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, 2009

              [ ] 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 has submitted  electronically
and  posted on its  corporate  Web site,  if any,  every  Interactive  Data File
required  to be  submitted  and posted  pursuant to Rule 405 of  Regulation  S-T
(ss.232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).  Yes [ ]
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 August 14, 2009.


<PAGE>

PART I        FINANCIAL INFORMATION

Item 1.       Financial Statements

              Consolidated Balance Sheets--June 30, 2009 (Unaudited)
              and December 31, 2008 (Audited)..................................3

              Unaudited Consolidated Statements of Income--Six Months Ended
              June 30, 2009 and June 30, 2008..................................4

              Unaudited Consolidated Statements of Income--Three Months Ended
              June 30, 2009 and June 30, 2008..................................5

              Consolidated Statements of Changes in Stockholders' Equity--Six
              Months Ended June 30, 2009 (Unaudited) and Year Ended
              December 31, 2008 (Audited)......................................6

              Unaudited Consolidated Statements of Cash Flows--Six Months Ended
              June 30, 2009 and June 30, 2008..................................7

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

Item 2.       Management's Discussion and Analysis of Financial Condition
              and Results of Operations.......................................19

Item 3.       Quantitative and Qualitative Disclosures about Market Risk......22

Item 4.       Controls and Procedures.........................................23

PART II       OTHER INFORMATION

Item 1.       Legal Proceedings...............................................24

Item 2.       Unregistered Sales of Equity Securities and Use of Proceeds.....24

Item 3.       Defaults Upon Senior Securities.................................24

Item 4.       Submission of Matters to a Vote of Security Holders.............24

Item 5.       Other Information...............................................24

Item 6.       Exhibits........................................................24

Signatures....................................................................25


                                       2

<PAGE>

                          Part I. Financial Information

Item 1.  Financial Statements


                     Grayson Bankshares, Inc. and Subsidiary
                           Consolidated Balance Sheets
                       June 30, 2009 and December 31, 2008
-------------------------------------------------------------------------------
<TABLE>


                                                                                     June 30,        December 31,
                                                                                       2009              2008
                                                                                   -----------        ---------
                                                                                   (Unaudited)        (Audited)
<S>                                                                              <C>              <C>
Assets
Cash and due from banks                                                           $    11,637,377  $      9,536,772
Federal funds sold                                                                      8,981,751        11,149,718
Investment securities available for sale                                               42,802,597        46,413,054
Investment securities held to maturity
   (fair value approximately $2,592,572 at June 30, 2009,
   and $3,044,781 at December 31, 2008)                                                 2,551,426         3,037,608
Restricted equity securities                                                            1,744,650         1,731,750
Loans, net of allowance for loan losses of $3,350,668
   at June 30, 2009 and $3,359,946 at December 31, 2008                               267,504,096       267,889,087
Cash value of life insurance                                                            7,930,892         7,774,892
Foreclosed assets                                                                       3,062,766         2,659,266
Property and equipment, net                                                            11,339,356        11,115,033
Accrued income                                                                          2,708,017         3,124,540
Other assets                                                                            3,220,875         3,765,204
                                                                                      -----------       -----------
                                                                                  $   363,483,803  $    368,196,924
                                                                                  ===============  ================

Liabilities and Stockholders' Equity
Liabilities
Deposits
   Noninterest-bearing                                                            $    43,932,289  $     41,883,404
   Interest-bearing                                                                   264,787,024       263,846,770
                                                                                      -----------       -----------
         Total deposits                                                               308,719,313       305,730,174

Long-term debt                                                                         25,000,000        30,000,000
Accrued interest payable                                                                  407,405           492,105
Other liabilities                                                                         355,415         2,957,950
                                                                                      -----------       -----------
                                                                                      334,482,133       339,180,229
                                                                                      -----------       -----------

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                                                                      28,443,944        28,302,082
Accumulated other comprehensive loss                                                   (2,112,609)       (1,955,722)
                                                                                      -----------       -----------
                                                                                       29,001,670        29,016,695
                                                                                      -----------       -----------
                                                                                  $   363,483,803  $    368,196,924
                                                                                  ===============  ================
</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, 2009 and 2008
-------------------------------------------------------------------------------

<TABLE>

                                                                                          Six Months Ended
                                                                                              June 30,
                                                                                       2009              2008
                                                                                       ----              ----
                                                                                    (Unaudited)       (Unaudited)
<S>                                                                                <C>              <C>
Interest income
   Loans and fees on loans                                                          $   8,939,865    $    9,882,500
   Federal funds sold                                                                      18,756           258,758
   Investment securities:
     Taxable                                                                              864,494           833,049
     Exempt from federal income tax                                                       212,668           242,904
                                                                                       ----------        ----------
                                                                                       10,035,783        11,217,211
                                                                                       ----------        ----------

Interest expense
   Deposits                                                                             3,901,651         5,046,566
   Interest on borrowings                                                                 611,245           463,000
                                                                                       ----------        ----------
                                                                                        4,512,896         5,509,566
                                                                                       ----------        ----------
         Net interest income                                                            5,522,887         5,707,645

Provision for loan losses                                                                 581,637           200,000
                                                                                       ----------        ----------
   Net interest income after
     provision for loan losses                                                          4,941,250         5,507,645
                                                                                       ----------        ----------

Noninterest income
   Service charges on deposit accounts                                                    461,326           459,483
   Increase in cash value of life insurance                                               156,000           156,000
   Net realized gains (losses) on securities                                              164,181            15,717
   Other income                                                                           321,083           451,657
                                                                                       ----------        ----------
                                                                                        1,102,590         1,082,857
                                                                                       ----------        ----------

Noninterest expense
   Salaries and employee benefits                                                       3,290,727         2,925,720
   Occupancy expense                                                                      238,105           181,035
   Equipment expense                                                                      421,932           451,340
   Other expense                                                                        1,534,421         1,222,102
                                                                                       ----------        ----------
                                                                                        5,485,185         4,780,197
                                                                                       ----------        ----------
         Income before income taxes                                                       558,655         1,810,305

Income tax expense                                                                         73,000           467,000
                                                                                       ----------        ----------
         Net income                                                                 $     485,655    $    1,343,305
                                                                                    =============    ==============

Basic earnings per share                                                            $        0.28    $         0.78
                                                                                    =============    ==============
Weighted average shares outstanding                                                     1,718,968         1,718,968
                                                                                    =============    ==============
Dividends declared per share                                                        $        0.20    $         0.42
                                                                                    =============    ==============

</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, 2009 and 2008
-------------------------------------------------------------------------------

