United States
                       Securities and Exchange Commission
                            Washington, D. C.  20549

                                   Form 10-Q

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


For the Quarterly Period Ended                          Commission File Number:
June 30, 1998                                                          0-15204 


                           National Bankshares, Inc.
-------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)


     Virginia                                                      54-1375874  
-------------------------------------------------------------------------------
(State or other jurisdiction of                             (I.R.S. Employer   
 incorporation or organization)                             Identification No.)


100 South Main Street
P.O. Box 90002
Blacksburg, Virginia                                                 24062-9002
-------------------------------------------------------------------------------
(Address of principal executive offices)                             (Zip Code)

(Registrant's telephone number, including area code)              (540)552-2011
                                                                  -------------

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


          Class                                  Outstanding at July 31, 1998  
-------------------------------               ---------------------------------
Common Stock, $2.50 Par Value                             3,792,833            



                        (This report contains 26 pages) <PAGE>
                   National Bankshares, Inc. and Subsidiaries

                                   Form 10-Q

                                     Index




                                                                        Page   
                                                                        ----   

PART I    FINANCIAL INFORMATION
--------------------------------

     Item 1 - Financial Statements

          Consolidated Balance Sheets, June 30, 1998
           and December 31, 1997                                         4-5   
                             
          Consolidated Statements of Income and
           Comprehensive Income, Three Months Ended 
           June 30, 1998 and 1997                                        6-7   
                                                                            
          Consolidated Statements of Income and 
           Comprehensive Income, Six Months Ended
           June 30, 1998 and 1997                                        8-9   

          Consolidated Statements of Changes in                
           Stockholders' Equity, Six Months Ended   
           June 30, 1998 and 1997                                         10   

          Consolidated Statements of Cash Flows,
           Six Months Ended June 30, 1998 and 1997                      11-12  

          Selected Consolidated Financial Data                          13-17  

     Item 2 - Management's Discussion and Analysis of 
          Financial Condition and Results of Operations                 18-23  


     Item 3 - Quantitative and Qualitative Disclosures About 
          Market Risk                                                     24   

PART II   OTHER INFORMATION
----------------------------

     Items 1 - 3 - Legal Proceedings; Changes in
          Securities; Defaults Upon Senior Securities                     25   

     Item 4 - Submission of Matters to a Vote of 
          Security Holders                                                25   

     Item 5 - Other Information                                           25   

     Item 6 - Exhibits and Reports on Form 8-K                            25   

SIGNATURES                                                                26   
----------



                                      -2-<PAGE>
                   National Bankshares, Inc. and Subsidiaries

                                     PART I

                             FINANCIAL INFORMATION

Item 1. Financial Statements

     The  consolidated  financial  statements  of  National  Bankshares,   Inc.
(Bankshares) and its wholly-owned subsidiaries, The National Bank of Blacksburg
(NBB) and  Bank of Tazewell County  (BTC), (the Company), conform  to generally
accepted  accounting principles  and to  general  practices within  the banking
industry.   The accompanying  interim period consolidated  financial statements
are  unaudited;  however,  in  the   opinion  of  management,  all  adjustments
consisting  of  normal recurring  adjustments which  are  necessary for  a fair
presentation  of the consolidated financial statements have been included.  The
results  of  operations  for  the  six  months ended  June  30,  1998  are  not
necessarily indicative  of results of operations for the full year or any other
interim  period.   The  interim  period consolidated  financial  statements and
financial  information included herein should  be read in  conjunction with the
notes to  consolidated  financial statements  included  in the  Company's  1997
Annual Report to Stockholders  and additional information supplied in  the 1997
Form 10-K.

     In  June  1997, the  Financial  Accounting Standards  Board  (FASB) issued
Statement of  Financial Accounting Standards No.  130, "Reporting Comprehensive
Income."   Statement  130 establishes  standards for  reporting and  display of
comprehensive income and its components (revenues,  expenses, gains and losses)
in  a full  set of  general purpose  financial statements.   Statement  130 was
issued  to  address  concerns  over  the  practice  of  reporting  elements  of
comprehensive income directly in equity.

     This Statement requires all items that are required to be recognized under
accounting standards as  components of  comprehensive income be  reported in  a
financial  statement that  is  displayed in  equal  prominence with  the  other
financial statements.  It does not require a specific format for that financial
statement  but requires that an enterprise display an amount representing total
comprehensive income for the  period in that financial statement.   Enterprises
are required to classify items of  "other comprehensive income" by their nature
in  the  financial  statement and  display  the  accumulated  balance of  other
comprehensive income separately from  retained earnings and additional paid-in-
capital in the equity section  of the balance sheet.   It does not require  per
share amounts  of comprehensive  income to be  disclosed.  The  Company adopted
Statement 130 on January 1, 1998.

     Other  comprehensive  income  at  present  arises  from  unrealized  gains
(losses)  on securities available  for sale.   The following table  shows other
comprehensive  income  arising from  unrealized  gains  (losses) on  securities
available for sale and the related income tax effects:

                                                    Six Months Ended
                                                        June 30,
         ($000's)                                    1998      1997
                                                     ----      ----
         Before tax amount                           $ 117        36  
         Tax (expense) benefit at 34%                  (40)      (12) 
                                                     -----      ----  
         Other comprehensive income, net of taxes    $  77        24  
                                                     =====      ====  



                                      -3-<PAGE>

                National Bankshares, Inc. and Subsidiaries
                       Consolidated Balance Sheets
                   June 30, 1998 and December 31, 1997
                               (Unaudited)
                                                 June 30,     December
 ($000's, except share and per share data)         1998       31, 1997
                                                 =========    ==========

