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 September 30, 2008

              [ ] 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, a non-accelerated  filer or a smaller reporting  company.
See definition of "large accelerated  filer,"  "accelerated  filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.

   Large  accelerated  filer [ ]             Accelerated  filer [ ]
   Non-accelerated filer [ ]                 Smaller  reporting company |X|
  (Do  not  check  if  smaller  reporting  company)

     Indicate  by check mark  whether  the  registrant  is a shell  company  (as
defined in Rule 12b-2 of the 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 November 13, 2008.
<PAGE>

                                TABLE OF CONTENTS

PART I   FINANCIAL INFORMATION

Item 1.  Financial Statements

         Consolidated Balance Sheets--September 30, 2008 (Unaudited)
          and December 31, 2007 (Audited).....................................3

         Unaudited Consolidated Statements of Income--Nine Months Ended
          September 30, 2008 and September 30, 2007...........................4

         Unaudited Consolidated Statements of Income--Three Months Ended
           September 30, 2008 and September 30, 2007..........................5

         Consolidated Statements of Changes in Stockholders' Equity--Nine
           Months Ended September 30, 2008 (Unaudited) and Year Ended
           December 31, 2007 (Audited)........................................6

         Unaudited Consolidated Statements of Cash Flows--Nine Months Ended
          September 30, 2008 and September 30, 2007...........................7

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

Item 2.  Management's Discussion and Analysis of Financial Condition
          and Results of Operations..........................................13

Item 3.  Quantitative and Qualitative Disclosures about Market Risk..........16

Item 4.  Controls and Procedures.............................................16

PART II  OTHER INFORMATION

Item 1.  Legal Proceedings...................................................17

Item 1A. Risk Factors........................................................17

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.........17

Item 3.  Defaults Upon Senior Securities.....................................17

Item 4.  Submission of Matters to a Vote of Security Holders.................17

Item 5.  Other Information...................................................17

Item 6.  Exhibits............................................................17

Signatures...................................................................18

                                       2
<PAGE>

                          Part I. Financial Information

Item 1.  Financial Statements


                     Grayson Bankshares, Inc. and Subsidiary
                           Consolidated Balance Sheets
                    Septermber 30, 2008 and December 31, 2007
--------------------------------------------------------------------------------
<TABLE>

                                                                                 September 30,         December 31,
Assets                                                                               2008                 2007
                                                                                ---------------      ----------------
                                                                                   (Unaudited)           (Audited)
<S>                                                                            <C>                <C>
Cash and due from banks                                                         $     9,776,329    $     10,746,139
Federal funds sold                                                                   10,009,532          24,637,131
Investment securities available for sale                                             47,086,221          38,429,328
Investment securities held to maturity
  (fair value approximately $3,031,965 at Septermber 30, 2008,
  and $3,064,241 at December 31, 2007)                                                3,031,546           3,014,048
Restricted equity securities                                                          1,629,750           1,129,850
Loans, net of allowance for loan losses of $2,870,662
  at September 30, 2008 and $2,757,745 at December 31, 2007                         271,893,315         263,729,116
Cash value of life insurance                                                          7,658,952           5,598,853
Foreclosed assets                                                                       100,000             160,000
Property and equipment, net                                                          10,811,825           8,485,058
Accrued income                                                                        3,192,417           2,996,261
Other assets                                                                          2,454,847           2,560,615
                                                                                ---------------    ----------------
                                                                                $   367,644,734    $    361,486,399
                                                                                ===============    ================

Liabilities and Stockholders' Equity

Liabilities
Deposits
   Noninterest-bearing                                                          $    44,166,698    $     44,630,854
   Interest-bearing                                                                 262,177,956         264,542,840
                                                                                ---------------    ----------------
     Total deposits                                                                 306,344,654         309,173,694

Long-term debt                                                                       30,000,000          20,000,000
Accrued interest payable                                                                982,721             536,393
Other liabilities                                                                       129,832           1,485,439
                                                                                ---------------    ----------------
                                                                                    337,457,207         331,195,526
                                                                                ---------------    ----------------

Commitments and contingencies                                                                 -                   -
Stockholders' equity
Preferred stock, $25 par value; 500,000
   shares authorized; none issued                                                             -                   -
Common stock, $1.25 par value; 2,000,000 shares
   authorized; 1,718,968 shares issued and
   outstanding                                                                        2,148,710           2,148,710
Surplus                                                                                 521,625             521,625
Retained earnings                                                                    28,916,418          29,026,036
Accumulated other comprehensive loss                                                 (1,399,226)         (1,405,498)
                                                                                ---------------    ----------------
                                                                                     30,187,527          30,290,873
                                                                                ---------------    ----------------
                                                                                $   367,644,734    $    361,486,399
                                                                                ===============    ================
</TABLE>

See Notes to Consolidated Financial Statements.

