<TABLE>
<S>                                                             <C>
                                                   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, 2008

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

                           For the transition period from ____________ to _____________

                                          Commission File Number: 0-30535

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


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

                   113 West Main Street
                  Independence, Virginia                                              24348
         (Address of principal executive offices)                                   (Zip Code)

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


         Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes  |X|    No  [ ]


         Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company.  See definition of "large accelerated filer," "accelerated
filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

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


         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 13, 2008.
<PAGE>

                                                 TABLE OF CONTENTS

PART I   FINANCIAL INFORMATION

Item 1.  Financial Statements

         Consolidated Balance Sheets--June 30, 2008
          and December 31, 2007                                                                         3

         Unaudited Consolidated Statements of Income--Six Months Ended
          June 30, 2008 and June 30, 2007                                                               4

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

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

         Unaudited Consolidated Statements of Cash Flows--Six Months Ended
          June 30, 2008 and June 30, 2007                                                               7

         Notes to Consolidated Financial Statements                                                     8

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

Item 3.  Quantitative and Qualitative Disclosures about Market Risk                                     16

Item 4.  Controls and Procedures                                                                        17

PART II    OTHER INFORMATION

Item 1.  Legal Proceedings                                                                              18

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds                                    18

Item 3.  Defaults Upon Senior Securities                                                                18

Item 4.  Submission of Matters to a Vote of Security Holders                                            18

Item 5.  Other Information                                                                              18

Item 6.  Exhibits                                                                                       18

Signatures                                                                                              19

                                                           2
<PAGE>


                                            Part I. Financial Information

Item 1.  Financial Statements


                                      Grayson Bankshares, Inc. and Subsidiary
                                            Consolidated Balance Sheets
                                        June 30, 2008 and December 31, 2007
-------------------------------------------------------------------------------------------------------------------

                                                                                    June 30,          December 31,
Assets                                                                                2008               2007
                                                                                ---------------    ----------------
                                                                                   (Unaudited)         (Audited)
Cash and due from banks                                                         $    10,672,764    $     10,746,139
Federal funds sold                                                                   11,850,899          24,637,131
Investment securities available for sale                                             48,227,386          38,429,328
Investment securities held to maturity
  (fair value approximately $3,069,217 at June 30, 2008,
  and $3,064,241 at December 31, 2007)                                                3,025,616           3,014,048
Restricted equity securities                                                          1,404,750           1,129,850
Loans, net of allowance for loan losses of $2,789,755
  at June 30, 2008 and $2,757,745 at December 31, 2007                              269,331,490         263,729,116
Cash value of life insurance                                                          7,583,952           5,598,853
Foreclosed assets                                                                       100,000             160,000
Property and equipment, net                                                           9,133,192           8,485,058
Accrued income                                                                        3,477,017           2,996,261
Other assets                                                                          2,818,483           2,560,615
                                                                                ---------------    ----------------
                                                                                $   367,625,549    $    361,486,399
                                                                                ===============    ================

Liabilities and Stockholders' Equity

Liabilities
Deposits
   Noninterest-bearing                                                          $    43,542,588    $     44,630,854
   Interest-bearing                                                                 267,606,274         264,542,840
                                                                                ---------------    ----------------
     Total deposits                                                                 311,148,862         309,173,694

Long-term debt                                                                       25,000,000          20,000,000
Accrued interest payable                                                                594,193             536,393
Other liabilities                                                                       522,940           1,485,439
                                                                                ---------------    ----------------
                                                                                    337,265,995         331,195,526
                                                                                ---------------    ----------------

Commitments and contingencies                                                                 -                   -

Stockholders' equity
Preferred stock, $25 par value; 500,000
   shares authorized; none issued                                                             -                   -
Common stock, $1.25 par value; 2,000,000 shares
   authorized; 1,718,968 shares issued and
   outstanding                                                                        2,148,710           2,148,710
Surplus                                                                                 521,625             521,625
Retained earnings                                                                    29,647,374          29,026,036
Accumulated other comprehensive loss                                                 (1,958,155)         (1,405,498)
                                                                                ---------------    ----------------
                                                                                     30,359,554          30,290,873
                                                                                ---------------    ----------------
                                                                                $   367,625,549    $    361,486,399
                                                                                ===============    ================





See Notes to Consolidated Financial Statements.