 ASSETS
 Cash and due from banks                         $ 11,347        12,435 
 Interest-bearing deposits                         15,908         9,728 
 Federal funds sold                                 7,420         4,300 
 Securities available for sale                     88,515        65,582 
 Securities held to maturity (fair value
  $61,322 in 1998 and $85,005 in 1997)             60,673        84,392 
 Mortgage loans held for sale                         864           405 
 Loans:
    Real estate construction loans                 11,611         8,510 
    Real estate mortgage loans                     46,352        42,969 
    Commercial and industrial loans               105,994       101,379 
    Loans to individuals                           69,551        66,635 
                                                 --------       ------- 
             Total loans                          233,508       219,493 

    Less unearned income and deferred fees         (2,535)       (2,503)
                                                 --------       ------- 
             Loans, net of unearned income and
              deferred fees                       230,973       216,990 

    Less allowance for loan losses                 (2,544)       (2,438)
                                                 --------       ------- 
             Loans, net                           228,429       214,552 
                                                 --------       ------- 
 Bank premises and equipment, net                   5,909         5,739 
 Accrued interest receivable                        3,622         3,445 
 Other real estate owned, net                         286           421 
 Other assets                                       2,507         1,908 
                                                 --------       ------- 

             Total assets                        $425,480       402,907 
                                                 ========       ======= 
 LIABILITIES AND STOCKHOLDERS' EQUITY
 Noninterest-bearing demand deposits             $ 50,397        45,093 
 Interest-bearing demand deposits                  81,316        77,863 
 Savings deposits                                  47,892        46,773 
 Time deposits                                    185,463       175,138 
                                                 --------       ------- 
             Total deposits                       365,068       344,867 
                                                 --------       ------- 

 Other borrowed funds                                 478           485 
 Accrued interest payable                             754           722 
 Other liabilities                                  1,291           966 
                                                 --------       ------- 
             Total liabilities                    367,591       347,040 
                                                 --------       ------- 
 Common stock subject to ESOP put option            2,195         1,838 
                                                 --------       ------- 


                                      -4-                      (Continued)<PAGE>

 Stockholders' equity:
    Preferred stock of no par value. 
     Authorized 5,000,000 shares; none issued
     and outstanding                                  ---           --- 
    Common stock of $2.50 par value. Authorized
     5,000,000 shares; issued and outstanding
     3,792,833 shares                               9,482         9,482 
    Retained earnings                              48,136        46,191 
    Accumulated other comprehensive income            271           194 
    Common stock subject to ESOP put option        (2,195)       (1,838)
                                                 --------       ------- 
             Total stockholders' equity            55,694        54,029 

 Commitments and contingent liabilities
                                                 --------       ------- 
             Total liabilities and
              stockholders' equity               $425,480       402,907 
                                                 ========       ======= 











































                                      -5-<PAGE>
                National Bankshares, Inc. and Subsidiaries
        Consolidated Statements of Income and Comprehensive Income
                Three Months Ended June 30, 1998 and 1997
                               (Unaudited)
                                                    June 30,   June 30,
 ($000's, except per share data)                      1998       1997
                                                   =========   =========
 INTEREST INCOME
 Interest and fees on loans                          $ 5,443     4,820  
 Interest on interest-bearing deposits                   163        61  
 Interest on federal funds sold                          109       149  
 Interest on securities - taxable                      1,765     1,985  
 Interest on securities - nontaxable                     443       455  
                                                     -------    ------  
             Total interest income                     7,923     7,470  
                                                     -------    ------  
 INTEREST EXPENSE
 Interest on time deposits of $100,000 or more           592       570  
 Interest on other deposits                            2,863     2,674  
 Interest on borrowed funds                                3         6  
                                                     -------    ------  
            Total interest expense                     3,458     3,250  
                                                     -------    ------
            Net interest income                        4,465     4,220

 Provision for loan losses                                73       100  
                                                     -------    ------  
            Net interest income after provision
             for loan losses                           4,392     4,120  
                                                     -------    ------  
 NONINTEREST INCOME
 Service charges on deposit accounts                     308       283  
 Other service charges and fees                           46        49  
 Credit card fees                                        180       168  
 Trust income                                            177       198  
 Other income                                             43         8  
 Realized securities gains, net                           72         6  
                                                     -------    ------  
             Total noninterest income                    826       712  
                                                     -------    ------  
 NONINTEREST EXPENSE                                                    
 Salaries and employee benefits                        1,459     1,330  
 Occupancy and furniture and fixtures                    245       280  
 Data processing and ATM                                 210       140  
 FDIC assessment                                           6        11  
 Credit card processing                                  163       151  
 Goodwill amortization                                    10         8  
 Net costs of other real estate owned                    ---         1  
 Other operating expense                                 757       590  
                                                     -------    ------  
             Total noninterest expense                 2,850     2,511  
                                                     -------    ------  
 Income before income tax expense                      2,368     2,321  
 Income tax expense                                      666       650  
                                                     -------    ------  

             Net income                                1,702     1,671  







                                      -6-                      (Continued)<PAGE>
 Other comprehensive income, net of taxes:
  Unrealized gains (losses) on securities
  available for sale                                     (10)      452  
                                                     -------    ------  

             Comprehensive income                    $ 1,692    $2,123  
                                                     =======    ======  

             Net income per share                    $   .45    $  .44  
                                                     =======    ======  




















































