Trademark early Lynch. Morbid surrealism overflowing with disturbing symbolism. Avant-garde art school projects are so useful for helping budding filmmakers find their voice, experiment with ambiguous concepts and be resourceful with the limited resources at their disposal. Talent is fostered in non-linear no-budget filmmaking. Lynch (as proved with 'Eraserhead') knew how to squeeze artistic craft from a shoestring.
Looks like exactly what it was: art school juvenilia by an artist overflowing with ideas and still accruing experience (and funding). But it was already remarkable how good Lynch was at creating a nightmare world with limited resources, and how fresh it felt to combine that nightmare world with traditional Americana. The story of a search for familial love—and the loss of it.
You can watch it here http://bit.ly/aE47eC. Though this has a third of Eraserhead's length and kind of the same feel/ideas, Grandmother has the same amount of story in it and it is way more creepier. Lynch's fisrst little masterpiece.
The desire for human connection, when the reality of everyday life is reduced to a cacophony of physical and verbal abuse. The tragedy when your parents are absurd clowns, who rob their son his right to a decent life. The grandmother is a symbol for affection and warmth, and Lynch mixes that with ghostly faces and pitch black rooms. Ultimately, getting love and then losing that makes life a very surreal experience.