<TABLE>

                                                                                         Three Months Ended
                                                                                              June 30,
                                                                                       2009              2008
                                                                                       ----              ----
                                                                                    (Unaudited)       (Unaudited)
<S>                                                                               <C>               <C>

Interest income
   Loans and fees on loans                                                          $   4,365,826    $    4,793,415
   Federal funds sold                                                                       8,123            85,305
   Investment securities:
     Taxable                                                                              429,472           478,711
     Exempt from federal income tax                                                       101,589           120,264
                                                                                        ---------         ---------
                                                                                        4,905,010         5,477,695
                                                                                        ---------         ---------

Interest expense
   Deposits                                                                             1,874,450         2,412,132
   Interest on borrowings                                                                 300,346           250,000
                                                                                        ---------         ---------
                                                                                        2,174,796         2,662,132
                                                                                        ---------         ---------
         Net interest income                                                            2,730,214         2,815,563

Provision for loan losses                                                                 446,803           125,000
                                                                                        ---------         ---------
   Net interest income after
     provision for loan losses                                                          2,283,411         2,690,563
                                                                                        ---------         ---------

Noninterest income
   Service charges on deposit accounts                                                    252,176           241,959
   Increase in cash value of life insurance                                                78,000            75,000
   Net realized gains (losses) on securities                                              138,714              (130)
   Other income                                                                           160,268           283,600
                                                                                        ---------         ---------
                                                                                          629,158           600,429
                                                                                        ---------         ---------

Noninterest expense
   Salaries and employee benefits                                                       1,649,014         1,493,643
   Occupancy expense                                                                      117,890            92,328
   Equipment expense                                                                      214,995           240,378
   Other expense                                                                        1,002,433           616,638
                                                                                        ---------           -------
                                                                                        2,984,332         2,442,987
                                                                                        ---------         ---------
         Income (loss) before income taxes                                                (71,763)          848,005

Income tax expense (benefit)                                                              (94,000)          196,000
                                                                                          -------           -------
         Net income                                                                 $      22,237    $      652,005
                                                                                    =============    ==============

Basic earnings per share                                                            $        0.01    $         0.38
                                                                                    =============    ==============
Weighted average shares outstanding                                                     1,718,968         1,718,968
                                                                                    =============    ==============
Dividends declared per share                                                        $        0.10    $         0.21
                                                                                    =============    ==============

</TABLE>


See Notes to Consolidated Financial Statements.

                                        5
<PAGE>

                     Grayson Bankshares, Inc. and Subsidiary
           Consolidated Statements of Changes in Stockholders' Equity
               For the Six Months ended June 30, 2009 (unaudited)
                 and the Year ended December 31, 2008 (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, 2007         1,718,968   $ 2,148,710  $   521,625  $  29,026,036  $     (1,405,498)  $ 30,290,873

Comprehensive income
  Net income                               -             -            -        754,359                 -        754,359
  Net change in pension reserve
   net of income taxes of ($569,949)       -             -            -              -        (1,106,372)    (1,106,372)
  Net change in unrealized
   gain on investment
   securities available for
   sale, net of taxes of $845,135          -             -            -              -         1,640,558      1,640,558
  Reclassification adjustment,
   net of income taxes of ($558,636)       -             -            -              -        (1,084,410)    (1,084,410)
                                                                                                              ---------
Total comprehensive income                                                                                      204,135

  Dividends paid
   ($.86 per share)                        -             -            -     (1,478,313)                -     (1,478,313)
                                   ---------   -----------  -----------  -------------  ----------------   -------------
Balance, December 31, 2008         1,718,968   $ 2,148,710  $   521,625  $  28,302,082  $     (1,955,722)  $ 29,016,695
                                   =========   ===========  ===========  =============  ================   ============

Comprehensive income
  Net income                               -             -            -        485,655                 -        485,655
  Net change in unrealized
   loss on investment
   securities available for
   sale, net of taxes of  $(136,642)       -             -            -              -          (265,246)      (265,246)
  Reclassification adjustment,
   net of income taxes of $55,822          -             -            -              -           108,359        108,359
                                                                                                                --------
Total comprehensive income                                                                                      328,768

  Dividends paid
   ($.20 per share)                        -             -            -       (343,793)                -       (343,793)
                                   ---------   -----------  -----------  -------------  ----------------   ------------
Balance, June 30, 2009             1,718,968   $ 2,148,710  $   521,625  $  28,443,944  $     (2,112,609)  $ 29,001,670
                                   =========   ===========  ===========  =============  ================   ============
</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, 2009 and 2008
------------------------------------------------------------------------------
<TABLE>


                                                                                          Six Months Ended
                                                                                              June 30,
                                                                                       2009              2008
                                                                                       ----              ----
                                                                                    (Unaudited)       (Unaudited)
<S>                                                                                <C>              <C>

Cash flows from operating activities
   Net income                                                                       $     485,655    $    1,343,305
   Adjustments to reconcile net income
     to net cash provided by (used in) operations:
       Depreciation and amortization                                                      411,000           387,000
       Provision for loan losses                                                          581,637           200,000
       Deferred income taxes                                                              609,000           269,000
       Net realized (gains) losses on securities                                         (164,181)          (15,716)
       Accretion of discount on securities, net of
         amortization of premiums                                                          42,534            (7,400)
       Deferred compensation                                                               (9,318)          (25,336)
       Net realized (gain) loss on foreclosed assets                                        2,073           (21,926)
       Life insurance income                                                                    -          (119,902)
       Changes in assets and liabilities:
         Cash value of life insurance                                                    (156,000)         (156,000)
         Accrued income                                                                   416,523          (480,756)
         Other assets                                                                      16,148          (242,166)
         Accrued interest payable                                                         (84,700)           57,800
         Other liabilities                                                             (2,593,217)         (937,163)
                                                                                       ----------          --------
           Net cash provided by (used in) operating activities                           (442,846)          250,740
                                                                                       ----------          --------

Cash flows from investing activities
   Net decrease in federal funds sold                                                   2,167,967        12,786,232
   Purchases of available-for-sale investment securities                              (13,980,295)      (28,236,274)
   Sales of available-for-sale investment securities                                    5,657,100                 -
   Maturities/calls of available-for-sale investment securities                        11,803,775        17,612,405
   Maturities/calls of held-to-maturity investment securities                             500,000                 -
   Purchases of restricted equity securities                                              (12,900)         (274,900)
   Net increase in loans                                                                 (631,646)       (5,977,374)
   Purchases of bank-owned life insurance                                                       -        (2,000,000)
   Proceeds from life insurance contracts                                                       -           290,803
   Proceeds from the sale of foreclosed assets                                             29,427           256,926
   Purchases of property and equipment, net of sales                                     (635,323)       (1,035,134)
                                                                                       ----------          --------
           Net cash provided by (used in) investing activities                          4,898,105        (6,577,316)
                                                                                       ----------          --------