                                      -7-<PAGE>
                National Bankshares, Inc. and Subsidiaries
        Consolidated Statements of Income and Comprehensive Income
                 Six Months Ended June 30, 1998 and 1997
                               (Unaudited)
                                                    June 30,   June 30,
 ($000's, except per share data)                      1998       1997
                                                   =========   =========
 INTEREST INCOME
 Interest and fees on loans                          $10,597     9,422  
 Interest on interest-bearing deposits                   337        81  
 Interest on federal funds sold                          178       231  
 Interest on securities - taxable                      3,514     3,983  
 Interest on securities - nontaxable                     868       918  
                                                     -------    ------  
             Total interest income                    15,494    14,635  
                                                     -------    ------  
 INTEREST EXPENSE

 Interest on time deposits of $100,000 or more         1,188     1,103  
 Interest on other deposits                            5,560     5,317  
 Interest on borrowed funds                                6        31  
                                                     -------    ------  
            Total interest expense                     6,754     6,451  
                                                     -------    ------  
            Net interest income                        8,740     8,184

 Provision for loan losses                                94       209  
                                                     -------    ------  
            Net interest income after provision
             for loan losses                           8,646     7,975  
                                                     -------    ------  
 NONINTEREST INCOME
 Service charges on deposit accounts                     583       561  
 Other service charges and fees                           99        99  
 Credit card fees                                        318       288  
 Trust income                                            353       380  
 Other income                                             54        48  
 Realized securities gains, net                           85        14  
                                                     -------    ------  
             Total noninterest income                  1,492     1,390  
                                                     -------    ------  
 NONINTEREST EXPENSE                                                    
 Salaries and employee benefits                        2,858     2,702  
 Occupancy and furniture and fixtures                    491       485  
 Data processing and ATM                                 406       253  
 FDIC assessment                                          15        14  
 Credit card processing                                  291       271  
 Goodwill amortization                                    17        15  
 Net costs of other real estate owned                     26         2  
 Other operating expense                               1,442     1,210  
                                                     -------    ------  
             Total noninterest expense                 5,546     4,952  
                                                     -------    ------  
 Income before income tax expense                      4,592     4,413  
 Income tax expense                                    1,282     1,212  
                                                     -------    ------  

             Net income                                3,310     3,201  





                                      -8-                      (Continued)<PAGE>
 Other comprehensive income, net of taxes:
  Unrealized gains (losses) on securities
  available for sale                                      77        24  
                                                     -------    ------  

             Comprehensive income                    $ 3,387     3,225  
                                                     =======    ======  

             Net income per share                    $   .87       .84  
                                                     =======    ======  




















































                                      -9-<PAGE>

                    National Bankshares, Inc. and Subsidiaries
            Consolidated Statements of Changes in Stockholders' Equity
                     Six Months Ended June 30, 1998 and 1997
                                   (Unaudited)





                                                             Common
                                                              Stock
                                                Accumulated  Subject
                                                   Other     To ESOP
     ($000's, except for per  Common  Retained Comprehensive   Put
      share data)              Stock  Earnings     Income    Option   Total
                              ======  =========  ==========  ======   =====
     Balances, December 31,
      1996                     $9,482   42,210       (248)   (1,643)  49,801 
     Net income                   ---    3,201        ---       ---    3,201 
     Unrealized gains                                                        
      (losses) on securities
      available for sale,
      net of tax                  ---      ---         24       ---       24 
     Dividend ($.33 per       
      share)                      ---   (1,251)       ---       ---   (1,251)
     Change in common stock
      subject to ESOP put
      option                      ---      ---        ---      (250)    (250)
                               ------   ------      -----    ------   ------ 

     Balances, June 30, 1997   $9,482   44,160       (224)   (1,893)  51,525 
                               ======   ======      =====    ======   ====== 


     Balances, December 31,
      1997                     $9,482   46,191        194    (1,838)  54,029 
     Net income                   ---    3,310        ---       ---    3,310 
     Unrealized gains
      (losses) on securities
      available for sale,
      net of tax                  ---      ---         77       ---       77 
     Dividend ($.36 per       
      share)                      ---   (1,365)       ---       ---   (1,365)
     Change in common stock
      subject to ESOP put
      option                      ---      ---        ---      (357)    (357)
                               ------   ------      -----    ------   ------ 
     Balances, June 30, 1998   $9,482   48,136        271    (2,195)  55,694 
                               ======   ======      =====    ======   ====== 






                                       -10-<PAGE>

                    National Bankshares, Inc. and Subsidiaries
                      Consolidated Statements of Cash Flows
                     Six Months Ended June 30, 1998 and 1997
                                   (Unaudited)

                                                         June 30,   June 30,
    ($000's)                                               1998       1997
                                                         =========  =========
    CASH FLOWS FROM OPERATING ACTIVITIES  
    Net Income                                            $3,310      3,201  

    Adjustments to reconcile net income to net cash                          
     provided by operating activities: 
         Provision for loan losses                            94        209  
         Provision for deferred income taxes                 (28)      (127) 
         Depreciation of bank premises and equipment         383        265  
         Amortization of intangibles                          68         29  
         Amortization of premiums and accretion of                
          discounts, net                                      28        (11) 
         Gains on bank premises and equipment 
          disposals                                          ---         (2) 
         Gains on calls of securities held to
          maturity, net                                      (85)       (14) 
         Net gains on other real estate owned                (19)       ---  
         (Increase) decrease in:
            Mortgage loans held for sale                    (459)       301  
            Accrued interest receivable                     (177)       (19) 
            Other assets                                    (449)        93  
         Increase (decrease) in:
            Accrued interest payable                          32        (32) 
            Other liabilities                                325       (576) 
                                                         -------    -------  
                   Net cash provided by operating
                    activities                             3,023      3,317  
                                                         -------    -------  
    CASH FLOWS FROM INVESTING ACTIVITIES
    Net (increase) decrease in federal funds sold         (3,120)     1,910  
    Net increase in interest-bearing deposits             (6,180)    (2,746) 
    Proceeds from calls and maturities of securities
     available for sale                                   14,936      4,741  
    Proceeds from calls and maturities of securities
     held to maturity                                     23,775     18,370  
    Purchases of securities available for sale           (37,747)    (2,852) 
    Purchases of securities held to maturity                 ---     (6,816) 
    Purchases of loan participations                      (2,910)    (1,149) 
    Collections of loan participations                     3,853      1,070  
    Net increase in loans made to customers              (15,159)   (15,222) 
    Proceeds from disposal of other real estate owned        194         29  
    Recoveries on loans charged off                          205         56  
    Bank premises and equipment expenditures                (553)      (350) 
    Proceeds from sale of bank premises and equipment        ---        ---  
                   Net cash used in investing 
                    activities                           (22,706)    (2,959) 
                                                         -------    -------  