                                       3
<PAGE>


                     Grayson Bankshares, Inc. and Subsidiary
                        Consolidated Statements of Income
              For the Nine Months ended September 30, 2008 and 2007
-------------------------------------------------------------------------------
                                                     Nine Months Ended
                                                      September 30,
                                                  2008              2007
                                             --------------   ---------------
Interest income:                              (Unaudited)       (Unaudited)
   Loans and fees on loans                    $  14,790,512    $   15,119,606
   Federal funds sold                               306,840           531,786
   Investment securities:
     Taxable                                      1,350,109           971,608
     Exempt from federal income tax                 363,191           324,627
                                              --------------   ---------------
                                                 16,810,652        16,947,627
                                              --------------   ---------------

Interest expense:
   Deposits                                       7,271,436         7,678,667
   Interest on borrowings                           731,964           358,784
                                              --------------   ---------------
                                                  8,003,400         8,037,451
                                              --------------   ---------------
         Net interest income                      8,807,252         8,910,176

Provision for loan losses                           293,397           273,588
                                              --------------   ---------------
   Net interest income after
     provision for loan losses                    8,513,855         8,636,588
                                              --------------   ---------------

Noninterest income:
   Service charges on deposit accounts              705,064           582,333
   Increase in cash value of life insurance         231,000           166,500
   Net realized gains (losses) on securities     (1,645,083)          (11,742)
   Other income                                     619,047           826,281
                                              --------------   ---------------
                                                    (89,972)        1,563,372
                                              --------------   ---------------
Noninterest expense:
   Salaries and employee benefits                 4,400,803         4,210,253
   Occupancy expense                                270,693           255,155
   Equipment expense                                664,185           616,214
   Other expense                                  1,904,629         1,687,504
                                              --------------   ---------------

                                                  7,240,310         6,769,126
                                              --------------   ---------------
         Income before income taxes               1,183,573         3,430,834

Income tax expense                                  210,241         1,003,000
                                              --------------   ---------------
         Net income                           $     973,332    $    2,427,834
                                              ==============    ==============

Basic earnings per share                      $        0.57    $         1.41
                                              ==============    ==============
Weighted average shares outstanding               1,718,968         1,718,968
                                              ==============    ==============
Dividends declared per share                  $        0.63    $         0.60
                                              ==============    ==============

See Notes to Consolidated Financial Statements.

                                       4
<PAGE>

                     Grayson Bankshares, Inc. and Subsidiary
                        Consolidated Statements of Income
             For the Three Months ended September 30, 2008 and 2007
--------------------------------------------------------------------------------


                                                     Three Months Ended
                                                       September 30,
                                                   2008              2007
                                              ---------------  ---------------
Interest income:                                (Unaudited)      (Unaudited)
   Loans and fees on loans                    $   4,908,012    $    5,054,489
   Federal funds sold                                48,082           182,011
   Investment securities:
     Taxable                                        517,060           317,933
     Exempt from federal income tax                 120,287           118,519
                                              -------------    ---------------
                                                  5,593,441         5,672,952
                                              -------------    ---------------

Interest expense:
   Deposits                                       2,224,870         2,616,353
   Interest on borrowings                           268,964           102,222
                                              -------------    ---------------
                                                  2,493,834         2,718,575
                                              -------------    ---------------
         Net interest income                      3,099,607         2,954,377

Provision for loan losses                            93,397           138,588
                                              -------------    ---------------
   Net interest income after
     provision for loan losses                    3,006,210         2,815,789
                                              -------------    ---------------

Noninterest income:
   Service charges on deposit accounts              245,581           239,571
   Increase in cash value of life insurance          75,000            55,500
   Net realized gains (losses) on securities     (1,660,800)           (1,760)
   Other income                                     167,390           262,566
                                              -------------    ---------------
                                                 (1,172,829)          555,877
                                              -------------    ---------------