                                                           3
<PAGE>


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


                                                                                           Six Months Ended
                                                                                                June 30,
                                                                                        2008              2007
                                                                                    -------------    --------------
Interest income:                                                                     (Unaudited)       (Unaudited)
   Loans and fees on loans                                                          $   9,882,500    $   10,065,117
   Federal funds sold                                                                     258,758           349,775
   Investment securities:
     Taxable                                                                              833,049           653,675
     Exempt from federal income tax                                                       242,904           206,108
                                                                                    -------------    --------------
                                                                                       11,217,211        11,274,675
                                                                                    -------------    --------------

Interest expense:
   Deposits                                                                             5,046,566         5,062,314
   Interest on borrowings                                                                 463,000           256,562
                                                                                    -------------    --------------
                                                                                        5,509,566         5,318,876
                                                                                    -------------    --------------
         Net interest income                                                            5,707,645         5,955,799

Provision for loan losses                                                                 200,000           135,000
                                                                                    -------------    --------------
  Net interest income after
     provision for loan losses                                                          5,507,645         5,820,799
                                                                                    -------------    --------------

Noninterest income:
   Service charges on deposit accounts                                                    459,483           342,762
   Increase in cash value of life insurance                                               156,000           111,000
   Net realized gains (losses) on securities                                               15,717            (9,982)
   Other income                                                                           451,657           563,715
                                                                                    -------------    --------------
                                                                                        1,082,857         1,007,495
                                                                                    -------------    --------------

Noninterest expense:
   Salaries and employee benefits                                                       2,925,720         2,801,094
   Occupancy expense                                                                      181,035           177,438
   Equipment expense                                                                      451,340           420,107
   Other expense                                                                        1,222,102         1,102,763
                                                                                    -------------    --------------
                                                                                        4,780,197         4,501,402
                                                                                    -------------    --------------
         Income before income taxes                                                     1,810,305         2,326,892

Income tax expense                                                                        467,000           696,000
                                                                                    -------------    --------------
         Net income                                                                 $   1,343,305    $    1,630,892
                                                                                    =============    ==============

Basic earnings per share                                                            $        0.78    $         0.95
                                                                                    =============    ==============
Weighted average shares outstanding                                                     1,718,968         1,718,968
                                                                                    =============    ==============
Dividends declared per share                                                        $        0.42    $         0.40
                                                                                    =============    ==============









See Notes to Consolidated Financial Statements.

                                                           4
<PAGE>





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


                                                                                          Three Months Ended
                                                                                               June 30,
                                                                                        2008             2007
                                                                                    -------------    --------------
Interest income:                                                                     (Unaudited)      (Unaudited)
   Loans and fees on loans                                                          $   4,793,415    $    5,176,307
   Federal funds sold                                                                      85,305           171,573
   Investment securities:
     Taxable                                                                              478,711           317,455
     Exempt from federal income tax                                                       120,264           111,819
                                                                                    -------------    --------------
                                                                                        5,477,695         5,777,154
                                                                                    -------------    --------------

Interest expense:
   Deposits                                                                             2,412,132         2,581,963
   Interest on borrowings                                                                 250,000           115,788
                                                                                    -------------    --------------
                                                                                        2,662,132         2,697,751
                                                                                    -------------    --------------
         Net interest income                                                            2,815,563         3,079,403

Provision for loan losses                                                                 125,000            75,000
                                                                                    -------------    --------------
   Net interest income after
     provision for loan losses                                                          2,690,563         3,004,403
                                                                                    -------------    --------------

Noninterest income:
   Service charges on deposit accounts                                                    241,959           224,582
   Increase in cash value of life insurance                                                75,000            55,500
   Net realized gains (losses) on securities                                                 (130)           (9,759)
   Other income                                                                           283,600           163,483
                                                                                    -------------    --------------
                                                                                          600,429           433,806
                                                                                    -------------    --------------