                                       -11-                    (Continued)<PAGE>

    CASH FLOWS FROM FINANCING ACTIVITIES  
    Deposits assumed, net of premium paid                  7,025        ---  
    Net increase in time deposits                          5,541      2,104  
    Net increase in other deposits                         7,401        881  
    Net increase(decrease) in other borrowed funds            (7)       757  
    Cash dividends paid                                   (1,365)    (1,251) 
                                                         -------    -------  
                  Net cash provided by 
                   financing activities                   18,595      2,491  
                                                         -------    -------  
    Net increase(decrease) in cash and due from banks     (1,088)     2,849  
    Cash and due from banks at beginning of period        12,435      9,989  
                                                         -------    -------  
    Cash and due from banks at end of period             $11,347     12,838  
                                                         =======    =======  
    SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
    Interest paid                                        $ 6,722    $ 6,483  
                                                         =======    =======  
    Cash paid for income taxes                           $ 1,233    $ 1,585  
                                                          =======   =======  

    Loans charged to the allowance for loan losses       $   193    $   402  
                                                         =======    =======  
    Loans transferred to other real estate owned         $    40        ---  
                                                         =======    =======  




































                                       -12-<PAGE>

                    National Bankshares, Inc. and Subsidiaries
                           Selected Balance Sheet Data
                       June 30, 1998 and December 31, 1997



                                               June 30,    December 31,
          ($000's)                               1998          1997
                                              =========    ============

          SELECTED PERIOD-END DATA
          Loans, net                           $228,429      214,552
          Total securities                      149,188      149,974
          Total assets                          425,480      402,907
          Total deposits                        365,068      344,867
          Stockholders' equity                   55,694       54,029


          SELECTED DAILY AVERADES DATA
          Loans, net                           $220,437      204,540
          Total securities                      146,456      157,179
          Total assets                          408,837      395,932
          Total deposits                        349,106      339,439
          Stockholders' equity                   54,821       53,712































                                       -13-<PAGE>

                    National Bankshares, Inc. and Subsidiaries
               Selected Income Statement, Ratios and Per Share Data
                     Six Months Ended June 30, 1998 and 1997
                         And Year Ended December 31, 1997



                                                  June 30,        December 31,

   ($000's, except per share data)             1998      1997         1997
                                              ======    ======    ============

   Interest income                          $15,494      14,635       29,797  
   Interest expense                           6,754       6,451       13,106  
   Net interest income                        8,740       8,184       16,691  
   Provision for loan losses                     94         209          435  
   Noninterest income                         1,492       1,390        2,834  
   Noninterest expense                        5,546       4,952       10,031  
   Income taxes                               1,282       1,212        2,499  
   Net income                                 3,310       3,201        6,560  
   Return on average assets                    1.63%       1.65%        1.66% 
   Return on average equity (1)               11.75%      12.29%       12.21% 
   Net income per share                      $  .87         .84         1.73  
   Book value per share (1)                  $15.26       14.08        14.73  



(1)  Includes amount related to common stock subject to ESOP put option excluded
     from stockholders' equity on the Consolidated Balance Sheets.

























                                       -14-<PAGE>

                                National Bankshares, Inc. and Subsidiaries
                                Average Balances and Interest Yields/Rates
                                Six Months Ended June 30, 1998 and 1997 and
                                       Year Ended December 31, 1997

   <TABLE>

   <CAPTION>
   ($000's)                        June 30, 1998            June 30, 1997          December 31, 1997

                                Average      Yield/      Average      Yield/      Average     Yield/
                                Balance       Rate       Balance       Rate       Balance      Rate
                                =======     =======      =======      =======     =======     =======
   <S>                          <C>         <C>          <C>          <C>         <C>         <C>
   Interest-earning
    assets(1)                  $  386,664       8.35%       370,857       8.25%    374,478      8.24% 

   Interest-bearing                                  
    liabilities                   302,392       4.50%       294,720       4.41%    295,565      4.43%  
                                             -------                   -------                 -----   
   Net interest spread                          3.85%                     3.84%                 3.81%  
                                             =======                   =======                 =====   

   Net interest margin                          4.83%                     4.74%                 4.74%  
                                             =======                   =======                 =====   


(1)  The yield on interest-earning assets is shown on a fully tax equivalent basis.


