================================================================================
                                  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 September 30, 2000


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


                         Commission file number 0-15204

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


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

     State or other jurisdiction of incorporation or organization - Virginia

        Internal Revenue Service - Employer Identification No. 54-1375874

          101 Hubbard Street, P.O. Box 90002, Blacksburg, VA 24062-9002

                                 (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  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 November 1, 2000
-------------------------------                  -------------------------------
Common Stock, $2.50 Par Value                               3,512,977


                         (This report contains 34 pages)

================================================================================


<PAGE>


                   National Bankshares, Inc. and Subsidiaries

                                    Form 10-Q

                                      Index



                                                                        Page
                                                                        ----

Part I      Financial Information
-----------------------------------------------

     Item     1 - Financial Statements

              Consolidated Balance Sheets, September 30, 2000
               and December 31, 1999                                     3-4

              Consolidated Statements of Income and
               Comprehensive Income, Three Months Ended
               September 30, 2000 and 1999                               5-6

              Consolidated Statements of income and
               Comprehensive Income, Nine Months Ended
               September 30, 2000 and 1999                               7-8

              Consolidated Statements of Changes in
               Stockholders' Equity, Nine Months Ended
               September 30, 2000 and 1999                                9

              Consolidated Statements of Cash Flows,
               Nine Months Ended September, 2000 and 1999               10-11

     Item     2 - Management's Discussion and Analysis of
               Financial Condition and Results of Operations            18-29

     Item     3 - Quantitative and Qualitative Disclosures
               About Market Risk                                        30-32

Part II     Other Information
-----------------------------------------

     Items    1 - 3 - Legal Proceedings; Changes in
               Securities and Use of Proceeds;
               Defaults Upon Senior Securities                            33

     Item     4 - Submission of Matters to a Vote of
               Security Holders                                           33

     Item     5 - Other Information                                       33

     Item     6 - Exhibits and Reports on Form 8-K

Signatures                                                                34
----------------




                                        2
<PAGE>




                   National Bankshares, Inc. and Subsidiaries
                           Consolidated Balance Sheets
                    September 30, 2000 and December 31, 1999

                                                 (Unaudited)       (Audited)
                                                September 30,     December 31,
($000's except share and per share data)             2000             1999
                                               ===============  ===============

Assets
Cash and due from banks                            $  9,301          13,311
Interest-bearing deposits                            18,003           9,219
Federal funds sold                                      100           2,800
Securities available for sale                       120,190         113,845
Securities held to maturity (fair value
 $21,010 in 2000 and $23,496 in 1999)                21,138          23,647
Mortgage loans held for sale                            122             229
Loans:
     Real estate construction loans                  18,307          14,669
     Real estate mortgage loans                      64,869          58,829
     Commercial and industrial loans                156,193         149,386
     Loans to individuals                            79,306          73,825
                                                ------------   -------------

          Total loans                               318,675         296,709
     Less unearned income and deferred fees          (2,409)         (1,916)
                                                -----------    ------------

          Loans, net of unearned income
           and deferred fees                        316,266         294,793
     Less: allowance for loan losses                 (3,732)         (3,231)
                                                -----------    ------------

          Loans, net                                312,534         291,562
                                                -----------    ------------

Bank premises and equipment, net                      8,388           8,506
Accrued interest receivable                           4,316           4,014
Other real estate owned, net                            467             447
Other assets                                          4,338           4,554
                                                -----------    ------------

          Total assets                             $498,897        $472,134
                                                ============   ============

Liabilities and stockholders' equity
Noninterest-bearing demand deposits                 $58,731          54,748
Interest-bearing demand deposits                     79,872          88,385
Savings deposits                                     42,129          44,834
Time deposits                                       248,540         219,220
                                                ------------   ------------

          Total deposits                            429,272         407,187
                                                ------------   ------------

Other borrowed funds                                 10,198          10,460
Accrued interest payable                                761             651
Other liabilities                                     1,097           1,113
                                                ------------   ------------

          Total liabilities                         441,328         419,411
                                                ------------   ------------



                                        3
<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 3,512,377 shares in 2000 and
      3,516,977 in 1999                               8,780           8,792
     Retained earnings                               51,309          47,384
     Accumulated other comprehensive (loss)          (2,520)         (3,453)
                                                 ----------    ------------

          Total stockholders' equity                 57,569          52,723
Commitments and contingent liabilities
                                                 -----------   ------------

          Total liabilities and
           Stockholders' equity                    $498,897        $472,134
                                                 ===========   ============



                                        4
<PAGE>



                   National Bankshares, Inc. and Subsidiaries
                Consolidated Statements of Income and Comprehensive Income
                      Three Months Ended September 30, 2000 and 1999
                                   (Unaudited)
                                               September 30,      September 30,
($000's except share and per share data)          2000                1999
                                              ===============   ===============

Interest income
Interest and fees on loans                          $7,160              6,237
Interest on interest-bearing deposits                  194                ---
Interest on federal funds sold                           2                ---
Interest on securities - taxable                     1,666              1,597
Interest on securities - nontaxable                    564                582
                                              -------------      -------------

          Total interest income                      9,586              8,416
                                              -------------      -------------

Interest expense
Interest on time deposits $100,000 or more             899                600
Interest on other deposits                           3,471              2,830
Interest on borrowed funds                             180                 76
                                              -------------      -------------

          Total interest expense                     4,550              3,506
                                              -------------      -------------

          Net interest income                        5,036              4,910
Provision for loan losses                              331                371
                                              -------------      -------------

          Net interest income after
           provision for loan losses                 4,705              4,539
                                              -------------      -------------

Noninterest income
Service charges on deposit accounts                    423                391
Other service charges and fees                          64                 72
Credit card fees                                       256                216
Trust income                                           206                277
Other income                                            22                ---
Realized securities gains (losses), net                  5                ---
                                              -------------      -------------

          Total noninterest income                     976                956
                                              -------------      -------------

Noninterest expense
Salaries and employee benefits                       1,548              1,486
Occupancy and furniture and fixtures                   317                313
Data processing and ATM                                241                242
FDIC  assessment                                        32                 12
Credit card processing                                 369                196
Goodwill amortization                                    9                  9
Net costs of other real estate owned                    33                 18
Other operating expenses                               742                749
                                              -------------      -------------

          Total noninterest expense                  3,291              3,025
                                              -------------      -------------

Income before income tax expense                     2,390              2,470
Income tax expense                                    (639)              (666)
                                              --------------     -------------

          Net income                                 1,751              1,804





                                        5
<PAGE>




Other comprehensive income (loss),net of taxes:
Unrealized gains (losses) on securities
 available for sale                                    856               (542)
                                              -------------      --------------

         Comprehensive income                       $2,607              1,262
                                              =============      =============