Noninterest expense:
   Salaries and employee benefits                 1,475,083         1,409,159
   Occupancy expense                                 89,658            77,717
   Equipment expense                                212,845           196,107
   Other expense                                    682,527           584,741
                                              -------------    ---------------
                                                  2,460,113         2,267,724
                                              -------------    ---------------
         Income before income taxes                (626,732)        1,103,942

Income tax expense                                 (256,759)          307,000
                                              -------------    ---------------

         Net income                           $    (369,973)   $      796,942
                                              ==============   ===============

Basic earnings per share                       $      (0.22)   $         0.46
                                              ==============   ===============
Weighted average shares outstanding               1,718,968         1,718,968
                                              ==============   ===============
Dividends declared per share                  $        0.21    $         0.20
                                              ==============   ===============

See Notes to Consolidated Financial Statements.




                                       5
<PAGE>


                     Grayson Bankshares, Inc. and Subsidiary
           Consolidated Statements of Changes in Stockholders' Equity
          For the Nine Months ended September 30, 2008 (unaudited) and
                   the Year ended December 31, 2007 (audited)
-------------------------------------------------------------------------------

<TABLE>
                                                                                           Accumulated
                                                                                              Other
                                       Common Stock                         Retained      Comprehensive
                                    Shares       Amount       Surplus       Earnings      Income (Loss)       Total
                                 -----------   -----------   ----------  -------------  -----------------  -------------
<S>                               <C>          <C>         <C>          <C>             <C>                <C>
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                               -             -            -      3,167,501                 -      3,167,501
  Net change in pension reserve
   net of income taxes of $156,273         -             -            -              -           303,354        303,354
  Net change in unrealized
   gain (loss) on investment
   securities available for
   sale, net of taxes of ($6,191)          -             -            -              -           (12,018)       (12,018)
  Reclassification adjustment,
   net of income taxes of $3,184           -             -            -              -             6,180          6,180
                                                                                        ----------------   -------------
Total comprehensive income                                                                                    3,465,017

  Dividends paid
   ($.86 per share)                        -             -            -     (1,478,313)                -     (1,478,313)
                                 -----------   -----------   ----------  -------------  -----------------  -------------

Balance, December 31, 2007         1,718,968   $ 2,148,710  $   521,625  $  29,026,036  $     (1,405,498)
$ 30,290,873

Comprehensive income
  Net income                               -             -            -        973,332                 -        973,332
  Net change in unrealized
   gain (loss) on investment
   securities available for
   sale, net of taxes of  $562,559             -            -            -              -
1,092,027                          1,092,027
  Reclassification adjustment,
   net of income taxes of ($559,328)       -             -            -              -        (1,085,755)    (1,085,755)
                                                                                        ----------------   -------------
Total comprehensive income                                                                                      979,604

  Dividends paid
   ($.63 per share)                        -             -            -     (1,082,950)                -     (1,082,950)
                                 -----------   -----------   ----------  -------------  -----------------  -------------
Balance, September 30, 2008        1,718,968   $ 2,148,710  $   521,625  $  28,916,418  $     (1,399,226)   $ 30,187,527

</TABLE>




See Notes to Consolidated Financial Statements.

                                       6
<PAGE>


                     Grayson Bankshares, Inc. and Subsidiary
                      Consolidated Statements of Cash Flows
              For the Nine Months ended September 30, 2008 and 2007
-------------------------------------------------------------------------------
<TABLE>

                                                                                          Nine Months Ended
                                                                                              September 30,
                                                                                           2008           2007
                                                                                    ---------------- ---------------
                                                                                        (Unaudited)    (Unaudited)
<S>                                                                                <C>              <C>
Cash flows from operating activities:
   Net income                                                                       $     973,332    $    2,427,834
   Adjustments to reconcile net income
     to net cash provided by operations:
       Depreciation and amortization                                                      580,500           562,500
       Provision for loan losses                                                          293,397           273,588
       Deferred income taxes                                                              221,000           281,000
       Net realized losses on securities                                                1,645,083            11,742
       Accretion of discount on securities, net of
         amortization of premiums                                                          (1,676)          (41,855)
       Deferred compensation                                                              (37,179)           (6,804)
       Net realized gain on foreclosed assets                                             (21,926)          (48,722)
       Life insurance income                                                             (119,902)                -
       Changes in assets and liabilities:
         Cash value of life insurance                                                    (231,000)         (166,500)
         Accrued income                                                                  (196,156)         (327,921)
         Other assets                                                                    (118,463)         (162,876)
         Accrued interest payable                                                         446,328           369,074
         Other liabilities                                                             (1,318,428)         (819,962)
                                                                                    ---------------- ---------------
           Net cash provided by operating activities                                    2,114,910         2,351,098
                                                                                    ---------------- ---------------