Noninterest expense:
   Salaries and employee benefits                                                       1,493,643         1,422,051
   Occupancy expense                                                                       92,328            90,110
   Equipment expense                                                                      240,378           219,663
   Other expense                                                                          616,638           585,955
                                                                                    -------------    --------------
                                                                                        2,442,987         2,317,779
                                                                                    -------------    --------------
         Income before income taxes                                                       848,005         1,120,430

Income tax expense                                                                        196,000           333,500
                                                                                    -------------    --------------
         Net income                                                                 $     652,005    $      786,930
                                                                                    =============    ==============

Basic earnings per share                                                            $        0.38    $         0.46
                                                                                    =============    ==============
Weighted average shares outstanding                                                     1,718,968         1,718,968
                                                                                    =============    ==============
Dividends declared per share                                                        $        0.21    $         0.20
                                                                                    =============    ==============









See Notes to Consolidated Financial Statements.

                                                           5
<PAGE>





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


                                                                                           Accumulated
                                                                                              Other
                                       Common Stock                         Retained      Comprehensive
                                    Shares       Amount       Surplus       Earnings      Income (Loss)       Total
                                  ----------   -----------  -----------  -------------  ----------------  -------------
Balance, December 31, 2006         1,718,968   $ 2,148,710  $   521,625  $  27,336,848  $     (1,703,014) $  28,304,169

Comprehensive income
  Net income                               -             -            -      3,167,501                 -      3,167,501
  Net change in pension reserve
   net of income taxes of $156,273         -             -            -              -           303,354        303,354
  Net change in unrealized
   gain (loss) on investment
   securities available for
   sale, net of taxes of ($6,191)          -             -            -              -           (12,018)       (12,018)
  Reclassification adjustment,
   net of income taxes of $3,184           -             -            -              -             6,180          6,180
                                                                                                          -------------
Total comprehensive income                                                                                    3,465,017

  Dividends paid
   ($.86 per share)                        -             -            -     (1,478,313)                -     (1,478,313)
                                   ---------   -----------  -----------  -------------  ----------------  -------------
Balance, December 31, 2007         1,718,968   $ 2,148,710  $   521,625  $  29,026,036  $     (1,405,498) $  30,290,873

Comprehensive income
  Net income                               -             -            -      1,343,305                 -      1,343,305
  Net change in unrealized
   gain (loss) on investment
   securities available for
   sale, net of taxes of ($290,046)        -             -            -              -          (563,030)      (563,030)
  Reclassification adjustment,
   net of income taxes of $5,344           -             -            -              -            10,373         10,373
                                                                                                          -------------
Total comprehensive income                                                                                      790,648

  Dividends paid
   ($.42 per share)                        -             -            -       (721,967)                -       (721,967)
                                   ---------   -----------  -----------  -------------  ----------------  -------------
Balance, June 30, 2008             1,718,968   $ 2,148,710  $   521,625  $  29,647,374  $     (1,958,155) $  30,359,554
                                   =========   ===========  ===========  =============  ================  =============














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, 2008 and 2007
-------------------------------------------------------------------------------------------------------------------

                                                                                           Six Months Ended
                                                                                               June 30,
                                                                                        2008              2007
                                                                                    -------------    --------------
                                                                                     (Unaudited)       (Unaudited)
Cash flows from operating activities:
   Net income                                                                       $   1,343,305    $    1,630,892
   Adjustments to reconcile net income
     to net cash provided by operations:
       Depreciation and amortization                                                      387,000           375,000
       Provision for loan losses                                                          200,000           135,000
       Deferred income taxes                                                              269,000           258,000
       Net realized (gains) losses on securities                                          (15,716)            9,982
       Accretion of discount on securities, net of
         amortization of premiums                                                          (7,400)          (24,563)
       Deferred compensation                                                              (25,336)           (5,086)
       Net realized gain on foreclosed assets                                             (21,926)          (48,722)
       Life insurance income                                                             (119,902)                -
       Changes in assets and liabilities:
         Cash value of life insurance                                                    (156,000)         (111,000)
         Accrued income                                                                  (480,756)         (281,119)
         Other assets                                                                    (242,166)         (254,528)
         Accrued interest payable                                                          57,800          (115,951)
         Other liabilities                                                               (937,163)         (758,766)
                                                                                    -------------    --------------
           Net cash provided by operating activities                                      250,740           809,139
                                                                                    -------------    --------------