         Net income per share                        $0.50               0.51
                                              =============      =============

          Weighted average number of common
           shares outstanding                    3,512,615          3,516,977
                                              =============      =============




                                        6
<PAGE>




                   National Bankshares, Inc. and Subsidiaries
           Consolidated Statements of Income and Comprehensive Income
                  Nine Months Ended September 30, 2000 and 1999
                                   (Unaudited)

                                                September 30,      September 30,
($000's except share and per share data)             2000              1999
                                                ===============   ==============

Interest income
Interest and fees on loans                             $20,545          17,612
Interest on interest-bearing deposits                      369              77
Interest on federal funds sold                             128              11
Interest on securities - taxable                         5,004           5,203
Interest on securities - nontaxable                      1,670           1,698
                                                ---------------   -------------

          Total interest income                         27,716          24,601
                                                ---------------   -------------

Interest expense
Interest on time deposits $100,000 or more               2,351           1,846
Interest on other deposits                               9,834           8,408
Interest on borrowed funds                                 525               6
                                                ---------------   -------------

          Total interest expense                        12,710          10,260
                                                ---------------   -------------

          Net interest income                           15,006          14,341
Provision for loan losses                                  997             840
                                                ---------------   -------------

          Net interest income after
           provision for loan losses                    14,009          13,501
                                                ---------------   -------------

Noninterest income
Service charges on deposit accounts                      1,184             999
Other service charges and fees                             201             186
Credit card fees                                           760             594
Trust income                                               611             718
Other income                                               102              57
Realized securities gains (losses), net                      5              24
                                                ---------------   -------------

          Total noninterest income                       2,863           2,578
                                                ---------------   -------------

Noninterest expense
Salaries and employee benefits                           4,662           4,552
Occupancy and furniture and fixtures                       938             840
Data processing and ATM                                    705             657
FDIC assessment                                             74              36
Credit card processing                                     805             538
Goodwill amortization                                       28              28
Net costs of other real estate owned                        59              24
Other operating expenses                                 2,105           2,222
                                                ---------------   -------------

          Total noninterest expense                      9,376           8,897
                                                ---------------   -------------

Income before income tax expense                         7,496           7,182
Income tax expense                                      (2,024)         (1,899)
                                               ---------------   -------------

          Net income                                     5,472           5,283




                                        7
<PAGE>




Other comprehensive income (loss),net of taxes:
Unrealized gains (losses) on securities
 available for sale                                        933          (3,509)
                                                ---------------   --------------

         Comprehensive income                           $6,405           1,774
                                                ===============   =============

         Net income per share                            $1.56            1.45
                                                ===============   =============

          Weighted average number of common
           shares outstanding                        3,515,337       3,638,232
                                                ===============   =============




                                        8
<PAGE>


<TABLE>

                   National Bankshares, Inc. and Subsidiaries
           Consolidated Statements of Changes in Stockholders' Equity
                  Nine Months Ended September 30, 2000 and 1999
                                   (Unaudited)

<CAPTION>

                                                                            Common
                                                                             Stock
                                                         Accumulated        Subject
                                                            Other           To ESOP
($000's, except for per           Common    Retained     Comprehensive       Put
 share data)                      Stock     Earnings        Income          Option        Total
                                ===============================================================
<S>                             <C>         <C>          <C>                <C>           <C>    <C>

Balances, December 31, 1998       $9,482      50,182         1,019          (2,180)      58,503

Net income                           ---       5,283           ---              ---       5,283

Unrealized gains
 (losses) on securities
 available for sale,
 net of tax (1)                      ---         ---        (3,509)             ---      (3,509)

Dividend ($0.39 per share)           ---      (1,372)          ---              ---      (1,372)

Stock tender offer (2)              (690)     (7,071)          ---              ---      (7,761)

Change in common stock
 subject to ESOP put
 option                              ---         ---           ---              (2)          (2)
                                -----------------------------------------------------------------

Balances, September 30, 1999      $8,792      47,022        (2,490)         (2,182)      51,142
                                ================================================================

Balances, December 31, 1999       $8,792      47,384        (3,453)             ---      52,723

Net income                           ---       5,472           ---              ---       5,472

Unrealized gains
 (losses) on securities
 Available for sale,
 net of tax (1)                      ---         ---           933              ---         933

Dividend ($0.42 per share)           ---      (1,477)          ---              ---      (1,477)

Stock repurchase (3)                 (12)        (70)          ---              ---         (82)

Change in common stock
 Subject to ESOP put
 option                              ---         ---           ---              ---          ---
                                -----------------------------------------------------------------

Balances, September 30,2000       $8,780      51,309        (2,520)             ---      57,569
                                ================================================================

(1)   Tax expense of $481 in 2000 and tax benefit of $1,808 for 1999.
(2)   Represents the repurchase of 275,856 shares at $28.00 per share and related
      expenses.
(3)   Represents  the  repurchase  of 2,000  shares at $18.50 per  share,  2,000
      shares at $17.50 per share,  300 shares at $16.38 per share and 300 shares
      at $16.50 per share.

</TABLE>


                                        9
<PAGE>



                   National Bankshares, Inc. and Subsidiaries
                      Consolidated Statements of Cash Flows
                  Nine Months Ended September 30, 2000 and 1999
                                   (Unaudited)

                                                    September 30,  September 30,
($000's)                                                2000           1999
                                                    =============  =============

Cash flows from operating activities
Net income                                              $5,472         5,283

Adjustments   to  reconcile  net  income  to  net  cash  Provided  by  operating
 activities:
     Provision for loan losses                             997           840
     Depreciation of bank premises and equipment           750           655
     Amortization of intangibles                           114           114
     Amortization of premiums and accretion of
      discount, net                                        107           361
     Gains on sales of bank premises and equipment          (6)          ---
     (Gains)losses on sales and calls of securities
      available for sale, net                                4           (24)
     Gains on sales and calls of securities
      held to maturity, net                                (9)           ---
     Losses on other real estate owned                      22            14
      (Increase) decrease in:
        Mortgage loans held for sale                        107        1,610
        Accrued interest receivable                       (289)         (186)
        Other assets                                      (379)         (143)
     Increase(decrease)in:
        Accrued interest payable                           110            45
        Other liabilities                                  (16)          187
                                                     -----------  -----------

          Net cash provided by operating
           activities                                    6,984         8,756
                                                     ----------   -----------