Cash flows from financing activities
   Net increase in deposits                                                             2,989,139         1,975,168
   Dividends paid                                                                        (343,793)         (721,967)
   Net increase (decrease) in long-term debt                                           (5,000,000)        5,000,000
                                                                                       ----------          --------
           Net cash provided by (used in) financing activities                         (2,354,654)        6,253,201
                                                                                       ----------          --------
           Net increase (decrease) in cash and cash equivalents                         2,100,605           (73,375)

Cash and cash equivalents, beginning                                                    9,536,772        10,746,139
                                                                                       ----------          --------
Cash and cash equivalents, ending                                                   $  11,637,377    $   10,672,764
                                                                                    =============    ==============

Supplemental disclosure of cash flow information
   Interest paid                                                                    $   4,597,596    $    5,451,766
                                                                                    =============    ==============
   Taxes paid                                                                       $     190,000    $      130,000
                                                                                    =============    ==============
   Transfers of loans to foreclosed properties                                      $     435,000    $      175,000
                                                                                    =============    ==============
</TABLE>
                                        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, 2009 and for the periods
ended June 30, 2009 and 2008  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, 2008, included in the Company's Annual Report on Form
10-K for the fiscal year ended  December 31, 2008. The results of operations for
the six-month and  three-month  periods ended June 30, 2009 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.

Recent Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board ("FASB") issued Statement
of  Financial  Accounting  Standards  ("SFAS")  No.  168,  "The FASB  Accounting
Standards  Codification  TM and the Hierarchy of Generally  Accepted  Accounting
Principles - a replacement  of FASB  Statement No. 162," ("SFAS 168").  SFAS 168
establishes the FASB Accounting  Standards  Codification TM  ("Codification") as
the source of authoritative  generally accepted  accounting  principles ("GAAP")
for nongovernmental entities. The Codification does not change GAAP. Instead, it
takes the thousands of individual  pronouncements  that currently  comprise GAAP
and reorganizes them into  approximately 90 accounting  Topics, and displays all
Topics  using a  consistent  structure.  Contents  in  each  Topic  are  further
organized first by Subtopic,  then Section and finally Paragraph.  The Paragraph
level is the only level that contains  substantive  content.  Citing  particular
content in the Codification  involves  specifying the unique numeric path to the
content  through the Topic,  Subtopic,  Section and  Paragraph  structure.  FASB
suggests  that all  citations  begin  with  "FASB  ASC,"  where ASC  stands  for
Accounting Standards  Codification.  SFAS 168, (FASB ASC 105-10-05,  10, 15, 65,
70) is effective for interim and annual periods ending after  September 15, 2009
and will not have an impact on the Company's  financial position but will change
the referencing system for accounting  standards.  The following  pronouncements
provide citations to the applicable  Codification by Topic, Subtopic and Section
in addition to the original standard type and number.


                                        8
<PAGE>

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

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


Note 1.  Organization and Summary of Significant Accounting Policies, continued

In December 2008 the FASB issued FASB Staff Position ("FSP") SFAS 132(R)-1 (FASB
ASC  715-20-65),  "Employers'  Disclosures  about  Postretirement  Benefit  Plan
Assets,"  ("FSP SFAS  132(R)-1").  This FSP provides  guidance on an  employer's
disclosures   about  plan  assets  of  a  defined   benefit   pension  or  other
postretirement  plan.  The  objective  of the FSP is to  provide  the  users  of
financial  statements with an  understanding  of: (a) how investment  allocation
decisions are made, including the factors that are pertinent to an understanding
of investment policies and strategies;  (b) the major categories of plan assets;
(c) the inputs and valuation  techniques  used to measure the fair value of plan
assets; (d) the effect of fair value measurements using significant unobservable
inputs (Level 3) on changes in plan assets for the period;  and (e)  significant
concentrations  of risk within plan  assets.  The FSP also  requires a nonpublic
entity, as defined in Statement of Financial  Accounting  Standard ("SFAS") 132,
to disclose net  periodic  benefit cost for each period for which a statement of
income is  presented.  FSP SFAS  132(R)-1 is  effective  for fiscal years ending
after  December 15, 2009. The Staff Position will require the Company to provide
additional disclosures related to its benefit plans.

FSP EITF  99-20-1,  "Amendments  to the  Impairment  Guidance  of EITF Issue No.
99-20," (FASB ASC  325-40-65)  ("FSP EITF  99-20-1") was issued in January 2009.
Prior to the FSP, other-than-temporary impairment was determined by using either
Emerging  Issues Task Force ("EITF") Issue No. 99-20,  "Recognition  of Interest
Income and Impairment on Purchased Beneficial Interests and Beneficial Interests
that  Continue to be Held by a  Transferor  in  Securitized  Financial  Assets,"
("EITF 99-20") or SFAS No. 115,  "Accounting for Certain Investments in Debt and
Equity Securities,"  ("SFAS 115") depending on the type of security.  EITF 99-20
required the use of market participant  assumptions  regarding future cash flows
regarding the  probability  of collecting all cash flows  previously  projected.
SFAS 115  determined  impairment  to be other than  temporary if it was probable
that the holder  would be unable to collect  all amounts  due  according  to the
contractual   terms.   To   achieve   a   more   consistent   determination   of
other-than-temporary  impairment,  the FSP amends  EITF 99-20 to  determine  any
other-than-temporary  impairment  based on the  guidance  in SFAS 115,  allowing
management  to  use  more  judgment  in  determining  any   other-than-temporary
impairment.  The FSP was effective for reporting  periods  ending after December
15, 2008. Management has reviewed the Company's security portfolio and evaluated
the portfolio for any other-than-temporary impairments.

On April 9, 2009,  the FASB issued three staff  positions  related to fair value
which are discussed below.