Cash flows from investing activities:
   Net decrease in federal funds sold                                                  12,786,232         7,923,582
   Purchases of investment securities                                                 (28,236,274)       (8,090,240)
   Sales of investment securities                                                               -         1,982,500
   Maturities of investment securities                                                 17,612,405         9,277,353
   (Purchases) sales of restricted equity securities                                     (274,900)          457,600
   Net increase in loans                                                               (5,977,374)      (12,051,769)
   Purchases of bank-owned life insurance                                              (2,000,000)                -
   Proceeds from life insurance contracts                                                 290,803                 -
   Proceeds from the sale of foreclosed assets                                            256,926           108,722
   Purchases of property and equipment, net of sales                                   (1,035,134)         (580,725)
                                                                                    -------------    --------------
           Net cash used in investing activities                                       (6,577,316)         (972,977)
                                                                                    -------------    --------------

Cash flows from financing activities:
   Net increase in deposits                                                             1,975,168        11,934,024
   Dividends paid                                                                        (721,967)         (687,587)
   Net increase (decrease) in long-term debt                                            5,000,000       (10,000,000)
                                                                                    -------------    --------------
           Net cash provided by financing activities                                    6,253,201         1,246,437
                                                                                    -------------    --------------
           Net increase (decrease) in cash and cash equivalents                           (73,375)        1,082,599

Cash and cash equivalents, beginning                                                   10,746,139        10,120,984
                                                                                    -------------    --------------
Cash and cash equivalents, ending                                                   $  10,672,764    $   11,203,583
                                                                                    =============    ==============

Supplemental disclosure of cash flow information:
   Interest paid                                                                    $   5,451,766    $    5,434,827
                                                                                    =============    ==============
   Taxes paid                                                                       $     130,000    $      364,468
                                                                                    =============    ==============
   Transfers of loans to foreclosed properties                                      $     175,000    $            -
                                                                                    =============    ==============


See Notes to Consolidated Financial Statements.

                                                           7
<PAGE>


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

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

Note 1.  Organization and Summary of Significant Accounting Policies

Organization

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

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

The  consolidated  financial  statements  as of June 30,  2008 and for the  periods  ended  June 30,  2008 and 2007
included  herein have been prepared by the Company  without  audit,  pursuant to the rules and  regulations  of the
Securities  and  Exchange  Commission.  In the opinion of  management,  the  information  furnished  in the interim
consolidated  financial statements reflects all adjustments necessary to present fairly the Company's  consolidated
financial  position,  results of  operations,  changes  in  stockholders'  equity  and cash flows for such  interim
periods.  Management  believes  that all  interim  period  adjustments  are of a  normal  recurring  nature.  These
consolidated  financial  statements should be read in conjunction with the Company's  audited financial  statements
and the notes  thereto as of December  31,  2007,  included  in the  Company's  Annual  Report on Form 10-K for the
fiscal year ended  December 31, 2007.  The results of operations for the  three-month  and six-month  periods ended
June 30, 2008 are not necessarily indicative of the results to be expected for the full year.

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

Principles of Consolidation

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

Note 2.  Restrictions on Cash

To comply with banking  regulations,  the Bank is required to maintain certain average cash reserve  balances.  The
daily average cash reserve  requirement was approximately  $2,825,000 and $2,775,000 for the periods including June
30, 2008 and December 31, 2007, respectively.