Cash flows from investing activities:
   Net (increase) decrease in federal funds sold                                       14,627,599          (493,207)
   Purchases of investment securities                                                 (28,736,274)       (8,742,750)
   Sales of investment securities                                                               -         1,982,500
   Maturities of investment securities                                                 18,427,979         9,961,103
   (Purchases) sales of restricted equity securities(                                     499,900)          458,552
   Net increase in loans                                                               (8,632,596)      (14,820,298)
   Purchases of bank-owned life insurance                                              (2,000,000)                -
   Proceeds from life insurance contracts                                                 290,803                 -
   Proceeds from the sale of foreclosed assets                                            256,926           108,722
   Purchases of property and equipment, net of sales                                   (2,907,267)         (286,045)
                                                                                    ---------------- ---------------
           Net cash used in investing activities                                       (9,172,730)      (11,831,423)
                                                                                    ---------------- ---------------

Cash flows from financing activities:
   Net increase (decrease) in deposits                                                 (2,829,040)       19,729,215
   Dividends paid                                                                      (1,082,950)       (1,031,381)
   Net increase (decrease) in long-term debt                                           10,000,000       (10,000,000)
                                                                                    ---------------- ---------------
           Net cash provided by financing activities                                    6,088,010         8,697,834
                                                                                    ---------------- ---------------
           Net decrease in cash and cash equivalents                                     (969,810)         (782,491)

Cash and cash equivalents, beginning                                                   10,746,139        10,120,984
                                                                                    ---------------- ---------------
Cash and cash equivalents, ending                                                   $   9,776,329    $    9,338,493
                                                                                    ================ ===============
Supplemental disclosure of cash flow information:
   Interest paid                                                                    $   7,557,072    $    7,668,377
                                                                                    ================ ===============
   Taxes paid                                                                       $     529,241    $      595,901
                                                                                    ================ ===============
   Transfers of loans to foreclosed properties                                      $     175,000    $      160,000
                                                                                    ================ ===============
</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  September  30, 2008 and for the
periods ended  September 30, 2008 and 2007 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,  2007,  included  in the
Company's  Annual  Report on Form 10-K for the fiscal  year ended  December  31,
2007. The results of operations for the three-month and nine-month periods ended
September 30, 2008 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  $2,878,000 and $2,775,000 for the periods including September 30,
2008 and December 31, 2007, respectively.

Note 3.  Allowance for Loan Losses

The  following  is an  analysis  of the  allowance  for loan losses for the nine
months ended September 30, 2008 and 2007.

                                                      2008              2007
                                                  -----------       -----------

Balance, beginning                                $ 2,757,745       $ 2,901,997
Provision charged to expense                          293,397           273,588
Recoveries of amounts charged off                     211,741            59,348
Amounts charged off                                  (392,221)         (447,538)
                                                  -----------       -----------
Balance, ending                                   $ 2,870,662       $ 2,787,395
                                                  ===========       ===========







                                       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 nine
months ended September 30, 2008 and 2007 follows:

                                                2008              2007
                                            ------------     --------------

Tax at statutory federal rate               $     402,415    $    1,166,483
Tax exempt interest income                       (136,752)         (132,193)
Other tax exempt income                          (126,677)          (67,665)
Other                                              71,255            36,375
                                            -------------  - --------------
                                            $     210,241    $    1,003,000
                                            =============    ==============

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 nine-month periods ended September 30, 2008 and 2007.

                                                      2008             2007
                                                  --------------   -------------

Service cost                                       $     293,685   $    290,742
Interest cost                                            275,922        268,374
Expected return on plan assets                          (331,827)      (275,316)
Amortization of net obligation at transition                 (27)           (27)
Amortization of prior service cost                         7,548          7,548
Amortization of net (gain) or loss                        38,796         58,329
                                                  --------------   ------------
Net periodic benefit cost                          $     284,097   $     349,650
                                                  ==============   ============
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 September 30, 2008 and 2007 is as follows: 2008 2007

Commitments to extend credit                    $  19,590,442    $   22,309,875
Standby letters of credit                                   -                 -
                                                -------------    ---------------
                                                $  19,590,442    $   22,309,875
                                                =============    ===============

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.







