218,000
                                                        ---------     ---------
                                                        1,968,990     1,331,627
                                                        ---------     ---------
      Net interest income                               3,112,190     2,824,143

PROVISION FOR LOAN LOSSES                                 137,500       105,000
                                                        ---------     ---------
  Net interest income after
   provision for loan losses                            2,974,690     2,719,143
                                                        ---------     ---------
NONINTEREST INCOME:
  Service charges on deposit accounts                     142,859       134,014
  Increase in cash value of life insurance                 51,000        57,000
  Net realized gains (losses) on securities                     -        (3,763)
  Other income                                            213,874       114,473
                                                        ---------     ---------
                                                          407,733       301,724
                                                        ---------     ---------

NONINTEREST EXPENSE:
  Salaries and employee benefits                        1,327,264     1,250,897
  Occupancy expense                                        74,921        67,280
  Equipment expense                                       204,756       200,340
  Other expense                                           531,801       486,446
                                                        ---------     ---------
                                                        2,138,742     2,004,963
                                                        ---------     ---------
      Income before income taxes                        1,243,681     1,015,904

INCOME TAX EXPENSE                                        372,000       286,000
                                                        ---------     ---------
      Net income                                       $  871,681     $ 729,904
                                                       ==========     =========

BASIC EARNINGS PER SHARE                               $      .51     $     .42
                                                       ==========     =========
WEIGHTED AVERAGE SHARES OUTSTANDING                     1,718,968     1,718,968
                                                       ==========     =========





SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                       5

<PAGE>

================================================================================

                     GRAYSON BANKSHARES, INC. AND SUBSIDIARY
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
             FOR THE SIX MONTHS ENDED JUNE 30, 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)     (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                                    -               -               -          1,710,117                -     1,710,117
  Net change in unrealized
   depreciation on investment
   securities available for
   sale, net of taxes of $(81,878)              -               -               -                  -         (158,941)     (158,941)
  Reclassification adjustment,
   net of taxes of $(4,069)                     -               -               -                  -           (7,900)       (7,900)
  Unrealized loss on interest rate
   swap, net of taxes of $(23,843)              -               -               -                  -          (46,282)      (46,282)
                                                                                                                           ---------
   TOTAL COMPREHENSIVE INCOME                                                                                             1,496,994
  Dividends paid
   ($.40 per share)                             -               -               -           (687,587)               -      (687,587)
                                        ---------      ----------       ---------        -----------        ---------   -----------

BALANCE, JUNE 30, 2006                  1,718,968      $2,148,710       $ 521,625        $26,759,228        $(866,814)  $28,562,749
                                        =========      ==========       =========        ===========        =========   ===========


</TABLE>








SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                       6

<PAGE>

================================================================================

                    GRAYSON BANKSHARES, INC. AND SUBSIDIARY
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                                  SIX  MONTHS ENDED
                                                                        JUNE 30,
                                                                   2006          2005
                                                                   ----          ----
                                                                (Unaudited   (Unaudited)
<S>                                                           <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                    $1,710,117   $1,482,026
  Adjustments to reconcile net income
   to net cash provided by operations:
     Depreciation and amortization                                 366,000      348,000
     Provision for loan losses                                     250,000      210,000
     Deferred income taxes                                         (31,843)      29,000
     Net realized (gains) losses on securities                     (11,969)       3,763
     Accretion of discount on securities, net of
      amortization of premiums                                     (22,748)      40,448
     Deferred compensation                                           1,318        2,770
     Changes in assets and liabilities:
      Cash value of life insurance                                (105,500)    (114,000)
      Accrued income                                              (410,940)    (372,700)
      Other assets                                                (146,946)    (214,561)
      Accrued interest payable                                     (72,064)     119,784
      Other liabilities                                            (25,992)    (106,188)
                                                                 ---------    ---------
        Net cash provided by operating activities                1,499,433    1,428,342
                                                                 ---------    ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Net (increase) decrease in federal funds sold                 11,921,302     (593,813)
  Purchases of investment securities                            (5,244,155)  (2,992,249)
  Sales of investment securities                                 4,012,000    1,932,481
  Maturities of investment securities                              632,380    1,877,601
  (Purchases) sales of restricted equity securities                382,200     (372,600)
  Net increase in loans                                        (15,895,902) (14,452,755)
  Proceeds from the sale of foreclosed assets                            -       65,000
  Purchases of property and equipment, net of sales               (320,343)    (152,819)
        Net cash used in investing activities                   (4,512,518) (14,689,154)