Note 3.  Allowance for Loan Losses

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

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

Balance, beginning                                                                  $   2,757,745    $    2,901,997
Provision charged to expense                                                              200,000           135,000
Recoveries of amounts charged off                                                         162,911            46,358
Amounts charged off                                                                      (330,901)         (139,585)
                                                                                    -------------    --------------
Balance, ending                                                                     $   2,789,755    $    2,943,770
                                                                                    =============    ==============








                                                           8
<PAGE>


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

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

Note 4.  Income Taxes

A  reconciliation  of income tax expense  computed at the statutory  federal  income tax rate to income tax expense
included in the statements of income for the six months ended June 30, 2008 and 2007 follows:

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

Tax at statutory federal rate                                                       $     615,504    $      791,143
Tax exempt interest income                                                                (99,947)          (84,899)
Other tax exempt income                                                                   (93,807)          (43,192)
Other                                                                                      45,250            32,948
                                                                                    -------------    --------------
                                                                                    $     467,000    $      696,000
                                                                                    =============    ==============

Note 5.  Employee Benefit Plan

The Bank has a  qualified  noncontributory  defined  benefit  pension  plan that  covers  substantially  all of its
employees.  The benefits are primarily  based on years of service and  earnings.  The following is a summary of net
periodic pension costs for the six-month periods ended June 30, 2008 and 2007.

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

Service cost                                                                        $     195,790    $      193,828
Interest cost                                                                             183,948           178,916
Expected return on plan assets                                                           (221,218)         (183,544)
Amortization of net obligation at transition                                                  (18)              (18)
Amortization of prior service cost                                                          5,032             5,032
Amortization of net (gain) or loss                                                         25,864            38,886
                                                                                    -------------    --------------
Net periodic benefit cost                                                           $     189,398    $      233,100
                                                                                    =============    ==============

Note 6.  Commitments and Contingencies

The Bank is party to financial  instruments  with  off-balance-sheet  risk in the normal course of business to meet
the  financing  needs of its  customers.  These  financial  instruments  include  commitments  to extend credit and
standby letters of credit.  These  instruments  involve,  to varying  degrees,  credit risk in excess of the amount
recognized in the consolidated balance sheets.

The Bank's exposure to credit loss in the event of  nonperformance  by the other party to the financial  instrument
for commitments to extend credit and standby  letters of credit is represented by the  contractual  amount of those
instruments.  The Bank uses the same credit  policies in making  commitments  and  conditional  obligations  as for
on-balance-sheet instruments.  A summary of the Bank's commitments at June 30, 2008 and 2007 is as follows:

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

Commitments to extend credit                                                        $  18,938,289    $   20,959,836
Standby letters of credit                                                                       -                 -
                                                                                    -------------    --------------
                                                                                    $  18,938,289    $   20,959,836
                                                                                    =============    ==============

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





                                                           9
<PAGE>


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

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

Note 6.  Commitments and Contingencies, continued

Collateral held varies, but may include accounts receivable,  inventory,  property and equipment,  residential real
estate and income-producing commercial properties.

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

Note 7.  Fair Value

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

Fair Value Hierarchy

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

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

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

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

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

Investment Securities Available for Sale

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









                                                           10
<PAGE>


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

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

Note 7.  Fair Value, continued

Loans

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

Derivative Assets and Liabilities

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

Foreclosed Assets

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

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

June 30, 2008                                       Total            Level 1          Level 2           Level 3
                                               ---------------  ---------------   ---------------  ----------------

   Investment securities available for sale    $    48,227,386  $              -  $    48,227,386  $              -
   Derivative assets                                         -                 -                -                 -
                                                --------------  ----------------  ---------------  ----------------
          Total assets at fair value           $    48,227,386  $              -  $    48,227,386  $              -
                                               ===============  ================  ===============  ================
   Derivative liabilities                                    -                 -                -                 -
                                               ---------------  ----------------  ---------------  ----------------
         Total liabilities at fair value       $             -  $              -  $             -  $              -
                                               ===============  ================  ===============  ================








