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

                                  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, 2007

              [ ] 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 14, 2007.
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<PAGE>
                               TABLE OF CONTENTS

PART I   FINANCIAL INFORMATION

Item 1.  Financial Statements

         Consolidated Balance Sheets--June 30, 2007
          and December 31, 2006..............................................3

         Consolidated Statements of Income--Six Months Ended
          June 30, 2007 and June 30, 2006....................................4

         Consolidated Statements of Income--Three Months Ended
          June 30, 2007 and June 30, 2006....................................5

         Consolidated Statements of Stockholders' Equity--Six Months
          Ended June 30, 2007 and Year Ended December 31, 2006...............6

         Consolidated Statements of Cash Flows--Six Months Ended
          June 30, 2007 and June 30, 2006....................................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

<PAGE>

                          Part I. Financial Information

Item 1.  Financial Statements


                     Grayson Bankshares, Inc. and Subsidiary
                           Consolidated Balance Sheets
                       June 30, 2007 and December 31, 2006
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                                   June 30,          December 31,
Assets                                                                                               2007               2006
                                                                                                  -----------         ---------
                                                                                                  (Unaudited)         (Audited)
<S>                                                                                             <C>              <C>
Cash and due from banks                                                                          $  11,203,583    $  10,120,984
Federal funds sold                                                                                   9,861,943       17,785,525
Investment securities available for sale                                                            33,107,676       35,719,431
Investment securities held to maturity
  (fair value approximately $2,976,685 at June 30, 2007,
  and $4,022,279 at December 31, 2006)                                                               3,002,663        3,991,393
Restricted equity securities                                                                           679,850        1,137,450
Loans, net of allowance for loan losses of $2,943,770
  at June 30, 2007 and $2,901,997 at December 31, 2006                                             257,433,972      245,517,203
Cash value of life insurance                                                                         5,484,560        5,373,560
Foreclosed assets                                                                                            -           60,000
Property and equipment, net                                                                          8,370,872        8,165,147
Accrued income                                                                                       3,211,824        2,930,705
Other assets                                                                                         2,950,859        2,802,877
                                                                                                  ------------     ------------
                                                                                                 $ 335,307,802    $ 333,604,275
                                                                                                 =============    =============

Liabilities and Stockholders' Equity

Liabilities
Demand deposits                                                                                  $  41,728,188    $  40,971,045
Interest-bearing demand deposits                                                                    19,088,394       17,704,016
Savings deposits                                                                                    35,579,559       37,356,154
Large denomination time deposits                                                                    68,568,139       63,294,716
Other time deposits                                                                                129,215,775      122,920,100
                                                                                                  ------------     ------------
     Total deposits                                                                                294,180,055      282,246,031

Long-term debt                                                                                      10,000,000       20,000,000
Accrued interest payable                                                                               437,495          553,446
Other liabilities                                                                                    1,736,777        2,500,629
                                                                                                  ------------     ------------
                                                                                                   306,354,327      305,300,106
                                                                                                  ------------     ------------

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                                                                                   28,280,153       27,336,848
Accumulated other comprehensive loss                                                                (1,997,013)      (1,703,014)
                                                                                                  ------------     ------------
                                                                                                    28,953,475       28,304,169
                                                                                                  ------------     ------------
                                                                                                 $ 335,307,802    $ 333,604,275
                                                                                                 =============    =============
</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, 2007 and 2006
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>


                                                                                           Six Months Ended
                                                                                               June 30,
                                                                                        2007              2006
                                                                                        ----              ----
Interest income:                                                                     (Unaudited)       (Unaudited)
<S>                                                                                <C>             <C>
   Loans and fees on loans                                                          $  10,065,117    $    8,617,793
   Federal funds sold                                                                     349,775           344,601
   Investment securities:
     Taxable                                                                              653,675           730,078
     Exempt from federal income tax                                                       206,108           151,725
                                                                                    -------------     -------------
                                                                                       11,274,675         9,844,197
                                                                                    -------------     -------------