                                       9
<PAGE>

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

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

Note 6.  Commitments and Contingencies, continued

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.  Fair Value

The Company uses fair value  measurements  to record fair value  adjustments  to
certain  assets  and  liabilities  and  to  determine  fair  value  disclosures.
Securities  available for sale, and  derivatives are recorded at fair value on a
recurring basis. Additionally, from time to time, the Company may be required to
record at fair value other  assets on a  nonrecurring  basis,  such as loans and
foreclosed assets.  These nonrecurring fair value adjustments  typically involve
application  of lower of cost or market  accounting or write-downs of individual
assets.

Fair Value Hierarchy

Under SFAS 157, the Company groups assets and liabilities at fair value in three
levels,  based on the markets in which the assets and liabilities are traded and
the  reliability of the assumptions  used to determine fair value.  These levels
are:

          Level  1 -  Valuation  is  based  upon  quoted  prices  for  identical
          instruments traded in active markets.

          Level  2  -  Valuation  is  based  upon  quoted   prices  for  similar
          instruments in active markets,  quoted prices for identical or similar
          instruments in markets that are not active, and model-based  valuation
          techniques for which all significant assumptions are observable in the
          market.

          Level 3 - Valuation is generated from model-based  techniques that use
          at least one  significant  assumption  not  observable  in the market.
          These unobservable  assumptions  reflect estimates of assumptions that
          market  participants  would use in  pricing  the  asset or  liability.
          Valuation  techniques  may include the use of option  pricing  models,
          discounted cash flow models and similar techniques.

Following  is a  description  of  valuation  methodologies  used for  assets and
liabilities recorded at fair value.

Investment Securities Available for Sale

Investment  securities  available  for  sale  are  recorded  at fair  value on a
recurring  basis.  Fair  value  measurement  is based  upon  quoted  prices,  if
available.  If quoted prices are not  available,  fair values are measured using
independent pricing models or other model-based valuation techniques such as the
present value of future cash flows,  adjusted for the security's  credit rating,
prepayment assumptions and other factors such as credit loss assumptions.  Level
1 securities  include those traded on an active  exchange,  such as the New York
Stock Exchange,  U.S. Treasury  securities that are traded by dealers or brokers
in active  over-the-counter  markets and money market funds.  Level 2 securities
include  mortgage-backed  securities  issued by government  sponsored  entities,
municipal bonds and corporate debt securities.  Securities classified as Level 3
include asset-backed securities in less liquid markets.









                                      10
<PAGE>

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

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

Note 7.  Fair Value, continued

Loans

The Company does not record loans at fair value on a recurring  basis.  However,
from time to time,  a loan is  considered  impaired  and an  allowance  for loan
losses is  established.  Loans for which it is probable that payment of interest
and principal will not be made in accordance with the  contractual  terms of the
loan  agreement  are  considered   impaired.   Once  a  loan  is  identified  as
individually  impaired,  management  measures impairment in accordance with SFAS
114,  "Accounting  by Creditors for Impairment of a Loan, " (SFAS 114). The fair
value of impaired  loans is estimated  using one of several  methods,  including
collateral value,  market value of similar debt,  enterprise value,  liquidation
value and discounted cash flows. Those impaired loans not requiring an allowance
represent  loans  for  which  the  fair  value  of the  expected  repayments  or
collateral exceed the recorded investments in such loans. At September 30, 2008,
substantially  all of the total impaired loans were evaluated  based on the fair
value of the collateral.  In accordance  with SFAS 157,  impaired loans where an
allowance  is  established  based  on  the  fair  value  of  collateral  require
classification  in  the  fair  value  hierarchy.  When  the  fair  value  of the
collateral is based on an observable  market price or a current appraised value,
the Company records the impaired loan as nonrecurring Level 2. When an appraised
value is not available or management determines the fair value of the collateral
is further impaired below the appraised value and there is no observable  market
price, the Company records the impaired loan as nonrecurring Level 3.

