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

                                   FORM 10-Q

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

               FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005

             [ ] 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)


<TABLE>
<CAPTION>
<S>                                           <C>
                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)
</TABLE>

                                (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 an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).  Yes  _____    No  __X__

      Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).  Yes  _____    No  __X__

      Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:

                 1,718,968 shares of Common Stock, par value
             $1.25 per share, outstanding as of November 11, 2005.
<page>

PART I   FINANCIAL INFORMATION

Item 1.  Financial Statements

         Consolidated Balance Sheets-September 30, 2005
                and December 31, 2004.........................................3

         Consolidated Statements of Income-Nine Months Ended
                September 30, 2005 and September 30, 2004 ....................4

         Consolidated Statements of Income-Three Months Ended
                September 30, 2005 and September 30, 2004 ....................5

         Consolidated Statements of Stockholders' Equity-Nine Months
                Ended September 30, 2005 and Year Ended December 31, 2004.....6

         Consolidated Statements of Cash Flows-Nine Months Ended
                September 30, 2005 and September 30, 2004.....................7

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

Item 2.  Management's Discussion and Analysis of Financial Condition
                and Results of Operations....................................10

Item 3.  Quantitative and Qualitative Disclosures about Market Risk..........13

Item 4.  Controls and Procedures.............................................14

PART II  OTHER INFORMATION

Item 1.  Legal Proceedings...................................................15

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.........15

Item 3.  Defaults Upon Senior Securities.....................................15

Item 4.  Submission of Matters to a Vote of Security Holders.................15

Item 5.  Other Information...................................................15

Item 6.  Exhibits............................................................15

Signatures...................................................................16

                                       2
<page>
                        PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

                    GRAYSON BANKSHARES, INC. AND SUBSIDIARY
                          CONSOLIDATED BALANCE SHEETS
                   SEPTEMBER 30, 2005 AND DECEMBER 31, 2004

                                                      SEPTEMBER 30, DECEMBER 31,
ASSETS                                                    2005          2004
                                                          ----          ----
                                                       (Unaudited)   (Audited)
Cash and due from banks                                $8,897,439   $10,032,399
Federal funds sold                                     13,343,730     8,833,069
Investment securities available for sale               33,810,545    33,786,785
Investment securities held to maturity                  2,965,344     2,975,455
Restricted equity securities                            1,519,650     1,147,050
Loans, net of allowance for loan losses of $2,745,682
  at September 30, 2005 and $2,609,759 at
  December 31, 2004                                   215,964,145   196,911,871
Cash value of life insurance                            5,096,722     4,925,722
Foreclosed assets                                         400,000        65,000
Property and equipment, net                             7,092,500     7,316,750
Accrued income                                          2,289,884     1,833,728
Other assets                                            2,557,310     2,387,052
                                                        ---------     ---------
                                                     $293,937,269  $270,214,881
                                                     ============  ============

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
Noninterest-bearing demand deposits                   $35,195,751   $31,569,179
Interest-bearing demand deposits                       21,527,246    21,352,601
Savings deposits                                       48,084,896    51,489,408
Large denomination time deposits                       43,898,329    36,668,682
Other time deposits                                    96,284,060    89,979,474
                                                       ----------    ----------
   Total deposits                                     244,990,282   231,059,344

FHLB advances                                          20,000,000    12,000,000
Accrued interest payable                                  697,899       253,652
Other liabilities                                         745,026       724,839
                                                          -------       -------
                                                      266,433,207   244,037,835
                                                      -----------   -----------

Commitments and contingencies                                   -             -

STOCKHOLDERS' EQUITY
Preferred stock, $25 par value; 500,000
  shares authorized; none issued                                -             -
Common stock, $1.25 par value; 5,000,000 shares
  authorized; 1,718,968 shares issued and
  outstanding                                           2,148,710     2,148,710
Surplus                                                   521,625       521,625
Retained earnings                                      25,289,572    23,797,289
Accumulated other comprehensive income (loss)            (455,845)     (290,578)
                                                         --------      --------
                                                       27,504,062    26,177,046
                                                       ----------    ----------
                                                     $293,937,269  $270,214,881
                                                     ============  ============

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                       3
<page>
                    GRAYSON BANKSHARES, INC. AND SUBSIDIARY
                       CONSOLIDATED STATEMENTS OF INCOME
             FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004