FSP  SFAS  115-2  and  SFAS  124-2  (FASB  ASC  320-10-65),   "Recognition   and
Presentation  of  Other-Than-Temporary  Impairments,"  ("FSP SFAS 115-2 and SFAS
124-2")   categorizes   losses   on  debt   securities   available-for-sale   or
held-to-maturity determined by management to be other-than-temporarily  impaired
into  losses  due to credit  issues and  losses  related  to all other  factors.
Other-than-temporary  impairment  (OTTI)  exists when it is more likely than not
that the security will mature or be sold before its amortized  cost basis can be
recovered.  An OTTI  related  to  credit  losses  should be  recognized  through
earnings.  An OTTI  related  to other  factors  should  be  recognized  in other
comprehensive   income.  The  FSP  does  not  amend  existing   recognition  and
measurement  guidance  related  to  other-than-temporary  impairments  of equity
securities.  Annual disclosures required in SFAS 115 and FSP SFAS 115-1 and SFAS
124-1 are also required for interim  periods  (including the aging of securities
with unrealized losses).

FSP SFAS 157-4 (FASB ASC 820-10-65), "Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability  Have  Significantly  Decreased and
Identifying Transactions That are Not Orderly" recognizes that quoted prices may
not be determinative of fair value when the volume and level of trading activity
has significantly  decreased.  The evaluation of certain factors may necessitate
that fair value be determined using a different valuation technique.  Fair value
should be the price that would be  received to sell an asset or paid to transfer
a liability in an orderly  transaction,  not a forced  liquidation or distressed
sale. If a transaction is considered to not be orderly,  little,  if any, weight
should  be  placed  on  the  transaction  price.  If  there  is  not  sufficient
information  to conclude as to whether or not the  transaction  is orderly,  the
transaction  price should be considered  when estimating fair value. An entity's
intention  to hold an asset or liability  is not  relevant in  determining  fair
value.  Quoted  prices  provided  by  pricing  services  may  still be used when
estimating  fair value in accordance with SFAS 157;  however,  the entity should
evaluate whether the quoted prices are based on current  information and orderly
transactions.  Inputs and valuation  techniques  are required to be disclosed in
addition to any changes in valuation techniques.


                                        9
<PAGE>

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

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


Note 1.  Organization and Summary of Significant Accounting Policies, continued

FSP SFAS 107-1 and APB 28-1 (FASB ASC  825-10-65),  "Interim  Disclosures  about
Fair Value of Financial  Instruments"  requires disclosures about the fair value
of  financial  instruments  for interim  reporting  periods of  publicly  traded
companies as well as in annual  financial  statements  and also  requires  those
disclosures in summarized  financial  information at interim reporting periods A
publicly traded company  includes any company whose securities trade in a public
market on either a stock  exchange  or in the  over-the-counter  market,  or any
company that is a conduit bond  obligor.  Additionally,  when a company  makes a
filing with a regulatory  agency in preparation  for sale of its securities in a
public market it is considered a publicly traded company for this purpose.

The three staff  positions are effective for periods ending after June 15, 2009,
with early  adoption of all three  permitted for periods  ending after March 15,
2009. The Company  adopted the staff  positions for its second quarter 10-Q. The
staff positions had no material impact on the financial  statements.  Additional
disclosures have been provided where applicable.

The Securities and Exchange  Commission ("SEC") issued Staff Accounting Bulletin
("SAB")  No. 111 (FASB ASC  320-10-S99-1)  on April 9, 2009 to amend Topic 5.M.,
"Other  Than  Temporary  Impairment  of Certain  Investments  in Debt and Equity
Securities"  and to supplement FSP SFAS 115-2 and SFAS 124-2.  SAB 111 maintains
the staff's previous views related to equity securities; however debt securities
are  excluded  from its  scope.  The SAB  provides  that  "other-than-temporary"
impairment is not  necessarily  the same as  "permanent"  impairment  and unless
evidence  exists to support a value equal to or greater than the carrying  value
of the equity security investment, a write-down to fair value should be recorded
and accounted for as a realized  loss.  The SAB was effective  upon issuance and
had no impact on the Company's financial position.

SFAS 165 (FASB ASC 855-10-05,  15, 25, 45, 50, 55),  "Subsequent Events," ("SFAS
165") was issued in May 2009 and provides  guidance on when a  subsequent  event
should be recognized in the financial statements. Subsequent events that provide
additional  evidence  about  conditions  that existed at the date of the balance
sheet should be  recognized at the balance  sheet date.  Subsequent  events that
provide  evidence about  conditions  that arose after the balance sheet date but
before financial  statements are issued, or are available to be issued,  are not
required to be recognized.  The date through which  subsequent  events have been
evaluated  must be  disclosed  as well as whether  it is the date the  financial
statements were issued or the date the financial statements were available to be
issued.  For  nonrecognized  subsequent events which should be disclosed to keep
the financial  statements from being misleading,  the nature of the event and an
estimate of its financial effect, or a statement that such an estimate cannot be
made,  should be  disclosed.  The  standard is  effective  for interim or annual
periods  ending after June 15, 2009. See Note 9 for  Management's  evaluation of
subsequent events.

The FASB  issued  SFAS 166 (not yet  reflected  in FASB  ASC),  "Accounting  for
Transfers of Financial  Assets - an amendment of FASB Statement No. 140," ("SFAS
166") in June 2009. SFAS 166 limits the circumstances in which a financial asset
should be  derecognized  when the  transferor  has not  transferred  the  entire
financial  asset  by  taking  into  consideration  the  transferor's  continuing
involvement.  The standard  requires  that a transferor  recognize and initially
measure at fair value all assets obtained  (including a transferor's  beneficial
interest) and liabilities incurred as a result of a transfer of financial assets
accounted for as a sale. The concept of a qualifying  special-purpose  entity is
removed from SFAS 140 along with the  exception  from  applying  FIN 46(R).  The
standard is effective  for the first annual  reporting  period that begins after
November 15, 2009, for interim periods within the first annual reporting period,
and for interim and annual reporting periods thereafter.  Earlier application is
prohibited.  The Company  does not expect the standard to have any impact on the
Company's financial position.

Other  accounting  standards  that have been  issued or  proposed by the FASB or
other standards-setting bodies are not expected to have a material impact on the
Company's financial position, results of operations or cash flows.


                                       10
<PAGE>

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

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


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  $2,877,000 and $2,413,000 for the periods including June 30, 2009
and December 31, 2008, respectively.