</TABLE>
















                                                   -15-<PAGE>

                    National Bankshares, Inc. and Subsidiaries
             Nonperforming Assets, Past Due Loans and Impaired Loans
                   June 30, 1998 and 1997 and December 31, 1997



                                            June 30,    June 30,  December 31,
   ($000's)                                   1998        1997        1997
                                            =========  =========  ============
   NONPERFORMING ASSETS
    Nonaccrual loans                        $   42       $ 359           87   

    Restructured loans                         ---         ---          ---   
                                            ------      ------       ------   
        Total nonperforming loans               42         359           87   
                                            ------      ------       ------   

                                                                              
    Foreclosed property                        286         447          421   
                                            ------      ------       ------   
        Total nonperforming assets          $  328         806          508   
                                            ======      ======       ======   
    Ratio of nonperforming assets to
     loans, net of unearned income and
     deferred fees and foreclosed
     properties (excludes
     nonaccrual securities)                    .14%        .21%         .23%  
                                            ======      ======       ======   
   ACCRUING LOANS PAST DUE 90 DAYS OR MORE
    Past due 90 days or more and
     still accruing                         $  962         504          672   
                                            ======      ======       ======   
                                                                 
    Ratio of loans past due 90 days or
     more to loans, net of unearned
     income and deferred fees                  .42%        .24%         .31%  
                                            ======      ======       ======   
   IMPAIRED LOANS
    Total impaired loans                    $  572         464          177   
                                            ======      ======       ======   
    Impaired loans with a
     valuation allowance                       284         188           53   
    Valuation allowance                        (52)       (106)         (53)  
                                            ------      ------       ------   
    Impaired loans net of allowance         $  232          82          ---   
                                            ======      ======       ======   
    Impaired loans with no
     valuation allowance                    $  288         276          124   
                                            ======      ======       ======   
    Average recorded investment
     in impaired loans                      $  279         551          458   
                                            ======      ======       ======   
    Income recognized on impaired loans     $   26           6           23   
                                            ======      ======       ======   
    Amount of income recognized
     on a cash basis                        $  ---           6           12   
                                            ======      ======       ======   




                                       -16-<PAGE>

                    National Bankshares, Inc. and Subsidiaries
                   Allowance for Loan Losses and Loan Loss Data
                   June 30, 1998 and 1997 and December 31, 1997



                                              For the periods ended

                                       June 30,      June 30,    December 31,
    ($000's)                             1998          1997          1997
                                      =========     =========    ============

    Balance at beginning of period    $  2,438        2,575         2,575    
    Provision for loan losses               94          209           435    

    Loans charged off                     (193)        (402)         (679)   
    Recoveries                             205           56           107    
                                      --------      -------      --------    

    Balance at end of period          $  2,544        2,438         2,438    
                                      ========      =======      ========    

    Ratio of allowance for loan
     losses to end of period
     loans, net of unearned income
     and deferred fees                    1.10%        1.16%         1.12%   
                                      ========      =======      ========    
    Ratio of net charge-offs
     (recoveries) to average
     loans, net of unearned
     income and deferred
     fees (1)                            (.01%)         .35%          .23%   
                                      ========      =======      ========    

    Ratio of allowance for loan
     losses to nonperforming loans
     (2)                              6,204.88%      679.11%     2,802.30%   
                                      ========      =======      ========    

















(1) Net charge-offs are on an annualized basis.
(2) The Company defines nonperforming loans as total nonaccrual and restructured
    loans.  Excluded are loans 90 days past due and still accruing.



                                       -17-<PAGE>
                   National Bankshares, Inc. and Subsidiaries


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


    The  purpose  of this  discussion  is to  set forth  information  about the
financial  condition and results of operations of National Bankshares, Inc. and
its wholly-owned subsidiaries (the  Company), which are not  otherwise apparent
from the  consolidated financial statements  and other information  included in
this report.   Reference should be  made to the financial  statements and other
information included in this  report as well as the 1997 Annual Report and Form
10-K for an understanding of the following discussion and analysis.

    This  Quarterly Report  on Form  10-Q  contains forward-looking  statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of  the Securities Exchange  Act of 1934.   The Company's  actual results could
differ materially from those set forth in the forward-looking statements.

Results of Operations - for the six months ended June 30,1998
-------------------------------------------------------------

    Net income for  the six  months ended June  30, 1998  was $3,310,000  which
represents an increase of $109,000 or 3.41% over the first six months  of 1997.
The return on average  assets as of June 30,  1998 and June 30, 1997  was 1.63%
and 1.65%, respectively.  The return on average equity was 11.75% and 12.29% at
June 30, 1998 and 1997, respectively.

    Earnings per share at the end of the  second quarter of 1998 was $0.87  per
share, an increase of $0.03 per share over the second  quarter of 1997.  

    The  overall  improvement  in  net  income  was  primarily  the  result  of
continued growth in net interest income and a decline in the provision for loan
losses.   These factors were offset  to a degree by  increased costs associated
with data processing.

Net Interest Income
-------------------

    Net  interest income  at  the end  of  the  first six  months  of 1998  was
$8,740,000, an increase of $556,000 or 6.79% over the same period in 1997.  The
net interest margin increased to 4.83% from 4.74% as a result of an increase in
the yield  on interest-earning  assets of  10 basis  points during  that period
while the cost  to fund  interest-earning assets  increased by  1 basis  point.
Continued strong loan  growth was the primary cause of the  net increase in the
interest margin.

Provision for Loan Losses
-------------------------

    The provision  for loan  losses  for the  period ended  June 30,  1998  was
$94,000, a decrease of $115,000  from the same period  the previous year.   The
net charge-off (recovery) ratio at June 30, 1998 was (.01%).  Loans charged off
at  June 30,  1998  were  $193,000  compared  to $402,000  at  June  30,  1997.
Recoveries  of loans previously charged off at the  end of the first six months
of 1998 were $205,000 compared to $56,000 for the same period in 1997.





                                      -18-<PAGE>
    Management anticipates that additional provisions will be  needed in future
periods  to ensure an adequate allowance for loan losses, due in part to future
loan growth and factors related to portfolio composition.