Interest expense:
   Deposits                                                                             5,062,314         3,374,458
   Interest on borrowings                                                                 256,562           432,000
                                                                                    -------------     -------------
                                                                                        5,318,876         3,806,458
                                                                                    -------------     -------------
         Net interest income                                                            5,955,799         6,037,739

Provision for loan losses                                                                 135,000           250,000
                                                                                    -------------     -------------
   Net interest income after
     provision for loan losses                                                          5,820,799         5,787,739
                                                                                    -------------     -------------
Noninterest income:
   Service charges on deposit accounts                                                    342,762           278,451
   Increase in cash value of life insurance                                               111,000           105,500
   Net realized gains (losses) on securities                                               (9,982)           11,969
   Other income                                                                           563,715           416,673
                                                                                    -------------     -------------
                                                                                        1,007,495           812,593
                                                                                    -------------     -------------

Noninterest expense:
   Salaries and employee benefits                                                       2,801,094         2,585,776
   Occupancy expense                                                                      177,438           144,834
   Equipment expense                                                                      420,107           407,786
   Other expense                                                                        1,102,763         1,015,819
                                                                                    -------------     -------------
                                                                                        4,501,402         4,154,215
                                                                                    -------------     -------------
         Income before income taxes                                                     2,326,892         2,446,117

Income tax expense                                                                        696,000           736,000
                                                                                    -------------     -------------
         Net income                                                                 $   1,630,892    $    1,710,117
                                                                                    =============    ==============

Basic earnings per share                                                            $        0.95    $         0.99
                                                                                    =============    ==============
Weighted average shares outstanding                                                     1,718,968         1,718,968
                                                                                    -------------     -------------
Dividends declared per share                                                        $        0.40    $         0.40
                                                                                    -------------     -------------

</TABLE>








See Notes to Consolidated Financial Statements.

                                       4
<PAGE>


                     Grayson Bankshares, Inc. and Subsidiary
                        Consolidated Statements of Income
                For the Three Months ended June 30, 2007 and 2006
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                                                           Three Months Ended
                                                                                               June 30,
                                                                                        2007              2006
                                                                                    -------------     -------------

Interest income:                                                                     (Unaudited)       (Unaudited)
<S>                                                                                <C>              <C>
   Loans and fees on loans                                                          $   5,176,307    $    4,488,840
   Federal funds sold                                                                     171,573           140,554
   Investment securities:
     Taxable                                                                              317,455           375,592
     Exempt from federal income tax                                                       111,819            76,194
                                                                                    -------------     -------------
                                                                                        5,777,154         5,081,180
                                                                                    -------------     -------------

Interest expense:
   Deposits                                                                             2,581,963         1,776,990
   Interest on borrowings                                                                 115,788           192,000
                                                                                    -------------     -------------
                                                                                        2,697,751         1,968,990
                                                                                    -------------     -------------
         Net interest income                                                            3,079,403         3,112,190

Provision for loan losses                                                                  75,000           137,500
                                                                                    -------------     -------------
   Net interest income after
     provision for loan losses                                                          3,004,403         2,974,690
                                                                                    -------------     -------------

Noninterest income:
   Service charges on deposit accounts                                                    224,582           142,859
   Increase in cash value of life insurance                                                55,500            51,000
   Net realized gains (losses) on securities                                               (9,759)                -
   Other income                                                                           163,483           213,874
                                                                                    -------------     -------------
                                                                                          433,806           407,733
                                                                                    -------------     -------------

Noninterest expense:
   Salaries and employee benefits                                                       1,422,051         1,327,264
   Occupancy expense                                                                       90,110            74,921
   Equipment expense                                                                      219,663           204,756
   Other expense                                                                          585,955           531,801
                                                                                    -------------     -------------
                                                                                        2,317,779         2,138,742
                                                                                    -------------     -------------
         Income before income taxes                                                     1,120,430         1,243,681

Income tax expense                                                                        333,500           372,000
                                                                                    -------------     -------------
         Net income                                                                 $     786,930    $      871,681
                                                                                    =============    ==============
Basic earnings per share                                                            $        0.46    $         0.51
                                                                                    =============    ==============
Weighted average shares outstanding                                                     1,718,968         1,718,968
                                                                                    =============    ==============
Dividends declared per share                                                        $        0.20    $         0.20
                                                                                    =============    ==============

</TABLE>


See Notes to Consolidated Financial Statements.