                                                           NINE MONTHS ENDED
                                                              SEPTEMBER 30,
                                                            2005        2004
                                                            ----        ----
INTEREST INCOME:                                               (Unaudited)
(Unaudited)
  Loans and fees on loans                               $11,199,763  $9,544,459
  Federal funds sold                                        232,080      92,823
  Investment securities:
   Taxable                                                  900,982     993,895
   Exempt from federal income tax                           301,995     340,204
                                                            -------     -------
                                                         12,634,820  10,971,381
                                                         ----------  ----------
INTEREST EXPENSE:
  Deposits                                                3,463,329   2,967,691
  Interest on borrowings                                    583,500     394,219
                                                            -------     -------
                                                          4,046,829   3,361,910
                                                          ---------   ---------
      Net interest income                                 8,587,991   7,609,471

PROVISION FOR LOAN LOSSES                                   399,468     285,000
                                                            -------     -------
  Net interest income after
   provision for loan losses                              8,188,523   7,324,471
                                                          ---------   ---------
NONINTEREST INCOME:
  Service charges on deposit accounts                       387,028     409,222
  Increase in cash value of life insurance                  171,000     180,000
  Net realized gains (losses) on securities                 (3,763)      38,643
  Other income                                              354,858     482,775
                                                            -------     -------
                                                            909,123   1,110,640
                                                            -------   ---------
NONINTEREST EXPENSE:
  Salaries and employee benefits                          3,690,646   3,220,325
  Occupancy expense                                         217,062     162,394
  Equipment expense                                         580,854     464,886
  Other expense                                           1,471,266   1,206,855
                                                          ---------   ---------
                                                          5,959,828   5,054,460
                                                          ---------   ---------
      Income before income taxes                          3,137,818   3,380,651

INCOME TAX EXPENSE                                          872,000     906,000
                                                            -------     -------
      Net income                                         $2,265,818  $2,474,651
                                                         ==========  ==========

BASIC EARNINGS PER SHARE                                  $    1.32   $    1.44
                                                          =========   =========
WEIGHTED AVERAGE SHARES OUTSTANDING                       1,718,968   1,718,968
                                                          =========   =========

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                       4
<page>
                    GRAYSON BANKSHARES, INC. AND SUBSIDIARY
                       CONSOLIDATED STATEMENTS OF INCOME
            FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004

                                                          THREE MONTHS ENDED
                                                              SEPTEMBER 30,
                                                            2005        2004
                                                            ----        ----
INTEREST INCOME:                                               (Unaudited)
(Unaudited)
  Loans and fees on loans                                $4,019,709  $3,322,166
  Federal funds sold                                        116,584      33,056
  Investment securities:
   Taxable                                                  300,426     297,262
   Exempt from federal income tax                            97,065     106,308
                                                             ------     -------
                                                          4,533,784   3,758,792
                                                          ---------   ---------
INTEREST EXPENSE:
  Deposits                                                1,323,654     967,636
  Interest on borrowings                                    241,500     133,334
                                                            -------     -------
                                                          1,565,154   1,100,970
                                                          ---------   ---------
      Net interest income                                 2,968,630   2,657,822

PROVISION FOR LOAN LOSSES                                   189,468     105,000
                                                            -------     -------
  Net interest income after
   provision for loan losses                              2,779,162   2,552,822
                                                          ---------   ---------
NONINTEREST INCOME:
  Service charges on deposit accounts                       146,974     156,518
  Increase in cash value of life insurance                   57,000      60,000
  Net realized gains (losses) on securities                       -     (21,486)
  Other income                                              118,189     108,030
                                                            -------     -------
                                                            322,163     303,062
                                                            -------     -------
NONINTEREST EXPENSE:
  Salaries and employee benefits                          1,224,777   1,095,805
  Occupancy expense                                          80,292      52,660
  Equipment expense                                         188,117     159,726
  Other expense                                             518,347     424,839
                                                            -------     -------
                                                          2,011,533   1,733,030
                                                          ---------   ---------
      Income before income taxes                          1,089,792   1,122,854

INCOME TAX EXPENSE                                          306,000     297,000
                                                            -------     -------
      Net income                                          $ 783,792   $ 825,854
                                                          =========   =========

BASIC EARNINGS PER SHARE                                  $     .46   $     .48
                                                          =========   =========
WEIGHTED AVERAGE SHARES OUTSTANDING                       1,718,968   1,718,968
                                                          =========   =========

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                       5
<page>

                    GRAYSON BANKSHARES, INC. AND SUBSIDIARY
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 (UNAUDITED) AND THE YEAR ENDED
                          DECEMBER 31, 2004 (AUDITED)