CASH FLOWS FROM FINANCING ACTIVITIES:
  Net increase in deposits                                      12,159,574    4,330,729
  Dividends paid                                                  (687,587)    (515,690)
  Net increase (decrease) in other borrowings                  (10,000,000)   8,000,000
                                                                 ---------    ---------
        Net cash provided by financing activities                1,471,987   11,815,039
                                                                 ---------    ---------
        Net increase (decrease) in cash and cash equivalents    (1,541,098)  (1,445,773)

CASH AND CASH EQUIVALENTS, BEGINNING                             8,394,366   10,032,399
                                                                 ---------    ---------
CASH AND CASH EQUIVALENTS, ENDING                               $6,853,268   $8,586,626
                                                                ==========   ==========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Interest paid                                                 $3,878,522   $2,361,891
                                                                ==========   ==========
  Taxes paid                                                    $  567,000    $ 484,000
                                                                ==========    =========
  Transfers of loans to foreclosed properties                   $   87,282    $       -
                                                                ==========    =========

</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") 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 June 30, 2006 and for the periods
ended June 30, 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 and six-month  periods  ended  June 30, 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 $2,054,000  and $2,162,000 for the periods including June 30, 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 six months
ended June 30, 2006 and 2005.

                                                           2006        2005
                                                           ----        ----

Balance, beginning                                     $2,678,055  $2,609,759
Provision charged to expense                              250,000     210,000
Recoveries of amounts charged off                          63,318      21,472
Amounts charged off                                      (265,949)   (161,095)
                                                         --------    --------
Balance, ending                                        $2,725,424  $2,680,136
                                                       ==========  ==========






                                       8

<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 six
months ended June 30, 2006 and 2005 follows:

                                                           2006        2005
                                                           ----        ----

Tax at statutory federal rate                           $  831,679   $ 696,329
Tax exempt interest income                                (63,831)    (81,471)
Other tax exempt income                                   (50,219)    (69,985)
Other                                                       18,371      21,127
                                                            ------      ------
                                                        $  736,000   $ 566,000
                                                        ==========   =========
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 six-month periods ended June 30, 2006 and 2005.

                                                           2006        2005
                                                           ----        ----

Service cost                                            $  194,810   $ 149,678
Interest cost                                              163,692     141,382
Expected return on plan assets                            (168,206)   (136,194)
Amortization of net obligation at transition                   (18)        (18)
Amortization of prior service cost                           5,032       5,032
Amortization of net (gain) or loss                          45,946      43,016
                                                            ------      ------
Net periodic benefit cost                               $  241,256   $ 202,896
                                                        ==========   =========


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 June 30, 2006 and 2005 is as follows:

                                                          2006        2005
                                                          ----        ----

Commitments to extend credit                          $17,804,593   $14,265,127
Standby letters of credit                                       -             -
                                                      -----------   ------------
                                                      $17,804,593   $14,265,127
                                                      ===========   ===========

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


                                       9

<PAGE>

================================================================================

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


NOTE 6.  COMMITMENTS AND CONTINGENCIES, CONTINUED

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.










































                                       10

<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 $925,410 for  the quarter ended June 30, 2006
compared to the quarter ended June 30, 2005, while  interest expense on deposits
and other borrowings increased by $637,363 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 $288,047 or 10.20% in the
second quarter of 2006 compared to the same period last year.

The provision for loan losses was $137,500  for  the quarter ended June 30, 2006
and $105,000 for the same period in 2005.  The increase was due primarily to the
increase in total loans outstanding.  The reserve  for  loan  losses at June 30,
2006 was approximately 1.16% of total loans.  Management believes  the provision
and the resulting allowance for loan losses are adequate.

Noninterest  income  was  $407,733  in  the  second quarter of 2006 compared  to
$301,724 in the second quarter of 2005.  The increase  was  due  primarily  to a
$100,000  gain  that was realized in the second quarter of 2006 upon termination
of an investment repurchase agreement.