                                       5
<PAGE>
<TABLE>
<CAPTION>

                                           Grayson Bankshares, Inc. and Subsidiary
                                       Consolidated Statements of Stockholders' Equity
              For the Six Months ended June 30, 2007 (unaudited) and the Year ended December 31, 2006 (audited)
------------------------------------------------------------------------------------------------------------------------------


                                                                                           Accumulated
                                       Common Stock                                           Other
                                       ------------                         Retained      Comprehensive
                                    Shares       Amount       Surplus       Earnings      Income (Loss)       Total
                                    ------       ------       -------       --------      -------------       -----
<S>                             <C>           <C>            <C>           <C>            <C>               <C>
Balance, December 31, 2005         1,718,968     2,148,710      521,625     25,736,698          (653,691)    27,753,342

Comprehensive income
  Net income                               -             -            -      3,147,221                 -      3,147,221
  Adjustment to initially
   apply SFAS No. 158,
   net of taxes of ($662,597)              -             -            -              -        (1,286,217)    (1,286,217)
  Net change in unrealized
   gain (loss) on investment
   securities available for
   sale, net of taxes of $137,638          -             -            -              -           267,179        267,179
  Reclassification adjustment,
   net of income taxes of ($15,602)        -             -            -              -           (30,285)       (30,285)
                                                                                                              ---------
Total comprehensive income                                                                                    2,097,898

  Dividends paid
   ($.90 per share)                        -             -            -     (1,547,071)                -     (1,547,071)
Balance, December 31, 2006         1,718,968     2,148,710      521,625     27,336,848        (1,703,014)    28,304,169
                                   ---------   -----------  -----------  -------------  ----------------   ------------

Comprehensive income
  Net income                               -             -            -      1,630,892                 -      1,630,892
  Net change in unrealized
   gain (loss) on investment
   securities available for
   sale, net of taxes of  $(148,060)       -             -            -              -          (287,411)      (287,411)
  Reclassification adjustment,
   net of income taxes of ($3,394)         -             -            -              -            (6,588)        (6,588)
                                                                                                           -------------
Total comprehensive income                                                                                    1,336,893

  Dividends paid
   ($.40 per share)                        -             -            -       (687,587)                -       (687,587)
                                   ---------   -----------  -----------  -------------  ----------------   ------------
Balance, June 30, 2007             1,718,968   $ 2,148,710  $   521,625  $  28,280,153  $     (1,997,013)  $ 28,953,475
              === ====             =========   ===========  ===========  =============  ================   ============



</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, 2007 and 2006
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                                           Six Months Ended
                                                                                               June 30,
                                                                                        2007              2006
                                                                                        ----              ----
                                                                                     (Unaudited)       (Unaudited)
<S>                                                                               <C>              <C>
Cash flows from operating activities:
   Net income                                                                       $   1,630,892    $    1,710,117
   Adjustments to reconcile net income
     to net cash provided by operations:
       Depreciation and amortization                                                      375,000           366,000
       Provision for loan losses                                                          135,000           250,000
       Deferred income taxes                                                              258,000           (31,843)
       Net realized (gains) losses on securities                                            9,982           (11,969)
       Accretion of discount on securities, net of
         amortization of premiums                                                         (24,563)          (22,748)
       Deferred compensation                                                               (5,086)            1,318
       Net realized gain on foreclosed assets                                             (48,722)                -
       Changes in assets and liabilities:
         Cash value of life insurance                                                    (111,000)         (105,500)
         Accrued income                                                                  (281,119)         (410,940)
         Other assets                                                                    (254,528)         (146,946)
         Accrued interest payable                                                        (115,951)          (72,064)
         Other liabilities                                                               (758,766)          (25,992)
                                                                                    -------------    --------------
           Net cash provided by operating activities                                      809,139         1,499,433
                                                                                    -------------    --------------

