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:
September 30, 1996                                                     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 October 21, 1996  
-------------------------------               ---------------------------------
COMMON STOCK, $2.50 PAR VALUE                             3,792,833            



                        (This report contains 24 pages) <PAGE>

                           NATIONAL BANKSHARES, INC.

                                   FORM 10-Q

                                     INDEX




                                                                        Page   
                                                                        ----   

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

     ITEM 1 - FINANCIAL STATEMENTS

          CONSOLIDATED BALANCE SHEETS, SEPTEMBER 30, 1996
           AND DECEMBER 31, 1995                                         4-5   
                             
          CONSOLIDATED STATEMENTS OF INCOME,
           NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995                  6    

          CONSOLIDATED STATEMENTS OF INCOME,
           THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995                 7    

          CONSOLIDATED STATEMENTS OF CHANGES IN                
           STOCKHOLDERS' EQUITY, NINE MONTHS ENDED   
           SEPTEMBER 30, 1996 AND 1995                                    8    

          CONSOLIDATED STATEMENTS OF CASH FLOWS
           NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995                 9-10  

          SELECTED CONSOLIDATED FINANCIAL DATA                          11-16  

     ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS                 17-20  


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

     ITEMS 1 - 3 - LEGAL PROCEEDINGS; CHANGES IN
        SECURITIES; DEFAULTS UPON SENIOR SECURITIES                       21   

     ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF
        SECURITY HOLDERS                                                  21   

     ITEM 5 - OTHER INFORMATION                                           21   

     ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K                            21   

     SIGNATURES                                                           22   








                                      -2-<PAGE>

                                     PART I
                                     ------

                             FINANCIAL INFORMATION
                             ---------------------


ITEM 1. FINANCIAL STATEMENTS

The consolidated financial  statements of National  Bankshares, Inc. (NBI)  and
its  wholly-owned   subsidiaries,  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.  All financial statements
have been  restated to reflect the  acquisition of The Bank  of Tazewell County
which was effected  in the second quarter  of 1996.  The  results of operations
for the nine months ended September 30, 1996 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  Corporation's 1995  Annual  Report  to
Stockholders and additional information supplied in the 1995 Form 10-K, as well
as  the Form 8-K containing merger-related financial statements filed on August
10, 1996.



































                                      -3-<PAGE>

                       CONSOLIDATED BALANCE SHEETS
                NATIONAL BANKSHARES, INC. AND SUBSIDIARIES
                 SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
                               (UNAUDITED)


                                                 SEPTEMBER    DECEMBER
 ($000's)                                        30, 1996     31, 1995
                                                 =========    ========
 ASSETS
 Cash and due from banks                         $ 13,993      10,055   
 Federal funds sold                                 1,320       7,725   
 Securities available for sale, at fair value      69,693      75,870   
 Securities held to maturity (fair value
  $103,427 in 1996 and $112,778 in 1995)          104,361     111,765   
 Mortgage loans held for sale                         137         880   
 Loans:
    Real estate construction loans                  7,011       6,007   
    Real estate mortgage loans                     44,278      45,589   
    Commercial and industrial loans                82,441      59,609   
    Loans to individuals                           58,927      56,920   
                                                 --------    --------   
             Total loans                          192,657     168,125   
    Less unearned income on loans                  (2,548)     (2,307)  
                                                 --------    --------   
             Loans, net of unearned income        190,109     165,818   
    Less allowance for loan losses                 (2,588)     (2,625)  
                                                 --------    --------   
             Loans, net                           187,521     163,193   
                                                 --------    --------   
 Bank premises and equipment, net                   4,826       4,679   
 Accrued interest receivable                        3,751       3,621   
 Other real estate owned, net                         731         762   
 Other assets                                       3,018       2,507   
                                                 --------    --------   
             Total assets                        $389,351     381,057   
                                                 ========    ========   
 LIABILITIES' AND STOCKHOLDERS' EQUITY
 Noninterest-bearing demand deposits             $ 41,820      39,816   
 Interest-bearing demand deposits                  75,960      73,101   
 Savings deposits                                  49,414      50,548   
 Time deposits                                    168,558     166,848   
                                                 --------    --------   
             Total deposits                       335,752     330,313   
                                                 --------    --------   