<TABLE>
<CAPTION>
                                                                     ACCUMULATED
                                                                        OTHER
                             COMMON STOCK              RETAINED     COMPREHENSIVE
                            SHARES    AMOUNT  SURPLUS  EARNINGS      INCOME (LOSS)     TOTAL
                            ------    ------  -------  --------      -------------     -----
<S>                        <C>        <C>         <C>       <C>          <C>       <C>

BALANCE, DECEMBER 31, 2003  1,718,968  $2,148,710  $521,625  $21,587,202  $343,259  $24,600,796

  COMPREHENSIVE INCOME
  Net income                        -           -         -    3,241,468         -    3,241,468
  Net change in unrealized
   appreciation on investment
   securities available for
   sale, net of taxes of $(305,101) -           -         -            -  (592,254)    (592,254)
  Reclassification adjustment,
   net of taxes of $(21,421)        -           -         -            -   (41,583)     (41,583)
                                                                                        --------
   TOTAL COMPREHENSIVE INCOME                                                         2,607,631

  Dividends paid
   ($.60 per share)                 -           -         -   (1,031,381)        -   (1,031,381)
                              -------  ----------   -------   ----------   -------   ----------
BALANCE, DECEMBER 31, 2004  1,718,968   2,148,710   521,625   23,797,289  (290,578)  26,177,046

  COMPREHENSIVE INCOME
  Net income                        -           -         -    2,265,818         -    2,265,818
  Net change in unrealized
   appreciation on investment
   securities available for
   sale, net of taxes of $(51,833)  -           -         -            -  (100,617)    (100,617)
  Reclassification adjustment,
   net of taxes of $1,279           -           -         -            -     2,484        2,484
  Unrealized loss on interest
   rate swap, net of taxes
    of $(34,584)                    -           -         -            -   (67,134)     (67,134)
                                                                                        --------
  TOTAL COMPREHENSIVE INCOME                                                           2,100,551

  Dividends paid
      ($.45 per share)              -           -         -     (773,535)        -      (773,535)
                              -------  ----------   -------   ----------   -------   -----------
BALANCE, SEPTEMBER 30, 2005 1,718,968  $2,148,710 $ 521,625  $25,289,572 $(455,845)  $27,504,062
                            =========  ========== =========  =========== =========   ===========

</table>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                       6
<page>
                    GRAYSON BANKSHARES, INC. AND SUBSIDIARY
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
               FOR THE NINE MONTHS ENDED JUNE 30, 2005 AND 2004
<TABLE>
<CAPTION>
                                                           NINE  MONTHS ENDED
                                                              SEPTEMBER 30,
                                                            2005        2004
                                                            ----        ----
                                                        (Unaudited)  (Unaudited)
<S>                                                           <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                   $2,265,818 $2,474,651
  Adjustments to reconcile net income
   to net cash provided by operations:
     Depreciation and amortization                               522,000     412,500
     Provision for loan losses                                   399,468     285,000
     Deferred income taxes                                       (29,000)    207,000
     Net realized (gains) losses on securities                     3,763     (38,643)
     Accretion of discount on securities, net of
      amortization of premiums                                    63,005     182,101
     Deferred compensation                                         4,871       5,513
     Changes in assets and liabilities:
      Cash value of life insurance                              (171,000)   (180,000)
      Accrued income                                            (456,156)     (6,445)
      Other assets                                               (56,121)   (756,269)
      Accrued interest payable                                   444,247     268,469
      Other liabilities                                          (86,402)   (133,845)
                                                                 -------    --------
        Net cash provided by operating activities              2,904,493   2,720,032
                                                               ---------   ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Net (increase) decrease in federal funds sold               (4,510,661)  6,925,180
  Purchases of investment securities                          (5,976,589)(14,020,765)
  Sales of investment securities                               1,932,481  16,787,021
  Maturities of investment securities                          3,815,005   4,369,127
  Sales (purchases) of restricted equity securities             (372,600)    129,600
  Net increase in loans                                      (19,786,742)(18,265,685)
  Purchases of property and equipment, net of sales             (297,750)   (904,514)
                                                                --------    --------
        Net cash used in investing activities                (25,196,856) (4,980,036)
                                                             -----------  ----------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Net increase in noninterest-bearing deposits                 3,626,572   1,904,224
  Net increase (decrease) in interest-bearing deposits        10,304,366  (3,585,633)
  Dividends paid                                                (773,535)   (670,398)
  Net increase in other borrowings                             8,000,000   2,000,000
                                                               ---------   ---------
        Net cash provided by (used in) financing activities   21,157,403    (351,807)
                                                              ----------    --------
        Net (decrease) in cash and cash equivalents           (1,134,960) (2,611,811)