Cash flows from investing activities:
   Net decrease in federal funds sold                                                   7,923,582        11,921,302
   Purchases of investment securities                                                  (8,090,240)       (5,244,155)
   Sales of investment securities                                                       1,982,500         4,012,000
   Maturities of investment securities                                                  9,277,353           632,380
   Sales of restricted equity securities                                                  457,600           382,200
   Net increase in loans                                                              (12,051,769)      (15,895,902)
   Proceeds from the sale of foreclosed assets                                            108,722                 -
   Purchases of property and equipment, net of sales                                     (580,725)         (320,343)
                                                                                    -------------    --------------
           Net cash used in investing activities                                         (972,977)       (4,512,518)
                                                                                    -------------    --------------

Cash flows from financing activities:
   Net increase in deposits                                                            11,934,024        12,159,574
   Dividends paid                                                                        (687,587)         (687,587)
   Net decrease in long-term debt                                                     (10,000,000)      (10,000,000)
           Net cash provided by financing activities                                    1,246,437         1,471,987
           Net increase (decrease) in cash and cash equivalents                         1,082,599        (1,541,098)

Cash and cash equivalents, beginning                                                   10,120,984         8,394,366
                                                                                    -------------    --------------
Cash and cash equivalents, ending                                                   $  11,203,583    $    6,853,268
                                                                                    =============    ==============

Supplemental disclosure of cash flow information:
   Interest paid                                                                    $   5,434,827    $    3,878,522
                                                                                    =============    ==============
   Taxes paid                                                                       $     364,468    $      567,000
                                                                                    =============    ==============
   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 nine 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, 2007 and for the periods
ended June 30, 2007 and 2006  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, 2006, included in the Company's Annual Report on Form
10-K for the fiscal year ended  December 31, 2006. The results of operations for
the  three-month  and six-month  periods ended June 30, 2007 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.

Critical Accounting Policies

The Company's  financial  statements are prepared in accordance  with accounting
principles  generally  accepted in the United  States  (GAAP).  The notes to the
audited consolidated  financial statements included in the Annual Report on Form
10-K for the year ended  December 31, 2006 contain a summary of its  significant
accounting policies.  Management believes the Company's policies with respect to
the  methodology  for the  determination  of the allowance for loan losses,  and
asset impairment judgments,  such as the recoverability of intangible assets and
other-than-temporary  impairment  of  investment  securities,  involve  a higher
degree of complexity  and require  management to make  difficult and  subjective
judgments  that often require  assumptions or estimates  about highly  uncertain
matters.  Accordingly,  management considers the policies related to those areas
as critical.

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  $2,333,000 and $2,124,000 for the periods including June 30, 2007
and December 31, 2006, 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, 2007 and 2006.

                                        2007           2006
                                        ----           ----

Balance, beginning                  $ 2,901,997    $ 2,678,055
Provision charged to expense            135,000        250,000
Recoveries of amounts charged off        46,358         63,318
Amounts charged off                    (139,585)      (265,949)
                                    -----------    -----------
Balance, ending                     $ 2,943,770    $ 2,725,424
                                    ===========    ===========



                                       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, 2007 and 2006 follows:

                                   2007         2006
                                   ----         ----

Tax at statutory federal rate   $ 791,143    $ 831,679
Tax exempt interest income        (84,899)     (63,831)
Other tax exempt income           (43,192)     (50,219)
Other                              32,948       18,371
                                ---------    ---------
                                $ 696,000    $ 736,000
                                =========    ==========
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, 2007 and 2006.