Noninterest expenses increased by $133,779, or 6.67%, for the quarter ended June
30, 2006 compared  to  the  quarter ended June 30, 2005.  The 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 $227,777, for the quarter ended June 30,  2006,  compared  to  the same
quarter in 2005.  Income tax expense increased from $286,000 to $372,000  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 $141,777, or 19.42%,  to  $871,681
compared to $729,904 last year.

For the six  months  ended  June  30,  2006,  total interest income increased by
$1,743,161 compared to the six-month period ended  June 30, 2005, while interest
expense  increased  by $1,324,783 over the same period.   This  resulted  in  an
increase in net interest  income  of  $418,378,  or 7.45%.  As stated above, the
increase in interest income was the result of increases  in  the  prime  lending
rate and an increase in average loans outstanding while the increase in interest
expense  came  as  a  result  of  increases in short-term interest rates and the
migration of funds from lower-yielding  transaction  accounts to higher-yielding
time deposits.

Non-interest income increased by $225,633 for the six-month  period  ended  June
30,  2006 compared to the same period in 2005.  The majority of the increase was
due to  a  gain of $60,000 that was realized upon the termination of an interest
rate swap in  the first quarter of 2006 combined with the aforementioned gain of
$100,000 realized  in  the  second  quarter  of  2006  upon  termination  of  an
investment repurchase agreement.

Normal  operating cost increases resulted in an overall increase in non-interest
expense of  $205,920,  or 5.22% for the first six months of 2006 compared to the
first six months of 2005.  Overall, the increases in net interest income and

                                       11

<PAGE>

================================================================================

                         PART I.  FINANCIAL INFORMATION

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


other income led to an increase  in  net  income of $228,091, or 15.39%, for the
six-month period ended June 30, 2006 compared to the six-month period ended June
30, 2005.

FINANCIAL CONDITION

Total assets increased by $2,942,368, or 0.97%,  from  December 31, 2005 to June
30, 2006.  Net loans increased by $15,558,620, federal funds  sold  decreased by
$11,921,302  and  investment securities increased by $381,704.  The decrease  in
federal funds sold  came  as  balances were used to retire long-term debt and to
fund a portion of the increase in loans.

Total deposits increased by $12,159,574,  or  4.86%,  from  December 31, 2005 to
June  30,  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 $15,000,000 at June 30, 2006.

Shareholders'  equity   totaled   $28,562,749  at  June  30,  2006  compared  to
$27,753,342 at December 31, 2005.   The  $809,407  increase  was  the  result of
earnings  for  the  six  months combined with a decrease in the market value  of
securities classified as available  for  sale,  and  the payment of dividends of
$687,587.

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  June  30,  2006.  No
balances were outstanding on these lines at June 30, 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  June  30,
2006.  Borrowings  from  BNP  Paribas,  which  are  secured  by  the pledging of
specific investment securities, totaled $5,000,000 at December 31, 2005 and June
30, 2006.  The remaining unused credit line from the Federal Home  Loan  Bank as
of June 30, 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.




                                       12

<PAGE>

================================================================================

                         PART I.  FINANCIAL INFORMATION

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


FORWARD-LOOKING STATEMENTS

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

































                                       13

<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 an increase in rates of 300
basis points over the next 12 months would result in an increase in net interest
income of $1,205,000, or 10.00%, while a similar  decrease in rates would result
in  a decrease in net interest income of $792,000, or  6.58%.   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.


















                                       14

<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.




























                                       15

<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

      (a)   The Company's Annual Meeting of Shareholders was held on April 11,
2005.

      (b)   Not applicable

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

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

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

            Bryan L. Edwards         1,290,446                     24,787
            Dennis B. Gambill        1,187,466                    127,767
            Jack E. Guynn, Jr.       1,295,669                     19,564
            Charles T. Sturgill      1,295,591                     19,642

      (d)   Not applicable

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.




                                       16

<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:  August 14, 2006                     By:  /s/ Jacky K. Anderson
                                                ----------------------
                                                 Jacky K. Anderson
                                                 President and CEO



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



                                       17

<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.