 Other borrowed money                               1,462         261   
 Accrued interest payable                             658         744   
 Other liabilities                                    981       1,585   
                                                 --------    --------   
             Total liabilities                    338,853     332,903   
                                                 --------    --------   



                                      -4-<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                                         9,482       9,482   
 Retained earnings                                 41,863      38,390   
 Net unrealized gains (losses) on
  securities available for sale                      (847)        282   
                                                 --------    --------   
             Total stockholders' equity            50,498      48,154   

 Commitments and contingent liabilities
                                                 --------    --------   
             Total liabilities and
              stockholders' equity               $389,351     381,057   
                                                 ========    ========   











































                                      -5-<PAGE>

                    CONSOLIDATED STATEMENTS OF INCOME
                NATIONAL BANKSHARES, INC. AND SUBSIDIARIES
              NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
                               (UNAUDITED)

                                                   SEPTEMBER   SEPTEMBER
 ($000's)                                           30, 1996   30, 1995
                                                   =========   =========
 INTEREST INCOME
 Interest and fees on loans                         $ 12,729     11,760 
 Interest on federal funds sold                          424        488 
 Interest on securities-taxable                        6,731      7,309 
 Interest on securities-nontaxable                     1,496      1,428 
                                                    --------    ------- 

             Total interest income                    21,380     20,985 
                                                    --------    ------- 
 INTEREST EXPENSE
 Interest on time deposits of $100,000 or more         1,532      1,376 
 Interest on other deposits                            8,217      7,980 
 Interest on short-term borrowings                        23         29 
                                                    --------    ------- 
            Total interest expense                     9,772      9,385 
                                                    --------    ------- 
            Net interest income                       11,608     11,600 
 Provision for loan losses                               216        225 
                                                    --------    ------- 
            Net interest income after provision
             for loan losses                          11,392     11,375 
                                                    --------    ------- 
 NONINTEREST INCOME

 Service charges on deposit accounts                     868        731 
 Other service charges and fees                          175        148 
 Credit card fees                                        376        330 
 Trust income                                            399        326 
 Other income                                              7         39 
 Realized securities gains (losses), net                   6        (86)
                                                    --------    ------- 
             Total noninterest income                  1,831      1,488 
                                                    --------    ------- 
 NONINTEREST EXPENSE

 Salaries and employee benefits                        3,711      3,550 
 Occupancy and furniture and fixtures                    765        714 
 Data processing and ATM                                 257        293 
 FDIC assessment                                           2        429 
 Credit card processing                                  348        306 
 Goodwill amortization                                    22         22 
 Net costs of other real estate owned                     10         85 
 Other operating expense                               1,846      1,731 
                                                    --------    ------- 
             Total noninterest expense                 6,961      7,130 
                                                    --------    ------- 
 Income before income tax expense                      6,262      5,733 
 Income tax expense                                    1,708      1,489 
                                                    --------    ------- 
             Net income                             $  4,554      4,244 
                                                    ========    ======= 
             Net income per share                   $   1.20       1.12 
                                                    ========    ======= 

                                      -6-<PAGE>

                    CONSOLIDATED STATEMENTS OF INCOME
                NATIONAL BANKSHARES, INC. AND SUBSIDIARIES
              THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
                               (UNAUDITED)

                                                   SEPTEMBER   SEPTEMBER
 ($000's)                                           30, 1996   30, 1995
                                                   =========   =========
 INTEREST INCOME
 Interest and fees on loans                         $  4,439      4,063 
 Interest on federal funds sold                          147        145 
 Interest on securities-taxable                        2,086      2,452 
 Interest on securities-nontaxable                       452        462 
                                                    --------    ------- 
             Total interest income                     7,124      7,122 
                                                    --------    ------- 
 INTEREST EXPENSE