                                                           11
<PAGE>


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

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

Note 7.  Fair Value, continued

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

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

June 30, 2008                                       Total            Level 1          Level 2           Level 3
                                               --------------   ---------------   ---------------  ----------------
   Loans                                       $       572,283  $              -  $       572,283  $              -
   Foreclosed assets                                   100,000                 -          100,000                 -
                                               ---------------   ---------------  ---------------  ----------------
          Total assets at fair value           $       672,283  $              -  $       672,283  $              -
                                               ===============  ===============   ===============  ================
          Total liabilities at fair value      $             -  $              -  $             -  $              -
                                               ===============  ===============   ===============  ================

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

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

Note 9.   Subsequent Event

On August 11, 2008,  S&P downgraded  the credit rating of the Federal Home Loan Mortgage  Corporation  (FHLMC) to a
rating of A and they remained on a negative  credit watch.  Due to this  downgrade,  the valuation of our preferred
stock in FHLMC has been reduced  significantly.  Management  is assessing  this change in  circumstances  for other
than temporary impairment.





















                                                           12
<PAGE>


                                           Part I. Financial Information

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

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

General

The  following  discussion  provides  information  about the major  components  of the  results of  operations  and
financial  condition  of the  Company.  This  discussion  and  analysis  should  be read in  conjunction  with  the
Consolidated Financial Statements and Notes to Consolidated Financial Statements included in this report.

Critical Accounting Policies

For a discussion of the Company's critical  accounting  policies,  including its allowance for loan losses, see the
Company's Annual Report on Form 10-K for the year ended December 31, 2007.

Results of Operations

Total  interest  income  decreased by $299,459 for the quarter  ended June 30, 2008  compared to the quarter  ended
June 30,  2007,  while  interest  expense on  deposits  and other  borrowings  decreased  by $35,619  over the same
period.  The  decrease in interest  income was  attributable  primarily  to  decreases  in  interest  rates.  Since
September  2007,  the Federal  Reserve  has lowered its target  overnight  borrowing  rate by 3.25%,  resulting  in
immediate  reductions  in federal  funds  interest as well as interest on loans  indexed to the prime lending rate.
The decrease in interest  rates did not have as great an impact on interest  expense as deposits  have not repriced
as quickly as loans and  federal  funds sold,  thus  leading to a decrease in the bank's net  interest  margin.  An
increase  in  borrowings  from the  Federal  Home Loan Bank also  increased  interest  expense.  The  result  was a
decrease  in net  interest  income of  $263,840,  or 8.57% for the  quarter  ended June 30,  2008,  compared to the
quarter ended June 30, 2007.

The  provision  for loan losses was $125,000 for the quarter ended June 30, 2008 and $75,000 for the same period in
2007.  The increase was due to a specific  charge-off  on a  commercial  loan.  The reserve for loan losses at June
30, 2008 was  approximately  1.03% of total loans.  Management  believes the provision and the resulting  allowance
for loan losses are adequate.

Noninterest  income was  $600,429 in the second  quarter of 2008  compared  to  $433,806  in the second  quarter of
2007.  The majority of the increase came as a result of life insurance proceeds of approximately $120,000.

Noninterest  expenses increased by $125,208,  or 5.40%, for the quarter ended June 30, 2008 compared to the quarter
ended June 30, 2007.  Normal increases in salary and benefit costs accounted for $71,592 of this increase.

The decrease in net interest  income  combined with the increase in noninterest  expense was the principal cause of
the decrease in net income  before taxes of $272,425 for the second  quarter of 2008,  compared to the same quarter
in 2007.  Income tax  expense  decreased  accordingly  to  $196,000  in the  quarter,  from  $333,500 in the second
quarter of 2007. As a result,  net income decreased by $134,925,  or 17.15%,  to $652,005 compared to $786,930 last
year.

For the six months ended June 30, 2008,  total  interest  income  decreased  by $57,464  compared to the  six-month
period ended June 30, 2007,  while interest  expense  increased by $190,690 over the same period.  This resulted in
a decrease in net interest  income of $248,154,  or 4.17%.  As stated  above,  the decrease in interest  income was
primarily  the result of  decreases  in interest  rates.  The  increase in interest  expense  came  primarily  as a
result of increased borrowings from the Federal Home Loan Bank.