CASH AND CASH EQUIVALENTS, BEGINNING                          10,032,399  11,748,140
                                                              ----------  ----------
CASH AND CASH EQUIVALENTS, ENDING                             $8,897,439  $9,136,329
                                                              ==========  ==========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Interest paid                                               $3,602,582  $3,093,441
                                                              ==========  ==========
  Taxes paid                                                   $ 944,000   $ 638,995
                                                               =========   =========
  Loans transferred to foreclosed assets                       $ 335,000   $       -
                                                               =========   =========
</table>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                       7
<page>
                    GRAYSON BANKSHARES, INC. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

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

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

The consolidated financial statements  as  of  September  30,  2005 and for the
periods ended September 30, 2005 and 2004 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, 2004, included in
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2004 as filed with the Securities  and  Exchange  Commission.   The  results of
operations for the three-month and nine-month periods ended September  30, 2005
and  2004 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.  ALLOWANCE FOR LOAN LOSSES

The  following is an analysis of the allowance for loan  losses  for  the  nine
months ended September 30, 2005 and 2004.

                                                            2005        2004
                                                            ----        ----

Balance, beginning                                       $2,609,759  $2,395,387
Provision charged to expense                                399,468     285,000
Recoveries of amounts charged off                            23,527      83,600
Amounts charged off                                        (287,072)   (224,335)
                                                           --------    --------
Balance, ending                                          $2,745,682  $2,539,652
                                                          ========== ==========

NOTE 3.  INCOME TAXES

A reconciliation of income tax expense computed at the statutory federal income
tax rate  to  income  tax  expense included in the statements of income for the
nine months ended September 30, 2005 and 2004 follows:

                                                            2005        2004
                                                            ----        ----

Tax at statutory federal rate                            $1,066,858  $1,149,421
Tax exempt interest income                                 (120,607)   (134,668)
Other tax exempt income                                    (105,382)   (121,839)
Other                                                        31,131      13,086
                                                             ------      ------
                                                          $ 872,000   $ 906,000
                                                          =========   =========
                                       8
<page>
                    GRAYSON BANKSHARES, INC. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 3.  EMPLOYEE BENEFIT PLAN

The Bank has a qualified noncontributory  defined  benefit  pension  plan  that
covers substantially all of its employees.  The benefits are primarily based on
years  of  service  and  earnings.   The following is a summary of net periodic
pension costs for the nine-month periods ended September 30, 2005 and 2004.

                                                            2005        2004
                                                            ----        ----

Service cost                                              $ 224,517   $ 165,879
Interest cost                                               212,073     180,804
Expected return on plan assets                             (204,291)   (138,582)
Amortization of net obligation at transition                    (27)        (27)
Amortization of prior service cost                            7,548       7,548
Amortization of net (gain) or loss                           64,524      45,069
                                                             ------      ------
Net periodic benefit cost                                 $ 304,344   $ 260,691
                                                          =========   =========


NOTE 4.  COMMITMENTS AND CONTINGENCIES

FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

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

The Bank's exposure to credit loss  in the event of nonperformance by the other
party to the financial instrument for  commitments to extend credit and standby
letters  of  credit  is  represented  by  the   contractual   amount  of  those
instruments.  The Bank uses the same credit policies in making  commitments and
conditional obligations as for on-balance-sheet instruments.  A summary  of the
Bank's commitments at September 30, 2005 and 2004 is as follows:

                                                            2005        2004
                                                            ----        ----

Commitments to extend credit                             $15,441,784 $9,224,530
Standby letters of credit                                         -           -
                                                         ----------- ----------
                                                         $15,441,784 $9,224,530
                                                         =========== ==========

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.

                                       9
<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.

The  Bank  operates  for  the  primary  purpose of meeting the banking needs of
individuals and small to medium sized businesses  in  the  Bank's service area,
while  developing  personal, hometown associations with these  customers.   The
Bank offers a wide range  of  banking  services  including checking and savings
accounts; commercial, installment, mortgage and personal  loans;  safe  deposit
boxes;  and  other  associated services.  The Bank's primary sources of revenue
are interest income from  its lending activities, and, to a lesser extent, from
its investment portfolio.   The  Bank  also earns fees from lending and deposit
activities. The major expenses of the Bank are interest on deposit accounts and
general and administrative expenses, such  as  salaries,  occupancy and related
expenses.