 Interest on time deposits of $100,000 or more           509        468 
 Interest on other deposits                            2,721      2,862 
 Interest on federal funds purchased                      10         14 
                                                    --------    ------- 
            Total interest expense                     3,240      3,344 
                                                    --------    ------- 
            Net interest income                        3,884      3,778 
 Provision for loan losses                               106         93 
                                                    --------    ------- 
            Net interest income after provision
             for loan losses                           3,778      3,685 
                                                    --------    ------- 
 NONINTEREST INCOME
 Service charges on deposit accounts                     309        246 
 Other service charges and fees                           52         55 
 Credit card fees                                        131        109 
 Trust income                                            139        117 
 Other income                                              2          5 
 Realized securities gains (losses), net                   2          5 
                                                    --------    ------- 
             Total noninterest income                    635        537 
                                                    --------    ------- 
 NONINTEREST EXPENSE
 Salaries and employee benefits                        1,247      1,191 
 Occupancy and furniture and fixtures                    256        268 
 Data processing and ATM                                  82         52 
 FDIC assessment                                           1         62 
 Credit card processing                                  128        104 
 Goodwill amortization                                     7         (9)
 Net costs of other real estate owned                      4         78 
 Other operating expense                                 556        603 
                                                    --------    ------- 
             Total noninterest expense                 2,281      2,349 
                                                    --------    ------- 
 Income before income tax expense                      2,132      1,873 
 Income tax expense                                      567        493 
                                                    --------    ------- 
             Net income                             $  1,565      1,380 
                                                    ========    ======= 
             Net income per share                   $   0.41       0.36 
                                                    ========    ======= 



                                       -7-<PAGE>

           CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                  NATIONAL BANKSHARES, INC. AND SUBSIDIARIES
                 NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
                                  (UNAUDITED)


                                                            NET
                                                         UNREALIZED
                                                           GAINS
                                                        (LOSSES) ON
                                                         SECURITIES
                              COMMON           RETAINED  AVAILABLE
($000's)                      STOCK   SURPLUS  EARNINGS   FOR SALE      TOTAL 
                              ======  =======  ======== ===========   ========

Balances, December 31,
 1994 as previously
 reported                    $ 4,285    1,187   14,791       (126)     20,137 
 .11129 for one stock
 split, 190,472
 additional shares issued        476     (476)     ---        ---         --- 
Adjustment in connection
 with pooling of interests     4,721     (711)  20,136     (1,625)     22,521 
                             -------   ------   ------     ------      ------ 
Balances, December 31,
 1994 as restated            $ 9,482      ---   34,927     (1,751)     42,658 

Net income                       ---      ---    4,244        ---       4,244 
Cash dividends                   ---      ---     (986)       ---        (986)
Change in net unrealized
 gains on securities
 available for sale, net
 of income taxes of $698         ---      ---      ---      1,354       1,354 
                             -------   ------   ------     ------      ------ 
Balances, September 30, 1995 $ 9,482      ---   38,185       (397)     47,270 
                             =======   ======   ======     ======      ====== 
Balances, December 31,
 1995 as previously
 reported                    $ 4,285    1,187   16,967        115      22,554 
 .11129 for one stock
 split, 190,472
 additional shares issued        476     (476)     ---        ---         --- 
Adjustment in connection
 with pooling of interests     4,721     (711)  21,423        167      25,600 
                             -------   ------   ------     ------      ------ 
Balances, December 31,
 1995 as restated            $ 9,482      ---   38,390        282      48,154 
Net income                       ---      ---    4,554        ---       4,554 
Cash dividends                   ---      ---   (1,081)       ---      (1,081)
Change in net unrealized
 gains on securities
 available for sale, net
 of income tax benefit of
 $582                            ---      ---      ---     (1,129)     (1,129)
                             -------   ------  -------     ------      ------ 

Balances, September 30, 1996 $ 9,482      ---   41,863       (847)     50,498 
                             =======   ======  =======     ======      ====== 