    Overall asset  quality remains satisfactory  as indicated by  nonperforming
asset data shown elsewhere in this report.

Noninterest Income
------------------

    Noninterest income  for the period ended  June 30, 1998 was  $1,492,000, an
increase  of  $102,000 or  7.34%. The  primary cause  of  the increase  was net
securities gains  which were related  to calls on securities  held to maturity.
Credit card fees increased by  10.42%.  The increase  for 1998 reflects a  full
six months  income from this activity  whereas 1997 reflects  a partial period.
Trust income  was down  by $27,000 or  7.11%. Trust income  is governed  by the
types  and volume of activities in which it  engages. This can result in income
variances from time to time.

    Other categories, service  charges or  on deposits,  other service  charges
and other income displayed lesser variances.

Noninterest Expense
-------------------

    Noninterest expense  for the first  six months of  1998 was up 12.00%  when
compared to the same period  in 1997.  Salaries  and employee benefits were  up
$156,000 or 5.77% when the  first six months of  1998 and 1997 are compared.  A
substantial portion  of this increase was  due to the acquisition  of the Galax
branch discussed elsewhere in  this report.  Data processing  expense increased
by $153,000 over the  first six months of 1997. In the  fourth quarter of 1997,
the Company upgraded its data processing equipment and software which increased
depreciation and maintenance costs.  Also, in anticipation of a data processing
upgrade  at  BTC,  depreciation  was  accelerated  on  certain  data processing
equipment that would become obsolete upon conversion later in 1998.

    OREO expense  was up  $24,000  the primary  result of  an increase  in  the
valuation  allowance for other real estate owned.   The valuation allowance for
other real estate is  periodically adjusted to reflect market  conditions which
may affect net realizable values.

    Other  expenses at June 30,  1998 were $1,442,000,  an increase of $232,000
over the same period in 1997.  This was  due to normal increases in the various
categories.  This category contains various  cash basis expenses such as office
supplies and postage which may vary due to  the timing and amount of purchases.
The addition of the Galax Branch also contributed to the increase.

Results of Operations - for the three months ended June 30,1998
---------------------------------------------------------------

    Net income for  the three  months ended June  30, 1998  was $1,702,000  and
increase of $31,000 or 1.86% over the  same period in 1997.  Earnings per share
for  the second quarter  of 1998  was $0.45  compared to  $0.44 for  the second
quarter of 1997.








                                      -19-<PAGE>
Net Interest Income
-------------------

    Net  interest income for  the second quarter  of 1998  was $4,465,000 which
represents  an increase  of $245,000  or 5.81%  over the  same period  in 1997.
While interest  expense rose $208,000, interest  income rose by $453,000.   The
increase in interest income was largely attributable to loan growth.

Provision for Loan Losses
-------------------------

    The provision for loan losses for the  second quarter of 1998 was  $73,000,
a  decrease of  $27,000 when  compared to  the same  period the  previous year.
Reference  is  made  to  the  year-to-date  discussion  of  this  category  for
management plans concerning this area.

Noninterest Income
------------------

    Noninterest Income for  the second quarter of 1998 was $826,000 an increase
of $114,000 when compared to the second quarter of 1997.

    Net securities gains  and losses which  increased $66,000  accounted for  a
significant  portion of  the  increase.   Also,  included  in other  income  is
approximately $45,000 in gains on the sale of other real estate owned.

    Service  charges  on  deposit  increased  by  $25,000  while  trust  income
declined by  $21,000 partially off  setting that  increase.  Refer  to comments
related  to trust income in  the year-to-date analysis  for further information
related  to the trust business in general.   Credit card fees were up partially
due to volume and in part due to the debit card program mentioned previously.

Noninterest Expense
-------------------

    Total noninterest expenses for the  second quarter of 1998  was $2,850,000,
up $339,000 over the same period in 1997.

    Salaries  and  fringe  benefits  increased   by  $129,000  or  9.70%.     A
substantial   portion  of  the  current  quarter's  increase  was  due  to  the
acquisition  of the  Galax branch.    The remainder  was due  to normal  salary
increases and other normal increases.

    Data  processing expense  increased  by $70,000  in  the second  quarter of
1998.    In  late 1997  the  Company  undertook a  major  upgrade  of its  data
processing  system.   Increases in  expense were  largely associated  with this
project.

    Other expenses increased $167,000 when the  second quarter of 1998 and 1997
are compared.  Many of the accounts included in the category are on  cash basis
such as stationary and supplies, postage, and correspondent bank fees, etc. and
will  vary  from quarter  to  quarter.   Also  included  in  this category  are
franchise taxes  which increase yearly as  they are tied to  growth in capital.
Costs associated  with the  Galax branch such  as additional supplies  and core
deposit expense also contributed to the increase. 







                                      -20-<PAGE>
Balance Sheet
-------------

    Total  assets  at  June  30,   1998  were  $425,480,000,  an   increase  of
$22,573,000 or 5.60%  over year-end 1997.  Total deposits at June 30, 1998 were
$365,068,000 an  increase of $20,201,000 from year-end 1997.  At June 30, 1998,
the newly added  Galax branch  had approximately $10,011,000  in deposits,  the
majority of which were acquired upon purchase of the branch.  
    At June 30, 1998,  total loans net of unearned income were $230,973,000, an
increase of $13,983,000 or 6.44% over total loans at December 31, 1997.  Growth
as  can be  seen on  the balance  sheet occurred  in all  areas of  real estate
construction and commercial loans,  real estate loans and loans  to individuals
also continued to increase.