Derivative Assets and Liabilities

Derivative  instruments  held or  issued  by the  Company  for  risk  management
purposes are traded in  over-the-counter  markets where quoted market prices are
not  readily  available.   Management  engages  third-party   intermediaries  to
determine the fair market value of these  derivative  instruments and classifies
these  instruments as Level 2. Examples of Level 2 derivatives are interest rate
swaps, caps and floors. No derivative  instruments were held as of September 30,
2008, or December 31, 2007.

Foreclosed Assets

Foreclosed  assets are  adjusted  to fair value  upon  transfer  of the loans to
foreclosed assets.  Subsequently,  foreclosed assets are carried at the lower of
carrying  value or fair  value.  Fair  value is based  upon  independent  market
prices,  appraised  values of the collateral or  management's  estimation of the
value of the  collateral.  When the fair value of the  collateral is based on an
observable  market price or a current  appraised  value, the Company records the
foreclosed  asset  as  nonrecurring  Level  2.  When an  appraised  value is not
available or management  determines  the fair value of the collateral is further
impaired below the appraised value and there is no observable  market price, the
Company records the foreclosed asset as nonrecurring Level 3.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis
<TABLE>

September 30, 2008                                 Total          Level 1        Level 2         Level 3
=================                              =============  =============  ==============   =============
<S>                                           <C>            <C>            <C>              <C>
   Investment securities available for sale    $  47,086,221  $           -  $    47,086,221  $           -
   Derivative assets                                       -              -                -              -
                                               =============  =============  ==============   =============

          Total assets at fair value           $  47,086,221  $           -  $    47,086,221  $           -
                                               =============  =============  ==============   =============

   Derivative liabilities                                  -              -                -              -
                                               -------------  -------------  --------------   -------------

         Total liabilities at fair value       $           -  $           -  $             -  $           -
                                               =============  =============  ==============   =============
</TABLE>


                                      11
<PAGE>

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

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

Note 7.  Fair Value, continued

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

The Company may be required,  from time to time, to measure  certain  assets and
liabilities  at fair  value on a  nonrecurring  basis in  accordance  with  U.S.
generally accepted accounting  principals.  These include assets and liabilities
that are  measured at the lower of cost or market that were  recognized  at fair
value below cost at the end of the period.  Assets and  liabilities  measured at
fair value on a nonrecurring basis are included in the table below.
<TABLE>

September 30, 2008                                  Total       Level 1        Level 2     Level 3
-------------------                                --------   -----------     --------   -----------
<S>                                               <C>        <C>             <C>        <C>
   Loans                                           $496,897   $         -     $496,897   $         -
   Foreclosed assets                                100,000             -      100,000             -
                                                   --------   ----------      --------   -----------
          Total assets at fair value               $596,897   $         -     $596,897   $         -
                                                   ========   ===========     ========   ===========
          Total liabilities at fair value          $      -   $         -     $      -   $         -
                                                   ========   ===========     ========   ===========
</TABLE>

Note 8.  Emerging Issues Task Force (EITF) 06-10

In March  2007,  the FASB  ratified  the  consensuses  reached by the  Financial
Accounting  Standards  Board's  (FASB's)  Emerging Issues Task Force relating to
EITF 06-10,  "Accounting for Collateral  Assignment  Split-Dollar Life Insurance
Arrangements"  (EITF 06-10).  EITF 06-10 states that  entities  with  collateral
split-dollar  life insurance  arrangements that provide a benefit to an employee
that extends to  postretirement  periods should recognize a liability for future
benefits  in  accordance   with  SFAS  No.  106,   "Employers'   Accounting  for
Postretirement Benefits Other Than Pensions",  (if in substance a postretirement
benefit plan exists). The Company evaluated the impact of applying this issue as
a change in  accounting  principle  through a  cumulative-effect  adjustment  to
retained  earnings.  Because the Bank has a limited number of split-dollar  life
insurance  arrangements  in  effect,  all of which are  term-based  arrangements
expiring  between  the years  2009 and 2013,  the  Company  determined  that the
liability for future benefits was not significant.







                                      12
<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, 2007.