Cash flows from investing activities
Net decrease in federal funds sold                       2,700         4,940
Net (increase)in interest-bearing
 deposits                                               (8,784)         (293)
Proceeds from calls and maturities of securities
 available for sale                                      5,970        23,903
Proceeds from sales of securities available for
 Sale                                                      751         1,218
Proceeds from calls and maturities of securities
 held to maturity                                        2,498         5,464
Purchases of securities available for sale             (11,754)      (11,944)
Purchases of loan participations                        (1,528)       (6,763)
Collections of loan participations                         620        11,045
Net increase in loans to customers                     (21,276)      (52,362)
Proceeds from disposal of other real estate owned          252           336
Recoveries on loans charged off                            (79)           45
Purchase of bank premises and equipment                   (638)       (2,368)
Proceeds from disposal of bank premises and equipment       10           ---
                                                     ----------   -----------

          Net cash used in investing
           activities                                  (31,258)      (26,779)
                                                     ---------    -----------




                                       10
<PAGE>




Cash flows from financing activities
Net increase in time deposits                           29,320        22,974
Net increase(decrease)deposits                          (7,235)        1,315
Net (decrease)in other borrowed funds                     (262)          345
Dividend paid                                           (1,477)       (1,372)
Repurchase of common stock                                 (82)       (7,761)
                                                     ----------   -----------

          Net cash provided by financing
           activities                                   20,264        15,501
                                                     ----------   -----------

Net decrease in cash and due from banks                 (4,010)       (2,522)
Cash and due from banks at beginning of period          13,311        14,421
                                                     ----------   -----------

Cash and due from banks at end of period                $9,301        11,899
                                                     ==========   ===========


Supplemental disclosure of cash flow information

Cash paid for interest                                 $12,600       $10,215
                                                     ==========   ===========

Cash paid for income taxes                              $2,395        $2,154
                                                     ==========   ===========

Loans charged to the allowance for loan losses            $575          $646
                                                     ==========   ===========

Loans transferred to other real estate owned              $294           $62
                                                     ==========   ===========




                                       11
<PAGE>



                   National Bankshares, Inc. and Subsidiaries

                   Notes to Consolidated Financial Statements

                               September 30, 2000
                                   (Unaudited)


Note (1)

      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 nine months ended September 30, 2000 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  1999 Annual Report to  Stockholders  and
additional information supplied in the 1999 Form 10-K.




                                       12
<PAGE>



Note (2)    Allowance for Loan Losses, Nonperforming Assets and Impaired Loans

                                                    For the periods ended
                                          September 30,           December 31,
                                        2000         1999       1999       1998
                                       =========================================
($000's, except for % data)
Balance at beginning of period         $   3,231     2,679      2,679     2,438

Provision for loan losses                    997       840      1,400       624

Loans charged off                           (575)     (646)      (978)     (638)

Recoveries                                    79        45        130       255
                                       -----------------------------------------

Balance at the end of period              $3,732     2,918      3,231     2,679
                                       =========================================

Ratio of allowance for loan losses to
the end of period loans net of unearned
income and deferred fees
                                           1.18%     1.02%      1.10%     1.12%
                                       =========================================

Ratio of net charge-offs (recoveries)
to average loans, net of unearned
income and deferred fees(1)
                                            .22%      .31%       .31%      .17%
                                       =========================================

Ratio of allowance for loan losses to
nonperforming loans(2)
                                       1,719.82% 4,421.21%  1,691.62% 9,567.86%
                                       =========================================

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

                                            September 30,         December 31,
                                           2000       1999      1999      1998
                                          ======================================
($000's, except for % data)

Nonperforming Assets

 Nonaccrual loans                           $217         67      151        28

 Restructured loans                          ---        ---       40       ---
                                          -------------------------------------

     Total nonperforming loans               217         67      191        28

Foreclosed property                          467        340      447       628
                                          -------------------------------------

     Total nonperforming assets             $684        407      638       656
                                          =====================================

Ratio of nonperforming assets to loans,
net of unearned income and deferred fees,
plus other real estate owned                .22%       .14%     .22%      .27%
                                          =====================================



                                       13
<PAGE>




Accruing Loans Past Due 90 Days or More

 Past due 90 days or more and
  still accruing                            $465      2,755    1,077       550
                                          =====================================

 Ratio of loans past due 90 days or
  more to loans, net of unearned
  income and deferred fees                  .15%       .96%     .37%      .23%
                                          =====================================

Impaired Loans

 Total impaired loans                       $603         67      317       373
                                          =====================================

 Impaired loans with a
  valuation allowance                       $267        ---      222       145
 Valuation allowance                        (230)       ---     (154)     (145)
                                          -------------------------------------

 Impaired loans net of allowance             $37        ---       68       ---
                                          =====================================

 Impaired loans with no
  valuation allowance                       $336         67       95       228
                                          =====================================

 Average recorded investment
  in impaired loans                         $543        107      292       387
                                          =====================================

 Income recognized on impaired
  Loans                                      $31        ---       13        32
                                          =====================================

 Amount of income recognized
  on a cash basis                            ---        ---      ---       ---
                                          =====================================





                                       14
<PAGE>



Note (3) Securities

      The amortized costs,  gross unrealized gains,  gross unrealized losses and
fair values for  securities  available for the sale by major security type as of
September 30, 2000 are as follows:

                                             September 30, 2000

                                            Gross         Gross
                            Amortized     Unrealized    Unrealized       Fair
($ in thousands)              Costs         Gains         Losses        Values
                         -------------------------------------------------------

Available for sale:

  U.S. Treasury              $  6,246          11             38          6,219
  U.S. Government
   agencies and
   corporations                53,312          22          2,464         50,870
  State and political
   subdivisions                35,958         212            692         35,478
  Mortgage-backed
   securities                  12,158           1            221         11,938
  Corporate debt
   securities                  14,342           5            655         13,692
  Federal Home Loan
   Bank stock                   1,328         ---            ---          1,328
  Other securities                665         ---            ---            665
                         -------------------------------------------------------

     Total securities
      available for sale     $124,009         251          4,070        120,190
                         =======================================================

      The amortized costs,  gross unrealized gains,  gross unrealized losses and
fair  values  for  securities  held to  maturity  by major  security  type as of
September 30, 2000 are as follows:

                                             September 30, 2000

                                            Gross         Gross
                            Amortized     Unrealized    Unrealized       Fair
($ in thousands)              Costs         Gains         Losses        Values
                         -------------------------------------------------------

Held to Maturity:

  U.S. Government
   agencies and
   corporations              $  5,501         ---            243          5,258
  State and political
   subdivisions                15,331         120              9         15,442
  Mortgage-backed
   securities                     306           4            ---            310
                         -------------------------------------------------------

     Total securities
      held to maturity        $21,138         124            252         21,010
                         =======================================================




                                       15
<PAGE>



Note (4) Restrictions on Dividend Payments and Capital Requirements

      Bankshares' and its subsidiaries'  actual  regulatory  capital amounts and
ratios are also presented in the following tables:

                                                                      To Be Well
                                                               Capitalized Under
                                             For Capital      Prompt Corrective
                                          Adequacy Purposes   Action Provisions
($ in thousands)      Amount     Ratio    Amount      Ratio   Amount      Ratio
                     -----------------------------------------------------------

September 30, 2000:
  Total capital(1)
  Bankshares
   Consolidated       $62,962    17.3%    27,406       8.0%    N/A        N/A
  NBB                  32,145    14.7%    17,550       8.0%   21,937      10.0%
  BTC                  28,394    23.3%     9,768       8.0%   12,210      10.0%
  Tier I capital(1)
  Bankshares
   Consolidated       $59,230    18.4%    13,703       4.0%    N/A        N/A
  NBB                  29,815    13.6%     8,775       4.0%   13,162       6.0%
  BTC                  26,992    22.1%     4,884       4.0%    7,326       6.0%
  Tier I capital(2)
  Bankshares
   Consolidated       $59,230    12.0%    19,825       4.0%    N/A        N/A
  NBB                  29,815    10.2%    11,710       4.0%   14,638       5.0%
  BTC                  26,992    13.5%     8,018       4.0%   10,022       5.0%

(1)   To Risk Weighted Assets
(2)   To Average Assets



                                       16
<PAGE>




                                                                      To Be Well
                                                               Capitalized Under
                                             For Capital      Prompt Corrective
                                          Adequacy Purposes   Action Provisions
($ in thousands)      Amount     Ratio    Amount      Ratio   Amount      Ratio
                    ------------------------------------------------------------

December 31, 1999:
  Total capital(1)
  Bankshares
   Consolidated       $58,433    18.3%    25,552       8.0%    N/A        N/A
  NBB                  29,320    14.1%    16,682       8.0%   20,853      10.0%
  BTC                  26,630    23.7%     8,998       8.0%   11,247      10.0%
  Tier I capital(1)
  Bankshares
   Consolidated       $55,202    17.3%    12,776       4.0%    N/A        N/A
  NBB                  27,222    13.1%     8,341       4.0%   12,512       6.0%
  BTC                  25,497    22.7%     4,499       4.0%    6,748       6.0%
  Tier I capital(2)
  Bankshares
   Consolidated       $55,202    11.7%    18,957       4.0%    N/A        N/A
  NBB                  27,222     9.8%    11,135       4.0%   13,919       5.0%
  BTC                  25,497    12.7%     8,019       4.0%   10,023       5.0%

(1)   Risk Weighted Assets
(2)   To Average Assets


      Substantially  all of  Bankshares'  retained  earnings  are  undistributed
earnings  of  its  banking   subsidiaries,   which  are  restricted  by  various
regulations  administered  by federal and state bank regulatory  agencies.  Bank
regulatory  agencies  restrict,  without  prior  approval,  the  total  dividend
payments of a bank in any  calendar  year to the bank's  retained  net income of
that year to date,  as defined,  combined  with its  retained  net income of the
preceding two years,  less any required  transfers to surplus.  At September 30,
2000,  retained net income from the Company's  NBB  affiliate  which was free of
such restriction amounted to approximately $2,656.

      At present,  no dividends are  available  from the Company's BTC affiliate
without prior regulatory  approval.  BTC remains well capitalized and management
does not believe that such approvals will be withheld.




                                       17
<PAGE>



                   National Bankshares, Inc. and Subsidiaries


Item 2.     Management's Discussion and Analysis of Financial Condition and
             Results of Operations (In thousands, except for per share data)

      The  purpose  of this  discussion  is to  provide  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 1999 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.

Analysis of  Financial  Condition and  Results of Operations for the Nine Months
Ended September 30, 2000
--------------------------------------------------------------------------------
      Net income for the nine months ended  September  30, 2000 was $5,472 which
represents an increase of $189 or 3.58% over the first nine months of 1999.  The
annualized  return on assets for the nine months  ended  September  30, 2000 was
1.51% and 1.59% for the period ended  September 30, 1999. The annualized  return
on average equity was 13.33% for the period ended  September 30, 2000 and 12.36%
for the period ended September 30, 1999.

      Earnings per share for the period ended  September  30, 2000 was $1.56 per
share, an increase of $0.11 per share over the same period in 1999.

The following table provides selected consolidated financial data.

                                      September 30,             December 31,
($000's, except per share and        2000       1999         1999        1998
 percent data)                   ===============================================

Interest income                    $27,716     $24,601       33,603      31,828
Interest expense                    12,710      10,260       14,203      13,928
Net interest income                 15,006      14,341       19,400      17,900
Provision for loan losses              997         840        1,400         624
Noninterest income                   2,863       2,578        3,512       3,174
Noninterest expense                  9,376       8,897       11,868      11,061
Income taxes                         2,024       1,899        2,556       2,591
Net income                          $5,472       5,283        7,088       6,798
Return on average assets             1.51%       1.59%         1.56%       1.61%
Return on average equity (1)        13.33%      12.36%        12.61%      11.66%
Basic net income per share           $1.56        1.45         1.96        1.79
Book value per share                $16.39       15.16        14.99       16.00

(1)   Includes  amount  related  to  common  stock  subject  to ESOP put  option
      excluded from stockholders'  equity on the Consolidated Balance Sheets for
      the year ended  December 31, 1998 and three month  period ended  September
      30, 1999.



                                       18
<PAGE>



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

      Net  interest  income  at the end of the  first  nine  months  of 2000 was
$15,006, an increase of $665 or 4.64% over the same period in 1999.

      The net  interest  margin is one of the  primary  ratios  used by banks to
measure net interest income. The net interest margin is composed of the yield on
earning  assets on a fully tax  equivalent  basis less the cost to fund  earning
assets. The funding cost factors in interest bearing deposits as well as capital
and demand  deposits.  The following table sets forth the Company's net interest
margin for the period specified.

                                 September 30,                December 31,
                              2000           1999           1999          1998
                            ----------------------------------------------------
Yield on earning assets       8.35%         8.12%          8.18%         8.25%
Cost to fund earning assets   3.70%         3.25%          3.33%         3.50%
                            ----------------------------------------------------

Net interest margin           4.65%         4.87%          4.85%         4.75%
                            ====================================================

      As can be seen by the table shown above,  the yield on earning  assets for
the nine months ended  September  30, 2000 has increased by 23 basis points from
the year-ended  September 30, 1999. The cost to fund earning assets increased by
45 basis points. These elements combined to produce a 22 basis point decrease in
the net interest margin.

      The yield on earning  assets  increased in part due to earning assets that
repriced upward as a result of the rising interest rate environment. The cost to
fund earning assets also increased due to rising rates.