Note 3.  Investment Securities

Debt and equity  securities  have been  classified in the  consolidated  balance
sheets according to management's  intent.  The carrying amount of securities and
their approximate fair values at June 30, 2009 and December 31, 2008 follow:
<TABLE>

                                                  Amortized        Unrealized       Unrealized           Fair
                                                    Cost              Gains           Losses             Value
                                                    ----              -----           ------             -----
<S>                                           <C>              <C>               <C>              <C>

June 30, 2009
Available for sale:
   U.S. Government agency securities           $     1,975,839  $         79,256  $             -  $      2,055,095
   Government sponsored enterprises                 13,124,561            37,044          288,811        12,872,794
   Mortgage-backed securities                       20,184,972           354,557                -        20,539,529
   State and municipal securities                    7,552,639            23,958          241,418         7,335,179
                                                     ---------            ------          -------         ---------
                                               $    42,838,011  $        494,815  $       530,229  $     42,802,597
                                               ===============  ================  ===============  ================
Held to maturity:
   State and municipal securities              $     2,551,426  $         63,662  $        22,516  $      2,592,572
                                               ===============  ================  ===============  ================

December 31, 2008
Available for sale:
   U.S. Government agency securities           $     2,385,806  $         56,252  $             -  $      2,442,058
   Government sponsored enterprises                 14,107,529           317,158           61,320        14,363,367
   Mortgage-backed securities                       20,738,936           258,666           60,281        20,937,321
   State and municipal securities                    8,978,491            15,410          323,593         8,670,308
                                                     ---------            ------          -------         ---------
                                               $    46,210,762  $        647,486  $       445,194  $     46,413,054
                                               ===============  ================  ===============  ================
Held to maturity:
   State and municipal securities              $     3,037,608  $         40,794  $        33,621  $      3,044,781
                                               ===============  ================  ===============  ================
</TABLE>

There were no securities  transferred between the available for sale and held to
maturity  portfolios during the six-month period ended June 30, 2009 or the year
ended December 31, 2008.

Restricted  equity securities were $1,744,650 at June 30, 2009 and $1,731,750 at
December 31, 2008.  Restricted equity securities consist of investments in stock
of the  Federal  Home Loan Bank of Atlanta  ("FHLB"),  Community  Bankers  Bank,
Pacific  Coast Bankers Bank,  and the Federal  Reserve Bank of Richmond,  all of
which are carried at cost. All of these entities are upstream  correspondents of
the Bank. The FHLB requires financial institutions to make equity investments in
the FHLB in order to borrow  money.  The Bank is  required to hold that stock so
long as it borrows from the FHLB. The Federal Reserve requires Banks to purchase
stock as a condition for membership in the Federal  Reserve  system.  The Bank's
stock in Community  Bankers Bank and Pacific  Coast  Bankers Bank is  restricted
only in the fact that the stock may only be repurchased by the respective banks.


                                       11
<PAGE>

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

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


Note 3.  Investment Securities, continued

The  following  table details  unrealized  losses and related fair values in the
Company's  held  to  maturity  and  available  for  sale  investment  securities
portfolios. This information is aggregated by the length of time that individual
securities  have been in a continuous  unrealized  loss  position as of June 30,
2009 and December 31, 2008.
<TABLE>

                                          Less Than 12 Months        12 Months or More                    Total
                                          -------------------        -----------------                    -----
                                         Fair      Unrealized       Fair      Unrealized      Fair      Unrealized
                                         Value       Losses         Value       Losses        Value       Losses
                                         -----       ------         -----       ------        -----       ------
<S>                                  <C>          <C>          <C>          <C>          <C>           <C>

June 30, 2009
Available for sale:
U.S. Government agency securities     $         -  $         -  $         -  $         -  $         -   $         -
Government sponsored enterprises       10,380,340      240,717       21,106       48,094   10,401,446       288,811
Mortgage-backed securities                      -            -            -            -            -             -
State and municipal securities          4,162,663      147,937      666,784       93,481    4,829,447       241,418
                                        ---------      -------      -------       ------    ---------       -------
  Total securities available for sale $14,543,003  $   388,654  $   687,890  $   141,575  $15,230,893   $   530,229

Held to maturity:
State and municipal securities        $   127,306  $     2,619  $   207,616  $    19,897  $   334,922   $    22,516
                                      ===========  ===========  ===========  ===========  ===========   ===========

December 31, 2008
Available for sale:
U.S. Government agency securities     $         -  $         -  $         -  $         -  $         -   $         -
Government sponsored enterprises          497,500        2,500       10,380       58,820      507,880        61,320
Mortgage-backed securities              9,678,440       60,281            -            -    9,678,440        60,281
State and municipal securities          5,347,720      245,323      806,730       78,270    6,154,450       323,593
                                        ---------      -------      -------       ------    ---------       -------
  Total securities available for sale $15,523,660  $   308,104  $   817,110  $   137,090  $16,340,770   $   445,194
                                      ===========  ===========  ===========  ===========  ===========   ===========

Held to maturity:
State and municipal securities        $   820,575  $    33,621  $         -  $         -  $   820,575   $    33,621
                                      ===========  ===========  ==========   ==========   ===========   ===========
</TABLE>

Management evaluates securities for other-than-temporary  impairment at least on
a quarterly  basis, and more frequently when economic or market concerns warrant
such evaluation.  Consideration is given to the length of time and the extent to
which the fair value has been less than cost,  and the  financial  condition and
near-term prospects of the issuer. The relative  significance of these and other
factors will vary on a case by case basis.

In analyzing an issuer's financial  condition,  management considers whether the
securities  are  issued  by the  federal  government  or its  agencies,  whether
downgrades by bond rating agencies have occurred,  the results of reviews of the
issuer's  financial  condition and the issuer's  anticipated  ability to pay the
contractual cash flows of the investments. Since the Company intends to hold all
of its investment securities until maturity, and it is more likely than not that
the  Company  will  not  have to sell any of its  investment  securities  before
unrealized  losses have been  recovered,  and the Company expects to recover the
entire amount of the  amortized  cost basis of all its  securities,  none of the
securities  are  deemed  other  than  temporarily  impaired  at June  30,  2009.
Management  continues to monitor all of these  securities  with a high degree of
scrutiny. There can be no assurance that the Company will not conclude in future
periods  that  conditions  existing at that time  indicate  some or all of these
securities are other than temporarily impaired,  which would require a charge to
earnings in such periods.