                                                  2007         2006
                                                  ----         ----

Service cost                                   $ 193,828    $ 194,810
Interest cost                                    178,916      163,692
Expected return on plan assets                  (183,544)    (168,206)
Amortization of net obligation at transition         (18)         (18)
Amortization of prior service cost                 5,032        5,032
Amortization of net (gain) or loss                38,886       45,946
                                               ---------    ----------
Net periodic benefit cost                      $ 233,100    $ 241,256
                                               =========    =========

Note 6.  Commitments and Contingencies

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, 2007 and 2006 is as follows:

                                   2007          2006
                                   ----          ----

Commitments to extend credit   $20,959,836   $17,804,593
Standby letters of credit                -             -
                               -----------   -----------
                               $20,438,947   $17,804,593
                               ===========   ===========

                                       9
<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.

Note 7.  Recent Accounting Pronouncements

On December  31, 2006,  the Company  adopted  Statement of Financial  Accounting
Standards ("SFAS") No. 158,  "Employers'  Accounting for Defined Benefit Pension
and Other Postretirement Plans" ("SFAS 158"), which was issued in September 2006
and amends  SFAS 87 and SFAS 106 to require  recognition  of the  overfunded  or
underfunded  status of pension  and other  postretirement  benefit  plans on the
balance  sheet.  Under  SFAS 158,  gains and  losses,  prior  service  costs and
credits,  and any remaining  transition  amounts under SFAS 87 and SFAS 106 that
have  not  yet  been  recognized  through  net  periodic  benefit  cost  will be
recognized in accumulated other comprehensive income, net of tax effects,  until
they are amortized as a component of net periodic cost. The adoption of SFAS 158
had a significant impact on the balance sheet of the Company. Prior to adoption,
the Company had a prepaid  pension benefit of $303,636;  after the adoption,  on
December 31, 2006, the Company had a liability of $1,645,178. This represents an
increase in the net pension liability of $1,948,814.  This increase in liability
is  recorded,  net of tax,  as a  reduction  of other  comprehensive  income  of
$1,286,217.  This  change  is the  cumulative  effect  of the  adoption  of this
standard.  Future  adjustments to  liabilities  and other  comprehensive  income
should  reflect  only one  year's  change  and are  expected  to be much less in
amount.




                                       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, 2006.

Results of Operations

Total interest income  increased by $695,974 for the quarter ended June 30, 2007
compared to the quarter ended June 30, 2006,  while interest expense on deposits
and other borrowings increased by $728,761 over the same period. The increase in
interest  income was  attributable  primarily  to an increase  in average  loans
outstanding.  The  increase in interest  expense was due to  increases in market
deposit  rates and to the  migration of funds by customers  from  lower-yielding
transaction accounts to higher-yielding  time deposits.  The result was a slight
decrease  in net  interest  income of $32,787 or 1.05% in the second  quarter of
2007 compared to the same period last year.

The  provision  for loan losses was $75,000 for the quarter  ended June 30, 2007
and  $137,500  for the same period in 2006.  The reserve for loan losses at June
30,  2007 was  approximately  1.13%  of total  loans.  Management  believes  the
provision and the resulting allowance for loan losses are adequate.

Noninterest  income was  $433,806  in the second  quarter  of 2007  compared  to
$407,733  in the second  quarter of 2006.  Service  charges on deposit  accounts
increased  in the  second  quarter  of  2007  due to  the  implementation  of an
overdraft privilege program.

Noninterest expenses increased by $179,037, or 8.37%, for the quarter ended June
30, 2007  compared to the quarter  ended June 30, 2006.  The increase  came as a
result of normal  increases in salaries,  benefits and other expenses,  combined
with the  additional  costs  attributable  to  branching  activity in the fourth
quarter of 2006.