      A second measure of net interest  income is the net interest  spread.  The
ratio consists of the yield on earning  assets on a fully tax  equivalent  basis
less the cost of interest bearing  liabilities.  It does not reflect the benefit
received  from  "free  funds"  provided  by demand  deposits  and  capital.  The
following  table sets forth the  Company's  net interest  spread for the periods
shown.

                                September 30,                December 31,
                             2000           1999           1999          1998
                           -----------------------------------------------------
Yield on earning assets      8.35%         8.12%          8.18%         8.25%
Cost of interest-bearing
 Liabilities                 4.56%         4.15%          4.18%         4.48%
                           -----------------------------------------------------

Net interest spread          3.79%         3.97%          4.00%         3.77%
                           =====================================================

      As  previously  mentioned,  the yield on earning  assets  increased due to
upward  repricing of earning assets.  The cost of interest  bearing  liabilities
increased by 38 basis points and directly  reflects  increased funding costs due
to the current rising rate environment.

      Competitive  factors in the Company's  market area, the need for funds and
the higher rate  environment  will continue to produce higher funding costs. The
effects  of  increased  funding  costs  will be offset to a degree by the upward
repricing of earning assets.



                                       19
<PAGE>




Provision and Allowance for Loan Losses
---------------------------------------

      The  adequacy of the  allowance  for loan losses is based on  management's
judgement  and  analysis  of  current  and  historical  loss  experience,   risk
characteristics  of the loan  portfolio,  concentrations  of  credit  and  asset
quality, as well as other internal and external factors such as general economic
conditions.

      An internal credit review department performs pre-credit analyses of large
credits and also conducts credit review activities that provide  management with
an early warning of asset quality deterioration. Changing trends in the loan mix
are also evaluated in determining the adequacy of the allowance for loan losses.

      The ratio of the allowance for loan losses to loans net of unearned income
was 1.18% at September  30, 2000.  This compares to 1.02% at September 30, 1999.
The  provision  for the first nine months of 2000 was $997 up $157 over the same
period the prior year. It is anticipated that the provision for 2000 will exceed
that of 1999. The increase over 1999 is due to loan growth.

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

      Noninterest  income is an important source of the Company's  income.  This
category is  comprised of service  charges on deposit  accounts,  other  service
charges  and  fees,  credit  card  fees,  trust  income  and other  income.  Net
securities gains and losses are also included in this category.

      Noninterest  income for the period ended September 30, 2000 was $2,863, an
increase of $285 or 11.06% over the same period in 1999.

      Service charges on deposit  accounts were $1,184 at September 30, 2000, an
increase of $185 or 18.52%  from the same period in 1999.  The change was due to
an increased level of volume, more aggressive collections and certain changes in
service charge structure.

      Other service  charges  increased by $15 when  September 30, 2000 and 1999
are compared. This increase was due to volume.

      Credit card fees increased by $166 or 27.95% when the first nine months of
2000 and 1999 are compared.  Continued growth in volume was the primary cause of
this increase.

      Trust income decreased by 14.90% when compared to the first nine months of
1999.  Trust income is dependent  on market  conditions  as well as the types of
accounts being handled at any given point in time. The level of estate business,
for example, cannot be predicted with any degree of preciseness.





                                       20
<PAGE>



      Other income, which is comprised of various miscellaneous types of income,
increased by $45 for the first nine months of 2000.

      Net  securities  gains  and  losses  decreased  $19 when 2000 and 1999 are
compared.  The income in this category  primarily  reflects  gains and losses on
securities called prior to maturity.

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

      Noninterest  expenses  for the first nine months of 2000 were  $9,376,  an
increase  of $479 or 5.38%  over the first  nine  months of 1999.  This  nominal
increase  was  due in part  to  management's  efforts  to  contain  controllable
expenses.

      Salaries  and  fringe  benefits  were  $4,662 at the end of the first nine
months of 2000. This represents an increase of $110 or 2.42% over the first nine
months of 1999.

      Occupancy  expenses  increased by $98 or 11.67% when the first nine months
of 2000 and 1999 are compared. This increase was in part due to expenses related
to the new corporate  office and banking facility opened in the third quarter of
1999.

      Data processing expense increased by $48 or 7.31%. This increase is due to
rising  maintenance  contracts.  Increased  expenses related to internet banking
services at the Company's NBB affiliate were also a factor.

      Credit card  expense  increased by $267 or 49.63% in the first nine months
of 2000.  Increases in overall volume contributed to this increase.  Included in
credit card expenses is  approximately  $156 in losses incurred by the Company's
NBB  affiliate  in the third  quarter.  The loss was the result of  charged-back
items from a single  merchant.  While the full  extent of loss to be incurred is
not known at this time,  management  estimates  the loss to  ultimately  be in a
range of $156 to $195.  As previously  mentioned,  $156 was charged to operating
expense in the third quarter.  It is expected that this matter will be concluded
in the fourth quarter.

      Other  expenses at  September  30, 2000 were  $2,105,  which  represents a
decrease of $117 or 5.27% over the same period in 1999.  Other expenses  include
various types of costs.  Examples of expense  accounts  included are  telephone,
franchise  taxes,  stationary  and supplies,  marketing  expense,  correspondent
charges and numerous others.

      The  decrease  experienced  so far in  2000  was  due  to a  reduction  in
controllable  expenses  such as marketing  and business  development.  Franchise
taxes,  normally  considered  to be a  noncontrollable  expense  also  decreased
significantly.  In mid 1999  capital  was  dividended  to NBI for the purpose of
repurchasing its own common stock. Accordingly, franchise taxes, which are based
on bank capital, decreased.



                                       21
<PAGE>



Balance Sheet
-------------

The following table sets forth selected consolidated balance sheet data.

                                      September 30,              December 31,
                                   2000         1999        1999         1998
                                 ==============================================
($000's)
Selected Period-End Data
--------------------------------

Loans, net                       $312,534      283,711     291,562      236,578

Total securities                  141,328      142,459     137,492      166,754

Total assets                      498,897      462,673     472,134      445,166

Total deposits                    429,272      406,985     407,187      382,696

Stockholders' equity (1)           57,569       51,142      52,723       58,503

Selected Daily Averages Data
------------------------------

Loans, net                       $301,836      259,934     266,431      225,613

Total securities                  140,575      155,252     151,424      152,432

Interest-bearing assets           457,852      421,457     426,753      398,340

Total assets                      482,966      445,384     454,189      420,988

Total deposits                    416,040      385,959     391,583      359,970

Interest-bearing liabilities      371,148      330,576     340,111      310,634

Stockholders' equity               54,679       54,944      56,196       58,282


      Total average assets at September 30, 2000 were  $482,966,  an increase of
$28,777 or 6.34% from December 31, 1999.