                                       12
<PAGE>

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

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


Note 3.  Investment Securities, continued

Investment  securities with amortized cost of approximately  $15,055,150 at June
30, 2009 and  $15,152,446  at December 31, 2008,  were pledged as  collateral on
public  deposits and for other  purposes as required or permitted by law.  Gross
realized gains and losses for the six-month and  three-month  periods ended June
30, 2009 and 2008 are as follows:

                          Six-months ended June 30,  Three-months ended June 30,
                          -------------------------  ---------------------------
                             2009           2008         2009          2008
                             ----           ----         ----          ----
Realized gains            $ 221,706     $  15,847     $ 138,714             -
Realized losses             (57,525)         (130)            -          (130)
                            -------          ----                        ----
                          $ 164,181     $  15,717     $ 138,714     $    (130)
                          =========     =========     =========     =========


The scheduled maturities of securities available for sale and securities held to
maturity at June 30, 2009, were as follows:
<TABLE>
                                                    Available for Sale            Held to Maturity
                                                    ------------------            ----------------
                                                  Amortized         Fair        Amortized         Fair
                                                    Cost            Value          Cost           Value
                                                    ----            -----          ----           -----
<S>                                           <C>            <C>             <C>            <C>

Due in one year or less                        $           -  $            -  $           -             -
Due after one year through five years              1,121,971       1,149,198        842,334       865,265
Due after five years through ten years            20,514,061      20,707,820        605,263       621,391
Due after ten years                               21,201,979      20,945,579      1,103,829     1,105,916
                                                  ----------      ----------      ---------     ---------
                                               $  42,838,011  $   42,802,597  $   2,551,426  $  2,592,572
                                               =============  ==============  =============  ============
</TABLE>

Maturities  of mortgage  backed  securities  are based on  contractual  amounts.
Actual maturity will vary as loans underlying the securities are prepaid.

Note 4.  Allowance for Loan Losses

The following is an analysis of the allowance for loan losses for the six months
ended June 30, 2009 and 2008.

                                                     2009              2008
                                                     ----              ----

Balance, beginning                                $ 3,359,946       $ 2,757,745
Provision charged to expense                          581,637           200,000
Recoveries of amounts charged off                      13,015           162,911
Amounts charged off                                  (603,930)         (330,901)
                                                     --------          --------
Balance, ending                                   $ 3,350,668       $ 2,789,755
                                                  ===========       ===========

Note 5.  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, 2009 and 2008 follows:

                                                       2009              2008
                                                       ----              ----

Tax at statutory federal rate                       $ 189,943         $ 615,504
Tax exempt interest income                            (75,754)          (99,947)
Other tax exempt income                               (53,040)          (93,807)
Other                                                  11,851            45,250
                                                       ------            ------
                                                    $  73,000         $ 467,000
                                                    =========         =========

                                       13
<PAGE>

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

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


Note 6.  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, 2009 and 2008.

                                                          2009           2008
                                                          ----           ----

Service cost                                           $ 195,538      $ 195,790
Interest cost                                            190,738        183,948
Expected return on plan assets                          (218,681)      (221,218)
Amortization of net obligation at transition                 (10)           (18)
Amortization of prior service cost                         5,390          5,032
Amortization of net (gain) or loss                        72,202         25,864
                                                          ------         ------
Net periodic benefit cost                              $ 245,177      $ 189,398
                                                       =========      =========

Note 7.  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, 2009 and 2008 is as follows:

                                                      2009               2008
                                                      ----               ----

Commitments to extend credit                      $16,585,231        $18,938,289
Standby letters of credit                                   -                  -
                                                  -----------        -----------
                                                  $16,585,231        $18,938,289
                                                  ===========        ===========

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.


                                       14
<PAGE>

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

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


Note 8.  Fair Value

SFAS 107,  Disclosures  about  Fair  Value of  Financial  Instruments,  requires
disclosure of fair value information about financial instruments, whether or not
recognized  in the balance  sheet.  In cases where quoted  market prices are not
available,  fair  values are based on  estimates  using  present  value or other
valuation  techniques.  Those  techniques  are  significantly  affected  by  the
assumptions  used,  including  the  discount  rate and  estimates of future cash
flows. In that regard,  the derived fair value estimates cannot be substantiated
by comparison to independent  markets and, in many cases,  could not be realized
in immediate settlement of the instruments.  SFAS 107 excludes certain financial
instruments and all nonfinancial  instruments from its disclosure  requirements.
Accordingly,  the aggregate  fair value  amounts  presented do not represent the
underlying value of the Company.

The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:

Cash and due from banks:  The carrying amounts reported in the balance sheet for
cash and due from banks approximate their fair values.

Federal  funds sold:  Due to their  short-term  nature,  the  carrying  value of
federal funds sold approximate their fair value.

Securities: Fair values for securities,  excluding restricted equity securities,
are based on quoted market prices, where available.  If quoted market prices are
not  available,  fair  values are based on quoted  market  prices of  comparable
instruments.  The carrying values of restricted  equity  securities  approximate
fair values.

Loans receivable:  For variable-rate  loans that reprice  frequently and with no
significant  change in credit risk,  fair values are based on carrying  amounts.
The fair  values  for  other  loans are  estimated  using  discounted  cash flow
analysis, based on interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality.  Loan fair value estimates include
judgments  regarding  future expected loss experience and risk  characteristics.
Fair values for impaired loans are estimated using discounted cash flow analysis
or  underlying  collateral  values,  where  applicable.  The carrying  amount of
accrued interest receivable approximates its fair value.

Cash value of life insurance:  The carrying amount reported in the balance sheet
approximates  fair value as it represents the cash  surrender  value of the life
insurance.

Deposit  liabilities:  The fair values disclosed for demand and savings deposits
are, by definition, equal to the amount payable on demand at the reporting date.
The fair values for  certificates  of deposit are  estimated  using a discounted
cash flow  calculation  that applies  interest rates  currently being offered on
certificates  to a schedule of  aggregated  contractual  maturities on such time
deposits.  The carrying amount of accrued  interest  payable  approximates  fair
value.

Long-term debt: The fair value of long-term debt is estimated using a discounted
cash flow calculation that applies interest rates currently available on similar
instruments.


                                       15
<PAGE>

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

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


Note 8.  Fair Value, continued

The estimated fair values of the Company's financial  instruments are as follows
(dollars in thousands):
<TABLE>

                                                     June 30, 2009         December 31, 2008
                                                     -------------         -----------------
                                                  Carrying       Fair     Carrying       Fair
                                                   Amount       Value      Amount       Value
                                                   ------       -----      ------       -----
<S>                                           <C>         <C>          <C>         <C>

Financial assets
   Cash and due from banks                     $   11,637  $    11,637  $    9,537  $    9,537
   Federal funds sold                               8,982        8,982      11,150      11,150
   Securities, available for sale                  42,803       42,803      46,413      46,413
   Securities, held to maturity                     2,551        2,593       3,038       3,045
   Restricted equity securities                     1,745        1,745       1,732       1,732
   Loans, net of allowance for loan losses        267,504      270,370     267,889      274,105
   Cash value of life insurance                     7,931        7,931       7,775        7,775

Financial liabilities
   Deposits                                       308,719      311,438     305,730      308,638
   Long-term debt                                  25,000       27,451      30,000       34,067
</TABLE>

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 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.