Results of Operations

Total interest  income  decreased by $79,511 for the quarter ended September 30,
2008 compared to the quarter ended September 30, 2007, while interest expense on
deposits and other  borrowings  decreased by $224,741 over the same period.  The
decrease in interest income was attributable  primarily to decreases in interest
rates.  From September 2007 to September  2008, the Federal  Reserve has lowered
its target overnight borrowing rate by 3.25%,  resulting in immediate reductions
in federal  funds  interest as well as  interest  on loans  indexed to the prime
lending rate.  Increased  earnings from growth in the loan portfolio were offset
by the decreases in interest  rates.  Recent actions by the Treasury and Federal
Reserve to increase  liquidity within the financial  markets has also driven the
rate earned on overnight federal funds sold below the actual target rate on many
occasions,  thus further  decreasing  interest earned on federal funds sold. The
increase  in interest  income on  investment  securities  was  primarily  due to
increases in the investment  portfolio as assets were shifted from federal funds
sold to investment securities. The decrease in interest expense on deposits came
as a result of  decreases  in  interest  rates,  primarily  in  certificates  of
deposit.  An increase in  borrowings  from the Federal Home Loan Bank led to the
increase in interest  expense on  borrowings.  The result was an increase in net
interest income of $145,230,  or 4.92% for the quarter ended September 30, 2008,
compared to the quarter ended September 30, 2007.

The provision  for loan losses was $93,397 for the quarter  ended  September 30,
2008 and  $138,588  for the same period in 2007.  The reserve for loan losses at
September 30, 2008 was approximately  1.06% of total loans.  Management believes
the  provision and the  resulting  allowance  for loan losses are adequate.  The
higher provision in 2007 was due to an impairment charge on a specific loan.

The decrease in  noninterest  income was due  primarily to a loss on  investment
securities.  During the quarter ended  September 30, 2008,  the Bank recorded an
other-than-temporary impairment charge on FHLMC (Freddie Mac) preferred stock of
$1,660,800.  The preferred stock, which was originally valued at $1,730,000,  is
now  carried at a value of  $69,200.  Neither  the Company nor the Bank owns any
other preferred or common equity investments in Fannie Mae or Freddie Mac. Other
income  decreased due to earnings in 2007 from an investment in a Small Business
Investment Company that did not recur in 2008.

Noninterest  expenses  increased by $192,389,  or 8.48%,  for the quarter  ended
September  30, 2008 compared to the quarter  ended  September  30, 2007.  Normal
increases in salary and benefit costs  accounted  for $65,924 of this  increase.
Other  cost  increases  resulted  from the recent  opening  of a new  operations
center.

The  decrease  in  net  interest   income   combined  with  the   aforementioned
other-than-temporary  impairment charge on investment  securities  resulted in a
net loss of  $369,973  for the quarter  ended  September  30,  2008  compared to
earnings of $796,942 for the same period last year. The net, after tax impact of
the impairment charge was $1,096,128, therefore earnings, without the impairment
charge, would have been approximately $726,155 for the third quarter of 2008.

For the nine months ended September 30, 2008, total interest income decreased by
$136,975  compared to the  nine-month  period ended  September  30, 2007,  while
interest expense  decreased by $34,051 over the same period.  This resulted in a
decrease in net interest  income of $102,924,  or 1.16%.  As stated  above,  the
decrease in interest income

                                      13
<PAGE>


                          Part I. Financial Information

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

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

was  primarily  the result of  decreases  in  interest  rates.  The  decrease in
interest   expense  on  deposits  was  the  result  of  decreases  in  rates  on
certificates  of deposit while the increase in interest on borrowings was due to
increased borrowings from the Federal Home Loan Bank.

Noninterest  income  decreased by  $1,653,344  for the  nine-month  period ended
September 30, 2008  compared to the same period in 2007.  This was due mainly to
the impairment  charges  discussed  above.  Service charges on deposit  accounts
increased due to the  implementation  of an overdraft  privilege  program in the
second quarter of 2007. Other income decreased due to earnings recognized in the
first quarter of 2007 from the Bank's investment in a Small Business  Investment
Company that did not recur in 2008.

Increases in salaries,  benefits and other normal operating costs, combined with
costs  associated  with the opening of a new operations  center,  resulted in an
increase in noninterest expense of $471,184, or 6.96%, for the first nine months
of 2008 compared to the first nine months of 2007. Overall,  the decrease in net
interest income combined with the securities  impairment charge and the increase
in  noninterest  expense led to a decrease in net income of  $1,454,502  for the
nine-month  period ended  September 30, 2008 compared to the  nine-month  period
ended September 30, 2007.