      In the  third  quarter  of 1999,  the  Office of the  Controller  Currency
announced  the  closure of a national  banking  institution  in  Keystone,  West
Virginia.  As a result of the  closure,  depositors  in that area were forced to
seek banking  relationships  with other  institutions  in the general area.  The
Company's BTC affiliate was a benefactor of this event.

      Deposits have also increased  when compared to December 31, 1999.  This is
the  direct  result  of  intensified  deposit  procurement  activities.  Deposit
gathering  activities will continue to receive  special  attention in the coming
months, in order to satisfy various needs for liquidity.

(1)  September  30, 1999 and December 31, 1998 figures are shown net of the ESOP
put option, ($2,180) and ($2,182), respectively.



                                       22
<PAGE>


Liquidity
---------

      Liquidity  is the  ability  to  provide  sufficient  cash  levels  to meet
financial commitments and to fund loan demand and deposit withdrawals. Cash from
operating  activities  was  $6,984  primarily  due to  earnings.  Cash  used  in
investing activities totaled $31,258.  Primary uses were purchases of securities
available  for sale and net  loans to  customers.  Offsetting  funds  used  were
reduction in federal funds sold and maturities and calls of securities.

      Cash from financing activities was $20,264.  This balance was comprised of
the previously mentioned efforts to obtain deposits.

      While  efforts  to  secure  additional   deposits  have  been  successful,
liquidity  continues to be negatively  affected by the securities  available for
sale  portfolio.  At present  the  portfolio  contains a  substantial  amount of
callable  securities.  Originally  anticipated  calls have not  occurred  due to
interest rate levels.  It remains unknown as to when interest rate levels may be
such that call features would activate.

      In the meantime,  the Company has utilized several credit  facilities such
as the Federal Home Loan Bank, Federal Reserve discount window and federal funds
lines available to meet liquidity needs.

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

      Total  stockholders'  equity  increased  $4,846 or 9.19% from December 31,
1999.  The  principal  reason  for  the  increase  was net  income.  Accumulated
comprehensive  loss  decreased  $933  during  the first  nine  months of 2000 to
$(2,520).  Offsetting  decreases  were the payment of a dividend  $1,477 and the
repurchase of 4,600 shares of common stock for $82.

Stock Repurchase
----------------

      On May 17, 2000 it was  announced  that the Board of Directors  authorized
management to buy up to 50,000 shares of the corporation's stock before December
31, 2000. The stock is to be purchased in open market transactions as management
determines  to be  prudent.  Management  will  consider  a variety  of  factors,
including  current  market  conditions,   company  capital  levels,  and  future
opportunities.

      As of September 30, 2000,  4,600 shares have been purchased for a total of
$82. Two  thousand  shares were  purchased at $18.50 per share,  two thousand at
$17.50 per share,  three hundred at $16.38 per share and three hundred at $16.50
per share.

Acquisitions
------------

      On August 17, 2000 The Company  entered  into an agreement to purchase six
branches  from  AmSouth  of  Birmingham  Alabama.   The  acquisitions   involves
approximately  $93,282 in deposits  and $41,310 in loans.  Three of the branches
Radford,  Dublin and  Pulaski  Virginia  will be merged into The  Company's  NBB
affiliate, with the remaining offices located in Wytheville, Abingdon and Marion
Virginia  merged with The Company's BTC affiliate.  It is  anticipated  that the
acquisition will be closed in the fourth quarter of 2000.

      In  another  move  to  improve  the  Company's  competitive  position  BTC
announced  on  September  15, 2000 that it would  acquire a branch in  Bluefield
Virginia  from First Union Bank.  The  acquisition  will involve the purchase of
approximately  $39,431 in  deposits  and  $11,033  in loans.  Plans call for the
acquisition to be completed in the first quarter of 2001.


Selected Affiliate Bank Data
----------------------------

      The following table sets forth selected data for NBB and BTC:

                                                   September 30, 2000
                                             -------------------------------

($000's, except for % data)                     NBB                  BTC
                                                ----                 ----
Assets                                        $295,237              201,313

Deposits                                       254,434              174,915

Net Income                                       3,347                2,103

Return on Average Assets                          1.57%                1.42%

Return on Average Equity                         16.01%               11.48%


Year 2000
---------

      The  Company was  cognizant  of the risks posed by the Year 2000 issue for
Bank operations and borrowers.  Subsequent to December 31, 1999, the Company was
not aware of any  information  that  indicates a  significant  vendor or service
provider may be unable to sell goods or provide  services to the Company because
of Year 2000 issues.  Further,  the Company has not  received any  notifications
from borrowers or regulatory agencies to which it is subject, nor is it aware of
any such  information  which  indicates  that  (1) a  borrower  has  experienced
significant issues which may impact its ability to service its loan or which may
impact its borrowing agreement terms or covenants or (2) significant  regulatory
action is being or may be taken  against the  Company,  as a result of Year 2000
issues.

      The Company has not experienced  any significant  disruptions to financial
or operating activities caused by failure in computerized systems resulting from
Year 2000 issues. Management does not expect Year 2000 issues to have a material
adverse effect on the Company's operations or financial results in 2000.

      The  Company was  prepared  for the  millennium  change and  continues  to
successfully  operate and handle the  transactions  of customers  subsequent  to
December 31, 1999.



                                       23
<PAGE>


<TABLE>

The following table sets forth selected quarterly consolidated financial data.

<CAPTION>

                                                           For the Quarter-Ended
($000's, except per share       September 30,     June 30,       March 31,     December 31,   September 30,
and percent data)                    2000           2000           2000            1999            1999
                                -------------   -------------  ------------    ------------   -------------
<S>                             <C>             <C>            <C>             <C>            <C>
Interest income                     $9,586          9,286          8,844           8,928           8,416
Interest expense                     4,550          4,274          3,886           3,869           3,506
Net interest income                  5,036          5,012          4,958           5,059           4,910
Provision for loan loss                331            313            353             560             371
Noninterest income                     976            962            925             934             956
Noninterest expense                  3,291          3,094          2,991           2,971           3,025
Income taxes                           639            698            687             657             666
Net income                          $1,751          1,869          1,852           1,805           1,804
 Return on average assets               1.42%         1.54%           1.58%           1.53%          1.60%
 Return on average equity              12.42%        13.97%          13.98%          13.50%         13.64%
Basic net income per share           $0.50           0.53           0.53            0.51            0.51


<CAPTION>

                                                    Daily Averages for the Quarter Ended
($000's, except per share       September 30,     June 30,       March 31,     December 31,   September 30,
and percent data)                    2000           2000           2000            1999            1999
                                -------------   -------------  ------------    ------------   -------------
<S>                             <C>             <C>            <C>             <C>            <C>
Loans, net                        $309,586        302,561        293,287         288,045         277,588
Total securities                   141,534        139,993        139,350         140,066         145,064
Total assets                       492,073        485,516        470,378         445,384         452,176
Total deposits                     423,784        419,506        404,746         408,803         392,710
Stockholders' equity                56,390         53,649         53,142          53,468          52,908

</TABLE>



                                       24
<PAGE>



Results of Operations for the Three Months Ended September 30, 2000
-------------------------------------------------------------------

      Net income for the quarter ended September  30,2000 was $1,751, a decrease
of $53 from the same quarter in 1999.