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, 2004.

RESULTS OF OPERATIONS

Total interest income increased by $774,992 for the quarter ended September 30,
2005  compared  to the quarter ended September 30, 2004, while interest expense
on deposits and other  borrowings  increased  by $464,184 over the same period.
The  increase in interest income is attributable  to  increases  in  the  prime
lending rate and to an increase in average loans outstanding while the increase
in interest  expense  came primarily as a result of the increases in short-term
interest rates that have  been implemented by the Federal Reserve over the past
year.  The result was an increase in net interest income of $310,808 or 11.69%.

The  provision  for credit losses was $189,468 for the quarter ended  September
30, 2005 and $105,000  for  the quarter ended September 30, 2004.  The increase
was due to the addition of a  specific  reserve  of $84,468 for a loan that was
identified as being impaired during the third quarter of 2005.  The reserve for
loan  losses  at September 30, 2005 was approximately  1.26%  of  total  loans.
Management believes  the  provision and the resulting allowance for loan losses
are adequate.

Non-interest income was up $19,101 in the third quarter of 2005 compared to the
third quarter of 2004.  A slight  decrease  in service charge income was offset
by an increase in mortgage origination fees and  a  decrease  in  losses on the
sale of investment securities.

Non-interest expense increased  by  $278,503,  or 16.07%, for the quarter ended
September 30, 2005 compared to the quarter ended September 30, 2004.  Increases
in salaries and employee benefits came as a result  of  employee  additions  as
well  as  cost  increases  for  employee  medical  benefits and defined-benefit
retirement plans.  Increases in occupancy, equipment and other expenses came as
a result of branching activity in 2004.

As  the  increase in net interest income was offset by  the  increase  in  non-
interest expense,  net  income  before taxes decreased by $33,062 for the third
quarter  of 2005 compared to the same  period  in  2004.   Income  tax  expense
increased  slightly  to  $306,000  for  the  quarter  ended  September 30, 2005
compared to $297,000 for the same period in 2004.  The increase  in tax expense
was due to a decrease in the average balance of tax-exempt investments.   As  a
result,  net  income for the quarter decreased by $42,062 or 5.09%, to $783,792
compared to net income of $825,854 for the same period in 2004.

                                       10
<page>
                        PART I.  FINANCIAL INFORMATION

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


For the nine months  ended  September 30, 2005, total interest income increased
by $1,663,439 compared to the nine-month period ended September 30, 2004, while
interest expense increased by  $684,919 over the same period.  This resulted in
an increase in net interest income  of  $978,520,  or 12.86%.  As stated above,
the  increase  in  interest  income was the result of increases  in  the  prime
lending rate and an increase in average loans outstanding while the increase in
interest expense came primarily as a result of increases in short-term interest
rates.

Non-interest income was down $201,517 for the nine-month period ended September
30, 2005 compared to the same period in 2004.  The decrease in other income was
due to a gain that was realized  upon  the termination of an interest rate swap
in the second quarter of 2004.

Normal  cost increases, combined with the  aforementioned  costs  of  salaries,
benefits,  and  branching  activities  resulted  in an increase in non-interest
expense of $905,368 for the first nine months of 2005  compared  to  the  first
nine  months  of 2004.  Overall, the increase in net interest income was offset
by the decrease in other income and the increase in other expenses to result in
a decrease in net income of $208,833, or 8.44%, for the nine-month period ended
September 30, 2005 compared to the nine-month period ended September 30, 2004.

FINANCIAL CONDITION

Total assets increased  by  $23,722,388,  or  8.78%  from  December 31, 2004 to
September  30,  2005.  Net loans increased by $19,052,274, federal  funds  sold
increased by $4,510,661 and investment securities increased by $13,649.

Total deposits increased  by  $13,930,938,  or  6.03% from December 31, 2004 to
September 30, 2005 as deposit growth picked up slightly in the third quarter of
2005  as  compared  to  previous  quarters.  Federal Home  Loan  Bank  advances
increased  by $8,000,000 from December  31,  2004  to  September  30,  2005  as
additional borrowings were necessary to help fund the increased loan demand.

Shareholders'  equity  totaled  $27,504,062  at  September 30, 2005 compared to
$26,177,046 at December 31, 2004.  The $1,327,016  increase  was  the result of
earnings  for the nine months combined with a decrease in the market  value  of
securities  classified  as  available  for  sale  of $98,133, a decrease in the
market value of interest rate swaps of $67,134, and the payment of dividends of
$773,535.