Asset Quality
-------------

    Nonperforming loans, which include nonaccrual loans  and restructured loans
but exclude loans past due 90 days and  still accruing, totaled $42,000 at June
30, 1998 compared to $87,000 at December 31, 1997.  Total foreclosed properties
were  $286,000 at June 30,  1998 a decline of  $135,000 from December 31, 1997.
The ratio  of net charge-offs  (recoveries) to  average loans, net  of unearned
income and deferred fees was (.01%) at June 30, 1998.  At year-end December 31,
1997, the ratio was .23%.  

    While asset quality trends are  generally favorable at present,  management
cannot  predict the duration  of the  current trend  as it  can be  affected by
changes in  the local  and national  economic conditions,  the impact  of which
cannot be precisely determined.

Liquidity
---------

    Liquidity is  the  ability  to  provide  sufficient  cash  levels  to  meet
financial commitments  and to fund  loan demand and  deposit withdrawals.   Net
cash provided by operating activities was $3,023,000 for the three months ended
June 30, 1998.  Net cash used  in investing activities was $22,706,000 with the
majority of  that cash  invested in securities  and loans.   Net  cash from  in
financing activities  was  $18,595,000.   Net  cash decreased  $1,088,000  from
December 31, 1997.

    The  Company actively manages its  liquidity position through its investing
activities.   At June  30, 1998, overnight  funds which includes  Federal Funds
sold and funds on deposit with  the Federal Home Loan Bank totaled $23,328,000.
In addition, securities with a remaining maturity of less than one year totaled
$22,670,000.    Liquidity is  also managed  through  the management  of deposit
liabilities  in particular, volatile funds such as time deposits over $100,000.
The  amount  of such  deposits is  largely dependent  on  the rate  of interest
offered.  The Company had approximately $31,987,000 in such deposits due within
twelve  months.   Other  types of  deposits  such as  interest-bearing  demand,
savings and  time deposits less than  $100,000 are less volatile  and less rate
dependent historically.

    Short  term liquidity  needs  can  also  be  satisfied  by  way  of  credit
facilities established with correspondent banks, the Federal Home Loan Bank and
Federal Reserve.  Longer term borrowings, if  necessary can be obtained through
the Federal Home Loan Bank.





                                      -21-<PAGE>
    Management  is  not aware  of any  trend,  commitment or  events  that will
result  in or that are  reasonably likely to result in  a decrease in liquidity
that  would be  adverse and  to a  degree that  operations would  be materially
impaired.

Capital Resources
-----------------

    Total stockholders' equity increased $1,665,000 or  3.08% from December 31,
1997.  During  the first half  of 1998, retained  earnings grew by  $1,945,000.
Accumulated comprehensive  income increased  stockholders'  equity by  $77,000.
This  category  is comprised  solely  of changes  in the  net  unrealized gains
(losses) on securities available for sale.  Common stock subject  to put option
increased by $357,000.  The common  stock subject to put option is  affected by
the current market price  of Bankshares' common stock as well as  the number of
shares outstanding.

    The following table sets  forth the various ratios by which bank capital is
measured.  Bankshares and its subsidiaries continue to be well capitalized.



                                             June 30,    December 31,
                                               1998          1997
                                            =========    ============
          Consolidated Capital Ratios
          ---------------------------
           Total capital (to risk
            weighted assets)                  22.56%        23.30%   
           Tier 1 Capital (to risk
            weighted assets)                  21.58%        22.30%   
           Tier 1 capital (to average
            assets, leverage ratio)           13.57%        13.70%   


Acquisition
-----------

    On  December 26,  1997,  NBB  entered into  an  agreement to  purchase  the
assets, including real  estate and improvements, and assume  the liabilities of
the  Galax, Virginia,  branch office  of First  American Federal  Savings Bank.
Settlement of  this purchase agreement  occurred on April  3, 1998 and  did not
have a material impact on the Company's results of operations or liquidity.

Year 2000
---------

    The Company  is cognizant  of the  risks  and challenges  presented by  the
impact of the  century date change on information processing and other computer
controlled systems.  The Year 2000 presents two related but distinct issues for
financial  institutions.   The  Company's internal  information processing  and
computer controlled  systems must  be Year 2000  compliant, and  the subsidiary
banks' compliance efforts are subject to regulatory review.  In addition, banks
face  credit risk  should their  commercial loans customers  suffer significant
business disruptions  as a result of  the impact of computer  failures in their
own operations or in those of their suppliers or customers.

    As a  normal part  of business operations,  the Company's subsidiaries  are
currently in the process of upgrading information processing systems which will
include the  acquisition of new  information processing hardware  and software.


                                      -22-<PAGE>
The primary goal of this project is to provide a  shared information processing
system for  affiliates, additional capacity  and the  ability to  use the  most
advanced software available from vendors.

    While the overall costs associated with  the upgrade are substantial, it is
not  anticipated  that the  Year 2000  component of  this  upgrade will  have a
material effect on the Company's consolidated financial statements.

Future Accounting Considerations
--------------------------------

    In March 1998, the  AICPA Accounting Standards Executive  Committee (AcSEC)
issued  Statement  of Position  98-1,"Accounting  for  the  Costs  of  Computer
Software Developed  or Obtained for Internal  Use."  SOP 98-1  is applicable to
all  nongovernmental entities and provides guidance on accounting for the costs
of computer software developed or obtained for internal use.   The SOP requires
that  certain  costs related  to the  development  or purchase  of internal-use
software  be capitalized and  amortized over the  estimated useful  life of the
software.  The SOP also requires that costs related to  the preliminary project
stage  and the post-implementation/operations stage (as defined in SOP 98-1) is
an internal-use computer software development project be expensed as incurred.