                                       -8-<PAGE>

                   CONSOLIDATED STATEMENTS OF CASH FLOWS
                NATIONAL BANKSHARES, INC. AND SUBSIDIARIES
               NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
                                (UNAUDITED)



                                                     SEPTEMBER  SEPTEMBER
 ($000's)                                            30, 1996    30, 1995
                                                     =========  =========
 CASH FLOWS FROM OPERATING ACTIVITIES  
 Net Income                                           $ 4,554       4,244 
 Adjustments to reconcile net income to net cash
   provided by operating activities: 
      Deferred taxes                                      582        (119)
      Provision for loan losses                           216         225 
      Provision for bond losses                           ---          90 
      Depreciation of bank premises and equipment         351         412 
      Amortization of intangibles                          22         116 
      Write-offs of other real estate                     ---          50 
      Amortization of premiums and accretion of
       discounts, net                                      39         (33)
      Gains on bank premises and equipment
       disposals                                          ---          (8)
      Losses on sale of other real estate                   2         --- 
      Gains on maturities of securities available
       for sale, net                                       (4)         (2)
      Gains on calls and maturities of securities
       held to maturity, net                              ---          (2)
      Net increase in mortgage loans held for sale        743        (926)
      (Increase) decrease in:
         Accrued interest receivable                     (130)       (161)
         Other assets                                    (511)        759 
      Increase (decrease) in:
         Accrued interest payable                        (862)         97 
         Other liabilities                                (86)       (335)
                                                      -------     ------- 
               Net cash provided by operating
                activities                            $ 4,916       4,407 
                                                      -------     ------- 

 CASH FLOWS FROM INVESTING ACTIVITIES
 Net (increase) decrease in federal funds sold          6,405      (3,335)
 Proceeds from calls and maturities of securities
  available for sale                                   13,860       5,540 
 Proceeds from calls and maturities of securities
  held to maturity                                     35,830      19,414 
 Purchases of securities available for sale            (9,397)     (7,816)
 Purchases of securities held to maturity             (28,457)    (15,778)
 Net increase in loans made to customers              (24,433)     (6,651)
 Proceeds from disposal of other real estate owned         29          88 
 Recoveries on loans charged-off                          111          62 
 Bank premises and equipment expenditures                   3           9 
 Proceeds from sale of bank premises and equipment       (587)       (324)
                                                      -------     ------- 
               Net cash used in investing
                activities                             (6,636)     (8,791)
                                                      -------     ------- 



                                       -9-<PAGE>

 CASH FLOWS FROM FINANCING ACTIVITIES  
 Net increase in time deposits                          1,710       9,940 
 Net increase (decrease) in other deposits              3,728      (3,806)
 Other borrowed money                                   1,301         528 
 Cash dividends paid                                   (1,081)       (986)
                                                      -------     ------- 

               Net cash provided by financing
                activities                              5,658       5,676 
                                                      -------     ------- 
 Net increase in cash and due from banks                3,938       1,292 
 Cash and due from banks at beginning of year          10,055      11,409 
                                                      -------     ------- 
 Cash and due from banks at end of nine months        $13,993      12,701 
                                                      =======     ======= 
 SUPPLEMENTAL CASH FLOW INFORMATION
 Unrealized gains/losses in securities available
  for sale (gross)                                    $(1,283)       (602)
 Deferred taxes                                           436         205 
                                                      -------     ------- 
Net unrealized gains (losses) on securities
  available for sale                                  $  (847)       (397)
                                                      =======     ======= 
 Loans charged to the allowance for loan losses       $   364         180 
                                                      =======     ======= 
 Interest paid                                        $ 9,858       9,288 
                                                      =======     ======= 

































                                       -10-<PAGE>

                    NATIONAL BANKSHARES, INC. AND SUBSIDIARIES
                              SELECTED CONSOLIDATED
                                  FINANCIAL DATA



                                                SEPTEMBER 30,     DECEMBER 31,
   ($000s except for % data)                   1996      1995         1995
                                             ========  ========   ============