The decrease in net interest  income  combined with the increase in  noninterest
expense led to a decrease in net income before taxes of $123,251 for the quarter
ended June 30, 2007,  compared to the same  quarter in 2006.  Income tax expense
decreased  accordingly  to $333,500 in the quarter,  from $372,000 in the second
quarter of 2006.  As a result,  net income  decreased by $84,751,  or 9.72%,  to
$786,930 compared to $871,681 last year.

For the six months  ended June 30,  2007,  total  interest  income  increased by
$1,430,478  compared to the six-month period ended June 30, 2006, while interest
expense  increased  by  $1,512,418  over the same  period.  This  resulted  in a
decrease in net  interest  income of $81,940,  or 1.36%.  As stated  above,  the
increase in interest  income was  primarily the result of an increase in average
loans  outstanding  while the  increase in interest  expense came as a result of
increases in market deposit rates and the migration of funds from lower-yielding
transaction accounts to higher-yielding time deposits.

Noninterest  income  increased by $194,902 for the six-month  period ended June
30,  2007  compared  to the same  period in 2006.  The  increase  was due to the
aforementioned  increase  in  service  charges on  deposit  accounts  as well as
earnings  recognized in the first quarter of 2007 from the Bank's  investment in
a small business investment company.

                                       11
<PAGE>

                          Part I. Financial Information

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

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

As indicated above,  increases in normal operating costs combined with the costs
of  branching  activity  in the fourth  quarter of 2006  resulted  in an overall
increase in noninterest expense of $347,187, or 8.36%, for the first six months
of 2007 compared to the first six months of 2006.  Overall,  the decrease in net
interest income and the increase in noninterest expense led to a decrease in net
income of  $79,225,  or 4.63%,  for the  six-month  period  ended June 30,  2007
compared to the six-month period ended June 30, 2006.

Financial Condition

Total assets increased by $1,703,527,  or 0.51%,  from December 31, 2006 to June
30, 2007. Net loans  increased by  $11,916,769,  federal funds sold decreased by
$7,923,582 and investment  securities decreased by $3,600,485.  The decreases in
federal  funds sold and  investment  securities  came as  balances  were used to
retire long-term debt.

Total deposits  increased by  $11,934,024,  or 4.23%,  from December 31, 2006 to
June 30,  2007.  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 $20,000,000 at December 31, 2006,
to $10,000,000 at June 30, 2007. Other liabilities  decreased from $2,500,629 at
December  31,  2006 to  $1,736,777  at June 30,  2007 due to a  contribution  of
$970,477 to the Bank's defined benefit pension plan.

Shareholders'   equity  totaled   $28,953,475  at  June  30,  2007  compared  to
$28,304,169  at December  31,  2006.  The  $649,306  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  $18,400,000  at June 30, 2007. No
balances were  outstanding on these lines at June 30, 2007 or December 31, 2006.
Long-term  debt  consists  of  borrowings  from the  Federal  Home Loan Bank and
Deutsche Bank.  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  $10,000,000  at December 31, 2006. The Federal Home Loan
Bank borrowings  were repaid in January 2007 and no amounts were  outstanding to
the Federal  Home Loan Bank at June 30, 2007.  Borrowings  from  Deutsche  Bank,
which are secured by the  pledging of specific  investment  securities,  totaled
$10,000,000  at each of June 30, 2007,  and December 31, 2006. The unused credit
line  from the  Federal  Home  Loan  Bank as of June 30,  2007 is  approximately
$50,000,000.

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  securities  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, 2006.






                                       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 approximately  $434,000,  or 3.52%,  while a similar decrease in rates
would result in a decrease in net interest income of approximately  $468,000, or
3.80%.  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, 2006.

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
               10, 2007.

          (b)  Not applicable

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

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

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

                   Julian L. Givens     1,073,711     126,960
                   Jean W. Lindsey      1,182,014      18,657
                   Carl J. Richardson   1,182,071      18,600

          (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, 2007               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.