Noninterest  income  increased by $75,362 for the six-month  period ended June 30, 2008 compared to the same period
in 2007.  Service  charges on deposit  accounts  increased  due to the  implementation  of an  overdraft  privilege
program in the second quarter of 2007.  Other income  decreased due to earnings  recognized in the first quarter of
2007 from the Bank's investment in a Small Business Investment Company, that did not recur in 2008.






                                                           13
<PAGE>


                                           Part I. Financial Information

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

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

As  indicated  above,  increases  in normal  operating  costs  resulted in an increase  in  noninterest  expense of
$278,795,  or 6.19%,  for the first six  months of 2008  compared  to the first six  months of 2007.  Overall,  the
decrease  in net  interest  income and the  increase  in  noninterest  expense  led to a decrease  in net income of
$287,587,  or 17.63%,  for the six-month period ended June 30, 2008 compared to the six-month period ended June 30,
2007.

Financial Condition

Total assets  increased by $6,139,150,  or 1.70%,  from December 31, 2007 to June 30, 2008. Net loans  increased by
$5,602,374,  federal funds sold decreased by $12,786,232  and investment  securities  increased by $9,809,626.  The
decrease  in  federal  funds  sold  came as  balances  were  used to fund the  increases  in loans  and  investment
securities.  The cash value of life  insurance  increased as the Bank made an  additional  investment of $2,000,000
in bank-owned life insurance during the first quarter of 2008.

Total  deposits  increased by  $1,975,168,  or 0.64%,  from December 31, 2007 to June 30, 2008.  The slower 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  increased  from  $20,000,000 at December 31, 2007, to $25,000,000 at June 30,
2008 as the Bank  sought  to lock in  lower-rate  funding  from the  Federal  Home  Loan  Bank.  Other  liabilities
decreased from  $1,485,439 at December 31, 2007 to $522,940 at June 30, 2008 due to a  contribution  of $949,743 to
the employee defined benefit pension plan.

Shareholders'  equity  totaled  $30,359,554  at June 30, 2008  compared to  $30,290,873  at December 31, 2007.  The
$68,681  increase  was the result of earnings  for the six months  combined  with a decrease in the market value of
securities classified as available for sale, and the payment of dividends of $721,967.

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

Liquidity and Capital Resources

Liquidity is the ability to convert  assets to cash to fund  depositors'  withdrawals  or borrowers'  loans without
significant  loss.  Federal fund lines  available from  correspondent  banks totaled  $18,400,000 at June 30, 2008.
No balances  were  outstanding  on these lines at June 30, 2008 or December 31, 2007.  Long-term  debt  consists of
borrowings  from the Federal Home Loan Bank and Deutsche Bank.  Borrowings  from the Federal Home Loan Bank,  which
are secured by a blanket collateral  agreement on the Bank's 1 to 4 family  residential real estate loans,  totaled
$15,000,000  at June 30, 2008 and  $10,000,000  at December 31, 2007.  Borrowings  from  Deutsche  Bank,  which are
secured by the pledging of specific  investment  securities,  totaled  $10,000,000  at each of June 30,  2008,  and
December 31,  2007.  The unused  credit line from the Federal  Home Loan Bank as of June 30, 2008 is  approximately
$40,000,000.

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

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



                                                           14
<PAGE>


                                           Part I. Financial Information

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

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

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

Forward-Looking Statements

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



































                                                           15
<PAGE>


                                           Part I. Financial Information

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

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

Not applicable to smaller reporting companies.





















































                                                           16
<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.






























                                                           17
<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 13, 2008.

         (b)      Not applicable

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

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

                       Name                          Votes For                             Votes Withheld
                  ---------------                    ---------                             --------------
                  Jacky K. Anderson                  1,011,092                                   1,158
                  Thomas M. Jackson, Jr.             1,006,156                                   6,094
                  J. David Vaughan                   1,005,152                                   7,098

         (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.










                                                           18
<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, 2008                                         By:      /s/ Jacky K. Anderson
                                                                       ---------------------
                                                                       Jacky K. Anderson
                                                                       President and CEO



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



                                                           19
<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.

</TABLE>