      The  return on  average  assets  for the third  quarter  of 2000 was 1.42%
compared to 1.60% for the quarter  ended  September  30, 1999.  This decline was
primarily the result of growth in average  assets coupled with a decrease in net
income.

      The return on average equity for the three months ended September 30, 2000
was 12.42%  compared to 13.64% for the quarter ended  September  30, 1999.  This
increase  was due to the  decline in  average  equity  caused by the  previously
mentioned tender offer that occurred in the second quarter of 1999.

Net Interest Income
-------------------
      Net interest income increased $126 when the third quarter of 1999 and 2000
are compared.  This modest increase is primarily due to the rising interest rate
environment and a recent slow down in loan production.

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

      The loan loss provision for the third quarter of 2000 was $331.  Reference
is made to previous comments  pertaining to the evaluation of the loan portfolio
and the adequacy of the loan reserve.

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

      Noninterest  income for the three months ended September 30, 2000 was $976
an increase of $20 or 2.09%.

      Services  charges  on  deposits  increased  $32.  The  change  was  due to
increased volume, more aggressive  collection efforts and certain changes in the
service charges structure.

      Credit card income continued to show good growth,  which was attributed to
volume.

      Trust income declined when compared to the third quarter of 1999.  Various
factors  contributed  to  the  decrease  among  which  were  volume  and  market
conditions.

Noninterest Expense
-------------------
      Noninterest  expenses were $3,291 for the three months ended September 30,
2000, an increase of $266 or 8.79% over the same period in 1999.

      Salaries and fringe benefits  increased $62 or 4.17% when the three months
ended September 30, 2000 and 1999 are compared.

      Occupancy expenses increased $4 when the two periods are compared.

      Data  processing  expense  decreased $1 when the third quarter of 2000 and
1999 are compared.

      Other  operating  expenses  declined by $7.  Refer to  comments  regarding
franchise taxes in the year-to-date discussion of noninterest expense.

Balance Sheet
-------------

      Total  average  assets at September  30, 2000 were $492,073 an increase of
$39,897 or 8.82%  over the second  quarter  of 2000.  As  previously  stated the
investment portfolio remains illiquid due to the interest rate environment. Some
improvement,  however,  occurred  as a result of  strong  deposit  growth  and a
decrease in loan demand.




                                       25
<PAGE>





Banking Terms

Basis Point - a  measurement  unit defined as one  hundredth of one percent;  it
usually refers to an interest rate.

Book  Value  Per  Share - the value of a share of  common  stock  determined  by
dividing shareholders' equity at the end of a period, excluding preferred stock,
by the number of common shares outstanding at the end of the same period.

Core Deposits - demand deposits,  savings accounts,  interest checking accounts,
insured money market accounts and  certificates of deposit under $100,000.  This
is a more stable source of funds than funds purchased on the basis of rate only.

Cost of Funds - interest on deposits and borrowed  funds  divided by the average
balance of such funds.

Comprehensive  Income - net  income  plus the  change  in  unrealized  gains and
losses,  net of tax,  plus certain  reclassification  adjustments  on securities
available for sale for the period.

Earning Assets - loans (net of unearned income),  investment  securities,  money
market investments and interest-bearing deposits in other banks.

Earnings Per Share-Basic - net income,  reduced by dividends on preferred stock,
divided by the  weighted  average  number of common  shares  outstanding  in the
period.

Equity  Capital/Share-holders'  Equity - a balance sheet amount that  represents
the total  investment  in the  corporation  by holders  of common and  preferred
stock; it includes amounts added through the retention of earnings.

Interest-Bearing  Liabilities  -  deposits  and  borrowed  funds  on  which  the
corporation pays interest;  includes  interest checking  accounts,  money market
accounts, certificates of deposit, short-term borrowings and long-term debt.

Leverage  Capital  Ratio - the total of Tier 1 capital less  certain  intangible
assets such as goodwill,  divided by quarterly  average assets. A key regulatory
capital requirement with the minimum amount allowed of 4%.

Net Interest  Income - the  difference  between  income from earning  assets and
interest paid on deposits and borrowed funds.

Net Interest Margin - net taxable-equivalent  interest income divided by average
earning assets.

Nonperforming  Assets - the sum of loans on which  interest  income is not being
accrued,  restructured  loans on which the interest  rates or terms of repayment
have been  materially  revised and real estate  that has been  acquired  through
foreclosure.

Rate-Sensitive   Assets/  Liabilities  -  earning  assets  and  interest-bearing
liabilities  that can be repriced or  replaced  at a  different  interest  rate,
within a specific period, due to rate changes or maturity.

Return on Average  Assets  (ROA) - net income as a percentage  of average  total
assets.  It is a key  profitability  ratio that indicates how effectively a bank
has used its total resources.

Return on Average  Equity  (ROE) - net income as a percentage  of total  average
shareholders' equity. Provides a measure of how productively a bank's equity has
been employed.

Risk-Based  Assets - a regulatory  method of  classifying  assets based on their
potential risk of loss, used in calculating  various capital ratios.  Assets are
classified  in one of four  categories  based  primarily  on credit risk and are
adjusted to reflect the relative riskiness of that category.

Securities  Available  for Sale -  securities  that will be held for  indefinite
periods  of time  and  that  may be sold as part of the  bank's  asset/liability
strategy.  These  securities  are recorded at their current  market value rather
than at their historical amortized cost.

Securities  Held to Maturity - securities  that the bank has the ability and the
intent to hold to maturity.  These  securities  are  recorded at their  original
cost, adjusted for amortization of premium or discount accretion.

Spread or  Interest-Rate  Differential  - the  difference  between  the  average
interest rates  received on earning  assets and the average  interest rates paid
for interest-bearing liabilities.

Taxable-Equivalent  In-come  -  income  that  has been  adjusted  by  increasing
tax-exempt  interest  income to an equivalent  pretax amount of taxable  income.
This adjustment  allows  corporations to compare the effective  pretax yields on
different mixes of taxable and tax-exempt assets.

Tier 1  Risk-Based  Capital  Ratio - common  shareholders'  equity less  certain
intangible  assets,  such as goodwill,  divided by  risk-based  assets.  Current
regulatory minimum requires that at least a 4% ratio be maintained.