Financial Condition

Total  assets  increased  by  $6,158,335,  or 1.70%,  from  December 31, 2007 to
September  30, 2008.  Net loans  increased  by  $8,164,199,  federal  funds sold
decreased by $14,627,599 and investment securities increased by $8,674,391.  The
decrease in federal  funds sold came as balances were used to fund the increases
in loans and investment  securities.  The cash value of life insurance increased
as the Bank made an additional  investment  of  $2,000,000  in  bank-owned  life
insurance during the first quarter of 2008.

Total  deposits  decreased by  $2,829,040,  or 0.92%,  from December 31, 2007 to
September 30, 2008.  The decrease in deposits came as management  moved to lower
deposit  rates in  conjunction  with the decreases in rates on loans and federal
funds sold.  Long-term debt increased from  $20,000,000 at December 31, 2007, to
$30,000,000  at  September  30,  2008 as the Bank  sought to lock in  lower-rate
funding  from the  Federal  Home Loan Bank.  Other  liabilities  decreased  from
$1,485,439  at December  31, 2007 to  $129,832  at  September  30, 2008 due to a
contribution of $949,743 to the employee defined benefit pension plan as well as
a decrease in federal income taxes payable.

Shareholders'  equity  totaled  $30,187,527  at December  30,  2008  compared to
$30,290,873  at December  31,  2007.  The  $103,346  decrease  was the result of
earnings  for the nine  months  combined  with the  change  in  market  value of
securities  classified  as available  for sale,  and the payment of dividends of
$1,082,950.

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 September 30, 2008. No
balances were  outstanding  on these lines at September 30, 2008 or December 31,
2007.  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  $20,000,000  at September 30, 2008 and  $10,000,000  at
December 31,  2007.  Borrowings  from  Deutsche  Bank,  which are secured by the
pledging of  specific  investment  securities,  totaled  $10,000,000  at each of
September  30, 2008,  and December  31,  2007.  The unused  credit line from the
Federal Home Loan Bank as of September 30, 2008 is approximately $35,000,000.





                                      14
<PAGE>

                          Part I. Financial Information

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

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

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.  If federal funds sold levels are higher than  management  considers
necessary then excess funds may be invested to increase  earnings.  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 or  repricing.  These
investments  are a  preferred  source  of funds in that  they can  generally  be
disposed of in any interest rate  environment with less damage to that quarter's
profits than longer-term investments.

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

Forward-Looking Statements

Certain  information  contained in this discussion may include  "forward-looking
statements"  within the meaning of Section 27A of the Securities Act of 1933, as
amended,  and Section 21E of the  Securities  Exchange Act of 1934,  as amended.
These  forward-looking  statements  are generally  identified by phrases such as
"the Company expects," "the Company  believes" or words of similar import.  Such
forward-looking  statements  involve known and unknown risks including,  but not
limited to, changes in general economic and business  conditions,  interest rate
fluctuations,  competition  within and from  outside the banking  industry,  new
products and  services in the banking  industry,  risk  inherent in making loans
such as  repayment  risks  and  fluctuating  collateral  values,  problems  with
technology  utilized by the Company,  changing  trends in customer  profiles and
changes in laws and regulations applicable to the Company.  Although the Company
believes that its expectations  with respect to the  forward-looking  statements
are based upon  reliable  assumptions  within the bounds of its knowledge of its
business  and  operations,  there  can  be no  assurance  that  actual  results,
performance or achievements  of the Company will not differ  materially from any
future  results,  performance  or  achievements  expressed  or  implied  by such
forward-looking  statements.  For  additional  information  on known and unknown
risks,  see the  "Caution  About  Forward  Looking  Statements"  section  in the
Company's Annual Report on Form 10-K for the year ended December 31, 2007.




















                                      15
<PAGE>


                          Part I. Financial Information

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

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

Not applicable to smaller reporting companies.


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.























                                      16
<PAGE>


                           Part II. Other Information

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


Item 1.   Legal Proceedings

          There are no material  pending legal  proceedings  other than ordinary
          routine litigation  incidental to the business to which the Company or
          the Bank is a party or of which any of their property is subject.

Item 1A.  Risk Factors

          Not applicable to smaller reporting companies.

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

          Not applicable

Item 3.   Defaults Upon Senior Securities

          Not applicable

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

          None

Item 5.   Other Information

          None

Item 6.   Exhibits

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

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

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

























                                      17
<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: November 13, 2008             By:  /s/ Jacky K. Anderson
                                         ----------------------------
                                         Jacky K. Anderson
                                         President and Chief Executive Officer



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



                                       18
<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.