                                       16
<PAGE>

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

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


Note 8.  Fair Value, continued

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.

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".  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 June 30, 2009,  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 June 30, 2009,
or December 31, 2008.

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.


                                       17
<PAGE>

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

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


Note 8.  Fair Value, continued

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

June 30, 2009                                       Total            Level 1          Level 2           Level 3
-------------                                       -----            -------          -------           -------
<S>                                           <C>              <C>               <C>              <C>

   Investment securities available for sale    $    42,802,597  $              -  $    42,802,597  $              -
   Derivative assets                                         -                 -                -                 -
                                               ---------------  ----------------  ---------------  ----------------
         Total assets at fair value            $    42,802,597  $              -  $    42,802,597  $              -
                                               ===============  ================  ===============  ================

   Derivative liabilities                                    -                 -                -                 -
                                               ---------------  ----------------  ---------------  ----------------
         Total liabilities at fair value       $             -  $              -  $             -  $              -
                                               ===============  ================  ===============  ================

December 31, 2008                                   Total            Level 1          Level 2           Level 3
-----------------                                   -----            -------          -------           -------

   Investment securities available for sale    $    46,413,054  $              -  $    46,413,054  $              -
   Derivative assets                                         -                 -                -                 -
                                               ---------------  ----------------  ---------------  ----------------
         Total assets at fair value            $    46,413,054  $              -  $    46,413,054  $              -
                                               ===============  ================  ===============  ================

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

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  principles.  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>

June 30, 2009                                       Total            Level 1          Level 2           Level 3
-------------                                       -----            -------          -------           -------
<S>                                           <C>              <C>               <C>              <C>

   Loans                                       $     1,153,339  $              -  $     1,153,339  $              -
   Foreclosed assets                                   640,040                 -          640,040                 -
                                               ---------------  ----------------  ---------------  ----------------
         Total assets at fair value            $     1,739,379  $              -  $     1,793,379  $              -
                                               ===============  ================  ===============  ================

         Total liabilities at fair value       $             -  $              -  $             -  $              -
                                               ===============  ================  ===============  ================

December 31, 2008                                   Total            Level 1          Level 2           Level 3
-----------------
   Loans                                       $       494,024  $              -  $       494,024  $              -
   Foreclosed assets                                 2,659,266                 -        2,659,266                 -
                                               ---------------  ----------------  ---------------  ----------------
         Total assets at fair value            $     3,153,290  $              -  $     3,153,290  $              -
                                               ===============  ================  ===============  ================

         Total liabilities at fair value       $             -  $              -  $             -  $              -
                                               ===============  ================  ===============  ================

</TABLE>

Note 9.  Subsequent Events

Management has evaluated events  occurring  subsequent to the balance sheet date
through August 14, 2009 (the financial statement issuance date),  determining no
events require additional disclosure in these consolidated financial statements.


                                       18
<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, 2008.

Results of Operations

Total interest income  decreased by $572,685 for the quarter ended June 30, 2009
compared to the quarter ended June 30, 2008,  while interest expense on deposits
and other borrowings decreased by $487,336 over the same period. The decrease in
interest income was  attributable  primarily to decreases in interest rates. The
Federal  Reserve has lowered its target  overnight  borrowing rate to a range of
0.00% to 0.25%, resulting in significant reductions in federal funds interest as
well as interest on loans indexed to the prime  lending  rate.  Because of this,
management  has  moved  to  simultaneously  lower  rates on  deposits;  however,
management's  ability to lower deposit rates has been limited by  competition in
the Bank's  market  area.  The result was a decrease in net  interest  income of
$85,349,  or 3.03% for the quarter ended June 30, 2009,  compared to the quarter
ended June 30, 2008.

The  provision  for loan losses was $446,803 for the quarter ended June 30, 2009
and  $125,000  for the same period in 2008.  The  increase  was due to increased
charge-offs as well as management's  desire to maintain higher reserve levels in
light  of  deteriorating  economic  conditions  and  increases  in the  level of
past-due loans.  The reserve for loan losses at June 30, 2009 was  approximately
1.24% of total loans,  compared to 1.03% at June 30, 2008.  Management  believes
the provision and the resulting allowance for loan losses are adequate.

Total noninterest  income was $629,158 in the second quarter of 2009 compared to
$600,429 in the second  quarter of 2008.  Other  income  decreased in the second
quarter  of 2009  compared  to the same  period  last  year due to the  one-time
receipt of life insurance proceeds of approximately $120,000 in 2008.

Noninterest  expenses  increased by $541,345,  or 22.16%,  for the quarter ended
June 30, 2009 compared to the quarter ended June 30, 2008.  The majority of this
increase resulted from increases in FDIC assessments.  In an effort to replenish
the federal deposit  insurance fund,  which has been diminished by the increased
level of bank failures in 2008 and 2009,  the FDIC has increased the  assessment
rates charged to member banks. A special  assessment was also levied on June 30,
2009. This five basis-point  assessment,  based on the bank's total assets, less
tangible equity, totaled approximately $165,000.

Overall,  the  increase  in loan loss  provisions  combined  with  increases  in
noninterest expenses resulted in a pre-tax loss of $71,763 for the quarter ended
June 30, 2009, compared to pre-tax earnings of $848,005 for the same period last
year.  Income tax expense  decreased by $290,000 from the second quarter of 2008
to the second  quarter of 2009  resulting  in a tax  benefit of $94,000  for the
period  ended June 30,  2009.  Net income for the  quarter  ended June 30,  2009
totaled $22,237, compared to $652,005 for the same period last year.

For the six months  ended June 30,  2009,  total  interest  income  decreased by
$1,181,428  compared to the six-month period ended June 30, 2008, while interest
expense decreased by $996,670 over the same period.  This resulted in a decrease
in net interest income of $184,758,  or 3.24%. As stated above,  the decrease in
interest income was primarily the result of decreases in interest rates.


                                       19
<PAGE>

                          Part I. Financial Information

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

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


Total  noninterest  income  increased by $19,733 for the six-month  period ended
June 30,  2009  compared  to the same  period  in 2008.  Net  realized  gains on
securities  increased by $148,464 in 2009 compared to 2008. As indicated  above,
other income  decreased in 2009 due to the  one-time  receipt of life  insurance
proceeds of approximately $120,000 in 2008.