   Selected Ratios and Per Share Data:
   ----------------------------------

   Net income                               $  4,554      4,244       5,525   
   Return on average assets                     1.57       1.51        1.44   
   Return on average equity                    12.45      12.60       11.70   
   Net income per share                         1.20       1.12        1.46   
   Book value per share                        13.31      12.46       12.70   

   Selected Balance Sheet Data:
   ---------------------------

   Securities                               $174,054    184,283     187,635   
   Loans, net                                187,521    162,680     163,193   
   Total assets                              389,351    384,168     381,057   
   Total deposits                            335,752    333,820     330,313   
   Stockholders' equity                       50,498     47,270      48,154   































                                       -11-<PAGE>

                    NATIONAL BANKSHARES, INC. AND SUBSIDIARIES
                              SELECTED BALANCE SHEET
                                  DAILY AVERAGES



                                              SEPTEMBER     SEPTEMBER
          ($000's)                             30, 1996      30, 1995
                                              =========    ============

          Federal funds sold                   $  9,800       11,210
          Securities                            179,202      183,947
          Loans, net (1)                        175,065      159,880
          Total assets                          386,821      376,905
          Noninterest-bearing deposits           41,604       37,009
          Interest-bearing deposits             293,666      292,415
          Stockholders' equity                   48,898       45,044




(1)  Total includes mortgage loans held for sale




































                                       -12-<PAGE>

   <TABLE>
                                NATIONAL BANKSHARES, INC. AND SUBSIDIARIES
                                    AVERAGE BALANCES AND INTEREST RATES

   <CAPTION>
   ($000 except for % data)      SEPTEMBER 30, 1996       SEPTEMBER 30, 1995       DECEMBER 31, 1995

                                AVERAGE      YIELD/      AVERAGE      YIELD/      AVERAGE     YIELD/
                                BALANCE     COST(1)      BALANCE      COST(1)     BALANCE     COST(1)
                                =======     =======      =======      =======     =======     =======
   <S>                          <C>         <C>          <C>          <C>         <C>         <C>
   Interest-earning assets      $365,350      8.14%      355,037        8.21%     360,563       8.11%  
   Interest-bearing
    liabilities                  294,175      4.44%      293,072        4.28%     293,700       4.33%  
                                            ------                    ------                  ------   

   Net interest spread                        3.70%                     3.93%                   3.78%  
                                            ======                    ======                  ======   
   Net interest margin                        4.55%                     4.68%                   4.59%  
                                            ======                    ======                  ======   




















(1)  Fully taxable equivalent  basis.  Yields  on securities held  for sale included  in these yields  are
     calculated based on historical cost.

</TABLE>                                                   


                                                   -13-<PAGE>

                    NATIONAL BANKSHARES, INC. AND SUBSIDIARIES
                                  LOAN LOSS DATA




                                              For the periods ended
                                      SEPTEMBER     SEPTEMBER    DECEMBER 31,
    ($000's except for % data)         30, 1996      30, 1995        1995
                                      =========     =========    ============

    Balance at beginning of period    $  2,625         2,551        2,551    
    Provision                              216           225          282    
    Loans charged-off                     (364)         (180)        (291)   
    Recoveries                             111            62           83    
                                      --------       -------       ------    
    Balance at end of period          $  2,588         2,658        2,625    
                                      ========       =======       ======    
    Ratio of allowance for loan
     losses to loans net of
     unearned income                      1.36%         1.61%        1.58%   
                                      ========       =======       ======    
    Ratio of net charge-offs to
     average loans net of unearned
     income (1)                            .19%          .10%         .13%   
                                      ========       =======       ======    
    Ratio of allowance for loan
     losses to nonperforming loans
     (2)                                 270.4%        182.6%       365.6%   
                                      ========       =======       ======    






