Total  Risk-Based  Capital Ratio - total capital  divided by risk-based  assets.
Total capital consists of common  shareholders'  equity,  the allowance for loan
losses, and certain components of nonpermanent  preferred stock and subordinated
debt less  certain  intangible  assets,  such as  goodwill.  Current  regulatory
minimum requires that at least an 8% ratio be maintained.

Yield on Earning Assets - total  taxable-equivalent  interest income dividend by
the average balance of earnings assets.



                                       26
<PAGE>







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  that are included in securities  available for sale and  securities
held to maturity.  The fair value of these  investments  at  September  30, 2000
approximated $3,900.

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 September  30,
2000,   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.

      The  method of  analysis  presented  in the  following  table has  certain
inherent shortcomings.  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. In addition,
loan  prepayments  and early  withdrawals of certificates of deposit could cause
the interest  sensitivities  to vary from those which  appear on the table.  The
classification  of  securities  as held to maturity or  available  for sale also
effects rate sensitivity. Available for sale securities which may be sold can be
used to adjust the Company's interest rate sensitivity  position.  Finally, call
features in the investment  portfolio can have a considerable  effect. Since the
call  decision is dependent  on interest  rate levels at a future point in time,
the ultimate effect on interest rate sensitivity cannot be precisely determined.
A  substantial  number  of  bonds  in the  investment  portfolio  contain  these
features.



                                       27
<PAGE>


<TABLE>

<CAPTION>

                                                      ========================================================================
                    Interest Rate                                               September 30, 2000
                                                      ------------------------------------------------------------------------

                Sensitivity Table (1)                      Interest-sensitive (days)
                                                                                               1-5         >5
                                                      -------------------------------------
 ($ in thousands)                                           1-90       91-180      181-365      Years      Years       Total
==============================================================================================================================
<S>                                                         <C>        <C>         <C>          <C>        <C>         <C>

Interest-earning assets:
 Loans, net of unearned income (2)                         $50,275      28,865      20,217     143,810     72,882     316,266
 Federal funds sold                                            100         ---         ---         ---        ---         100
 Interest bearing deposits                                  18,003         ---         ---         ---        ---      18,003
 Securities available for sale (3)                           3,761       1,931         998      33,627     79,873     120,190
 Securities held to maturity (3)                             1,147       3,847       2,168      13,043        933      21,138
 Mortgage loans held for sale                                  122         ---         ---         ---        ---         122
------------------------------------------------------------------------------------------------------------------------------
   Total interest-earning assets                           $73,408      34,643      23,383     190,480    153,688     475,819
==============================================================================================================================

==============================================================================================================================
Interest-bearing liabilities:
Interest-bearing demand deposits                           $79,872         ---         ---         ---        ---      79,872
Savings deposits                                            42,129         ---         ---         ---        ---      42,129
Time deposits                                               34,467      57,115      74,865      82,093        ---     248,540
Other borrowed funds                                           198         ---      10,000         ---        ---      10,198
------------------------------------------------------------------------------------------------------------------------------
   Total interest-bearing liabilities                     $156,666      57,115      84,865      82,093        ---     380,739
------------------------------------------------------========================================================================
Cumulative ratio of interest-
 Sensitive assets to interest-
 sensitive liabilities                                         .47         .51         .44         .85       1.25         ---
------------------------------------------------------========================================================================
Cumulative interest-sensitivity gap                        $(83,258)   (105,730)   (167,212)   (58,825)    94,863         ---
==============================================================================================================================

</TABLE>

(1)   The  Company  is  sensitive  to  interest  rate  changes,  as  liabilities
      generally reprice or mature before interest-earning  assets. The above gap
      table  reflects the  Company's  rate-sensitive  position at September  30,
      2000,  and is not  necessarily  reflective of its position  throughout the
      year.  The  carrying  amounts  of   interest-rate   sensitive  assets  and
      liabilities  are  presented in the periods in which they reprice to market
      rates or mature and are summed to show the interest-rate sensitivity gap.
(2)   Excludes nonaccrual loans.
(3)   Call features on certain securities, if exercised could have the effect of
      materially  shortening the average life of the investment  portfolio.  The
      exercise of a call feature is  dependent  upon the rate  environment.  The
      call  decision  is  at  the  issuer's  discretion  and  ultimate  benefit.
      Securities available for sale are shown at amortized cost.




                                       28
<PAGE>



      The Company also uses  simulation  analysis to forecast its balance  sheet
and monitor  interest  rate  sensitivity.  One test used by the Company is shock
analysis,  which measures the effect of a  hypothetical,  immediate and parallel
shift in interest  rates.  The following table shows the results of a rate shock
of 100,  200,  and 300 basis  points and the effects on net income and return on
average assets and return on average equity for the nine months ended  September
30, 2000.

($000's, except for percent data)
                                         Return on              Return on
   Rate Shift        Net Income        Average Equity         Average Assets
================================================================================
         300           $5,323                  8.98%                  1.06%
         200            6,063                 10.30%                  1.23%
         100            6,799                 11.60%                  1.39%
      (-)100            8,258                 14.11%                  1.71%
      (-)200            8,891                 15.33%                  1.87%
      (-)300            9,379                 16.03%                  1.96%


      Simulation  analysis  allows  the  Company  to test  asset  and  liability
management  strategies  under rising and falling rate  conditions.  As a part of
simulation process, certain estimates and assumptions must be made dealing with,
but not  limited  to,  asset  growth,  the mix of assets and  liabilities,  rate
environment,  and local and national economic  conditions.  Asset growth and the
mix of assets can to a degree be influenced by  management.  Other areas such as
the rate environment and economic factors cannot be controlled.  For this reason
actual  results  may vary  materially  from  any  particular  forecast  or shock
analysis.

      This shortcoming is offset to a degree by the periodic  re-forecasting  of
the balance  sheet to reflect  current  trends and  economic  conditions.  Shock
analysis must also be updated  periodically as a part of the asset and liability
management process.




                                       29
<PAGE>



                   National Bankshares, Inc. and Subsidiaries
                                     Part II
                                Other Information




Items 1-3.       Legal Proceedings; Changes in Securities and Use of Proceeds;
                 Defaults Upon Senior Securities

                 None for the three months ended September 30, 2000.

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

                 None

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
                      September 30, 2000:

                      August 17, 2000 - Purchase of Ams South Virginia Branches




                                       30
<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:  11/13/2000              /s/James G. Rakes
            -------------           -------------------------------------
                                    James G. Rakes, Chairman
                                    President and Chief Executive Officer





     Date:  11/13/2000              /s/J. Robert Buchanan
            -------------           -------------------------------------
                                    J. Robert Buchanan, Treasurer
                                    (principal financial officer)


                                       31
<PAGE>