Total noninterest expense increased by $704,988 for the first six months of 2009
compared to the first six months of 2008. The increase is attributable primarily
to salary and benefit costs and regulatory assessments.  Increases in salary and
benefit  costs  are the  result  of  additional  employees,  as well as  routine
increases in wages  combined with pension and insurance cost  increases.  Salary
expense was also impacted by the decreased  level of loan  originations  in 2009
compared to 2008. The higher level of loan  originations in the first six months
of 2008 resulted in a higher level of loan officer salary  deferrals than in the
first six months of 2009, thus reducing salary expense for the period in 2008 as
compared to 2009.  Regulatory  assessments also increased  significantly for the
six-month  period ended 2009  compared to the same period in 2008.  FDIC and OCC
assessments  increased by approximately  $424,000 for the six-month period ended
June 30, 2009.

Overall, the decrease in net interest income combined with the increases in loan
loss  provisions  and  noninterest  expense  led to a decrease  in net income of
$857,650 for the six-month  period ended June 30, 2009 compared to the six-month
period ended June 30, 2008.

Financial Condition

Total assets decreased by $4,713,121,  or 1.28%,  from December 31, 2008 to June
30,  2009.  Net loans  decreased by $384,991,  federal  funds sold  decreased by
$2,167,967 and investment  securities decreased by $4,096,639.  The decreases in
federal  funds sold and  investment  securities  came as  balances  were used to
reduce borrowings from the Federal Home Loan Bank.

Total deposits increased by $2,989,139, or 0.98%, from December 31, 2008 to June
30, 2009. The slight  deposit  growth came as management  moved to lower deposit
rates in  conjunction  with the  decreases  in rates on loans and federal  funds
sold.  Long-term  debt  decreased  from  $30,000,000  at December 31,  2008,  to
$25,000,000  at June 30, 2009 as the Bank sought to enhance net interest  income
by using excess  federal  funds sold  balances to reduce  Federal Home Loan Bank
borrowings.  Other liabilities decreased from $2,957,950 at December 31, 2008 to
$355,415 at June 30, 2009 due primarily to a  contribution  of $2,000,000 to the
employee defined benefit pension plan.

Nonperforming  assets,  including  nonaccrual  loans,  loans  past due more than
ninety days and foreclosed  assets,  increased from  $13,467,262 at December 31,
2008 to  $14,285,487  at June 30, 2009.  Foreclosed  assets  consist of fourteen
properties  totaling  $3,062,766 at June 30, 2009.  One  commercial  real estate
property  represents  the  majority of the balance in  foreclosed  assets with a
value of $2,422,726.  The remaining  properties  include twelve residential real
estate  properties and one tract of undeveloped land. There were eight additions
and one disposal of  foreclosed  properties in the second  quarter of 2009.  All
foreclosed  properties  are being  marketed  for sale.  Loans past due more than
ninety days decreased from $1,593,331 at December 31, 2008 to $1,436,649 at June
30, 2008.

Nonaccrual loans increased from $9,214,665 at December 31, 2009 to $9,786,072 at
June 30, 2009. During the second quarter of 2009, loans totaling $2,274,260 were
added to nonaccrual  status while loans  totaling  $1,019,761  were removed from
nonaccrual status. Loans are removed from nonaccrual status when they are deemed
a loss and  charged to the  allowance,  transferred  to  foreclosed  assets,  or
returned to accrual status based upon  performance  consistent with the original
terms of the loan or a subsequent restructuring thereof. Management continues to
closely monitor  nonperforming assets and their impact on earnings and loan loss
reserves.

Stockholders'   equity  totaled   $29,001,670  at  June  30,  2009  compared  to
$29,016,695  at  December  31,  2008.  The  $15,025  decrease  was the result of
earnings  for the six months  combined  with a decrease  in the market  value of
securities  classified  as available  for sale of  $156,887,  and the payment of
dividends of $343,793.


                                       20
<PAGE>

                          Part I. Financial Information

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

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

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. Unsecured federal fund
lines available from correspondent banks totaled $9,000,000 at June 30, 2009. No
balances were  outstanding on these lines at June 30, 2009 or December 31, 2008.
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  $15,000,000  at June 30,  2009 and  $20,000,000  at and
December 31,  2008.  Borrowings  from  Deutsche  Bank,  which are secured by the
pledging of specific investment securities,  totaled $10,000,000 at each of June
30, 2009,  and December 31, 2008.  The unused  credit line from the Federal Home
Loan Bank as of June 30, 2009 is approximately $41,000,000.

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  security  transactions  consist  of
replacing  securities that have been called or matured. The Bank keeps a portion
of its investment  portfolio in unpledged assets that are less than 24 months to
maturity.  These investments are a preferred source of funds in that they can be
disposed of in any interest rate environment  without causing significant damage
to that quarter's profits.

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

Forward-Looking Statements

Certain  information  contained in this discussion may include  "forward-looking
statements"  within the meaning of Section 27A of the Securities Act of 1933, as
amended,  and Section 21E of the  Securities  Exchange Act of 1934,  as amended.
These  forward-looking  statements  are generally  identified by phrases such as
"the Company expects," "the Company  believes" or words of similar import.  Such
forward-looking  statements  involve known and unknown risks including,  but not
limited to, changes in general economic and business  conditions,  interest rate
fluctuations,  competition  within and from  outside the banking  industry,  new
products and  services in the banking  industry,  risk  inherent in making loans
such as  repayment  risks  and  fluctuating  collateral  values,  problems  with
technology  utilized by the Company,  changing  trends in customer  profiles and
changes in laws and regulations applicable to the Company.  Although the Company
believes that its expectations  with respect to the  forward-looking  statements
are based upon  reliable  assumptions  within the bounds of its knowledge of its
business  and  operations,  there  can  be no  assurance  that  actual  results,
performance or achievements  of the Company will not differ  materially from any
future  results,  performance  or  achievements  expressed  or  implied  by such
forward-looking  statements.  For  additional  information  on known and unknown
risks,  see the "Forward  Looking  Statements"  section in the Company's  Annual
Report on Form 10-K for the year ended December 31, 2008.


                                       21
<PAGE>

                          Part I. Financial Information

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

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


Not applicable to smaller reporting companies.


                                       22
<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.


                                       23
<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 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 May 12,
              2009.

         (b)  Not applicable

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

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

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

           Bryan L. Edwards                    1,118,998             20,434
           Dennis B. Gambill                   1,121,556             17,876
           Jack E. Guynn, Jr.                  1,118,998             20,434
           Charles T. Sturgill                 1,122,166             17,266

         (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.


                                       24
<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, 2009                 By: /s/ Jacky K. Anderson
                                          Jacky K. Anderson
                                          President and Chief Executive
                                          Officer


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


<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.