    SOP 98-1  is effective  for financial  statements issued  for fiscal  years
beginning after December 15, 1998.  Earlier application is encouraged in fiscal
years for  which annual  financial statements have  not been  issued.   Initial
application should be as of  the beginning of the fiscal year in  which the SOP
is  first adopted and  applied to costs  incurred for all  projects during that
fiscal  year,  including those  in progress  upon  initial application.   Costs
incurred prior to initial application  of the SOP, whether capitalized or  not,
should not be adjusted to the amounts that would have been  capitalized had the
SOP been in effect when those costs were incurred.

    In  late 1998,  BTC plans  to  complete an  upgrade  of information  system
hardware and software and expand its microcomputer network.

    However, the  Company does  not plan  to adopt  SOP 98-1  until January  1,
1999, therefore it is  not anticipated SOP 98-1 will have  a material effect on
the  consolidated financial position, results of operations or liquidity of the
Company.

    There  have been  no  other recent  accounting pronouncements  issued  that
would have a material effect on the consolidated financial position, results of
operations or liquidity of the Company.



















                                      -23-<PAGE>
                   National Bankshares, Inc. and Subsidiaries



Item 3.   Quantitative and Qualitative Disclosures About Market Risk

Derivatives

    The  Company is not a  party to derivative  financial instruments with off-
balance sheet risks such as futures, forwards, swaps and options.   The Company
is  a party  to  financial instruments  with off-balance  sheet  risks such  as
commitments   to  extend  credit,  standby  letters  of  credit,  and  recourse
obligations in the normal course of business to meet the financing needs of its
customers.   Management  does not  plan  any future  involvement  in high  risk
derivative  products.     The   Company  has  investments   in  mortgage-backed
securities,  collateralized mortgage  obligations,  structured notes  and other
similar instruments which  are included  in securities available  for sale  and
securities held to maturity.  The  fair value of these investments at June  30,
1998 approximated $8,606,000.

Interest Rate Sensitivity

    The Company's  securities  and  loans  and  its  deposits  are  subject  to
interest  rate  risk.    The  Company's  profitability  in  the near  term  may
temporarily  be affected, either positively by a falling interest rate scenario
or negatively by  a period of rising rates.  The  table below sets forth, as of
June 30, 1998,  the distribution  of repricing opportunities  of the  Company's
interest-earning assets  and  interest-bearing liabilities,  the interest  rate
sensitivity gap  (i.e.,  interest  rate  sensitive assets  less  interest  rate
sensitive  liabilities), and the cumulative interest rate sensitivity gap.  The
table  sets forth  the time  periods during  which interest-earning  assets and
interest-bearing  liabilities will  mature or  may reprice  in accordance  with
their contracted terms.

    Certain shortcomings  are inherent in the  method of  analysis presented in
the following table.  For example, although certain assets and liabilities  may
have similar  maturities or periods of  repricing, they may  react in different
degrees and at different times to changes in market interest rates.  Also, loan
prepayments  and early withdrawals of  certificates of deposit  could cause the
interest sensitivities to vary from those which appear on the table.


    ($000's)          <3 Months   6 Months  12 Months  1-5 Years   >5 Years
                      =========   ========  =========  =========   ========

    Interest-earning
     assets          $  86,983     22,836     45,080    128,563    120,891 

    Interest-bearing
     liabilities       164,299     28,725     54,884     45,211     22,030 
                      --------    -------    -------    -------    ------- 

    Gap                (77,316)    (5,889)    (9,804)    83,352     98,861 
                      ========    =======    =======    =======    =======

    Cumulative gap    $(77,316)   (83,205)   (93,009)    (9,657)    89,204 
                      ========    =======    =======    =======    ======= 






                                      -24-<PAGE>
                   National Bankshares, Inc. and Subsidiaries
                                    PART II
                               OTHER INFORMATION


Items 1-3.    Legal Proceedings;  Changes in  Securities; Defaults Upon  Senior
              Securities

              None for the three months ended
              June 30, 1998.

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

              Three Class 2 Directors of the Company were elected by a vote
              of the security holders for a term of three years each.

              (a) This matter was submitted  to a vote at the  Company's Annual
                  Meeting of Stockholders held on April 14, 1998.

              (b) The name of each director elected at the meeting follows:
                    Alonzo A. Crouse
                    James G. Rakes
                    Jeffery R. Stewart

                  The name  of each  director  whose term  of office  continued
                  after the meeting is listed:
                    Charles L. Boatwright
                    T.C. Bowen, Jr.
                    Robert E. Christopher, Jr.
                    Paul A. Duncan
                    William T. Peery

              (c) The  number  of votes  cast for  or  against each  nominee is
                  provided  below.   There  were  no  abstaining votes  and  no
                  broker non-votes.

                  Election of Directors

                  Director              Votes For      Votes Against
                  ========              =========      =============
                  Alonzo A. Crouse      3,273,006          14,912
                  James G. Rakes        3,285,276           2,642
                  Jeffrey R. Stewart    3,265,458          22,460

Item 5.       Other Information

              None

Item 6.       Exhibits and Reports on Form 8-K

              (a) Exhibit 27 - Financial Data Schedule

              (b) Reports on  Form 8-K filed during the three months ended June
                  30, 1998:

                  None






                                      -25-<PAGE>
                   National Bankshares, Inc. and Subsidiaries

                                   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.



                           National Bankshares, Inc.
                                  (Registrant)








   Date:    08/14/98          /s/James G. Rakes
          -------------       -----------------------------
                              James G. Rakes, President and
                              Chief Executive Officer





   Date:    08/14/98          /s/J. Robert Buchanan
          -------------       -----------------------------
                              J. Robert Buchanan, Treasurer
                              (principal financial officer)

























                                      -26-<PAGE>