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   approximately   $14,000,000  at
September 30, 2005. No balances were outstanding on these lines at September 30,
2005 or December  31, 2004.  Borrowings  from the Federal Home Loan Bank totaled
$12,000,000  at December 31, 2004 and  $20,000,000  at September  30, 2005.  The
remaining unused credit line from the Federal Home Loan Bank as of September 30,
2005 was  approximately  $23,900,000.  The Federal  Home Loan Bank  advances are
secured by a blanket  collateral  agreement on the Bank's 1-4 family residential
real estate loans.

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.

                                       11
<page>
                          PART I. FINANCIAL INFORMATION

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


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
significant  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 "Caution About Forward Looking Statements" section  in
the Company's Annual Report on Form 10-K for the year ended December 31, 2004.















                                       12
<page>


                        PART I.  FINANCIAL INFORMATION

Item 3.  Quantitative and Qualitative Disclosures about Market Risk


The principal goals  of  the Bank's asset and liability management strategy are
the maintenance of adequate liquidity and the management of interest rate risk.
Interest rate risk management  balances the effects of interest rate changes on
assets that earn interest or liabilities  on which interest is paid, to protect
the Bank from wide fluctuations in its net  interest  income  that could result
from interest rate changes.

Management must ensure that adequate funds are available at all  times  to meet
the  needs  of its customers.  On the asset side of the balance sheet, maturing
investments,  loan  payments, maturing loans, federal funds sold, and unpledged
investment securities  are  principal  sources  of liquidity.  On the liability
side of the balance sheet, liquidity sources include core deposits, the ability
to  increase  large  denomination  certificates,  federal   fund   lines   from
correspondent banks, borrowings from the Federal Home Loan Bank and the Federal
Reserve Bank, as well as the ability to generate funds through the issuance  of
long-term debt and equity.

Interest  rate  risk is the effect that changes in interest rates would have on
interest income and interest expense as interest-sensitive assets and interest-
sensitive  liabilities  either  reprice  or  mature.   Management  attempts  to
maintain  the   portfolios  of  interest-earning  assets  and  interest-bearing
liabilities with  maturities  or  repricing  opportunities  at levels that will
afford protection from erosion of net interest margin, to the extent practical,
from changes in interest rates.

The  Bank  uses  a number of tools to manage its interest rate risk,  including
simulating net interest  income under various scenarios, monitoring the present
value change in equity under  the same scenarios, and monitoring the difference
or  gap  between rate sensitive assets  and  rate  sensitive  liabilities  over
various time periods.

The earnings  simulation  model  forecasts annual net income under a variety of
scenarios that incorporate changes  in  the  absolute  level of interest rates,
changes  in  the  shape  of  the  yield  curve  and  changes  in interest  rate
relationships.   Management  evaluates the effect on net interest  income  from
gradual changes in the Prime Rate  of  up to 300 basis points up or down over a
12-month period.  The current model indicates  that an increase in rates of 300
basis points over the next twelve months would result  in  a  decrease  in  net
interest  income of $564,000, or 4.76%, while a similar decrease in rates would
result in an  increase  in net interest income of $87,000, or 0.74%.  The model
also incorporates management's  forecasts for balance sheet growth, noninterest
income and noninterest expense.   The  interest  rate  scenarios  are  used for
analytical  purposes  and  do  not represent management's view of future market
movements.  Rather, these are intended  to  provide  a measure of the degree of
volatility interest rate movements may apply to the earnings  of  the  Company.
Modeling  the sensitivity of earnings to interest rate risk is highly dependent
on numerous  assumptions  embedded in the simulation model.  While the earnings
sensitivity analysis incorporates  management's  best estimate of interest rate
and  balance  sheet dynamics under various market rate  movements,  the  actual
behavior and resulting earnings impact likely will differ from that projected.

                                       13
<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 subsidiaries) 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.

















                                       14
<page>
                          PART II.  OTHER INFORMATION



                    GRAYSON BANKSHARES, INC. AND SUBSIDIARY



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

      None

ITEM 5.  OTHER INFORMATION

      None

ITEM 6.  EXHIBITS

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

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

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









                                       15

<page>
                                  SIGNATURES


      Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



                                           GRAYSON BANKSHARES, INC.




Date:  November 14, 2005                   By:  /s/ Jacky K. Anderson
                                                ---------------------
                                                 Jacky K. Anderson
                                                 President and CEO



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

                                       16
<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.