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


                                       -14-<PAGE>

                    NATIONAL BANKSHARES, INC. AND SUBSIDIARIES
                NONPERFORMING ASSETS, PAST DUE AND IMPAIRED LOANS

                                         SEPTEMBER   DECEMBER 31,  SEPTEMBER
   ($000's except for % data)             30, 1996       1995       30, 1995
                                         =========   ============  =========
   Nonperforming Assets
   -------------------
    Nonaccrual loans                      $   991          933         719    
    Restructured loans                        ---          ---         ---    
                                          -------       ------      ------    
       Total nonperforming loans              991          933         719    
                                          -------       ------      ------    
    Foreclosed property                       731          762         979    
    Other repossessed property                  6           11          19    
                                          -------       ------      ------    
       Total foreclosed and
        repossessed properties                737          773         998    
                                          -------       ------      ------    
          Total nonperforming assets      $ 1,728        1,706       1,717    
                                          =======       ======      ======    
    Ratio of nonperforming assets to
     loans net of unearned income and
     foreclosed/repossessed assets            .90%         .90%       1.02%   
                                          =======       ======      ======    
   Accruing Loans Past Due 90 Days or More
   ---------------------------------------

    Past due 90 days or more and
     still accruing (1)                   $   329          574         737    
                                          =======       ======      ======    
    Ratio of loans past due 90
     days or more to loans, net
     of unearned income (1)                   .17%         .35%      0.45%    
                                          =======       ======     ======     
   Impaired Loans
   --------------
    Total impaired loans                  $ 1,053        1,035      1,480     
                                          =======       ======     ======     
    Impaired loans with a
     valuation allowance                      736          690      1,211     
    Valuation allowance                      (655)        (345)      (792)    
                                          -------       ------     ------     
    Impaired loans net of allowance            81          345        419     
                                          =======       ======     ======     
    Impaired loans with no
     valuation allowance                      317          690        269     
                                          =======       ======     ======     
    Average recorded investment
     in impaired loans                      1,036        1,288      1,424     
                                          =======       ======     ======     

    Income recognized on impaired loans        18           47         47     
                                          =======       ======     ======     
    Amount of income recognized
     on a cash basis                          ---            5         11     
                                          =======       ======     ======     

(1)  Calculated ratios exclude impaired debt securities for all periods shown.


                                      -15-<PAGE>

Business Combination
--------------------

     On June 1, 1996, NBI  issued 1,888,209 shares of its common stock in a one
for one exchange for  all the outstanding common stock of  the Bank of Tazewell
County, Tazewell Virginia.  This business combination has been accounted for as
a pooling-of-interest combination and, accordingly, the consolidated  financial
statements  for the  periods  prior to  the combination  have been  restated to
include the  accounts and results of operations of the Bank of Tazewell County.
There were no adjustments of a material amount resulting from  Bank of Tazewell
County's adoption of NBI accounting policies.

     In May 1996,  NBI declared a stock  split of .11129 per  share effected in
the form of a stock split to the  holders of NBI common stock just prior to the
merger effective  date  to facilitate  the  one-for-one common  stock  exchange
ratio.   All stockholders' equity accounts, share  and per share data have been
adjusted retroactively to reflect the stock split.

     The results of operations previously reported by the separate  enterprises
and the combined amounts presented in the accompanying financial statements are
summarized below:

                             Nine Months            Years Ended
                                Ended              December 31,
($000's)                     September 
                              30, 1996          1995           1994
                            =============      ======         ======
Revenues:
National Bankshares, Inc.      $14,072         17,448         16,169    
Bank of Tazewell County          9,139         12,846         11,941    
                               -------         ------         ------    
Combined                       $23,211         30,294         28,110    
                               =======         ======         ======    

Net Income:
National Bankshares, Inc.      $ 2,921          3,256          2,916    
Bank of Tazewell County          1,633          2,269          2,387    
                               -------         ------         ------    
Combined                       $ 4,554          5,525          5,303    
                               =======         ======         ======    




















                                      -16-<PAGE>

                   NATIONAL BANKSHARES, INC. AND SUBSIDIARIES
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


     The purpose of this discussion is  to set forth information about National
Bankshares, Inc. (NBI) financial  condition and results of operations  which is
not otherwise  apparent from  the consolidated  financial statements  and other
information included  in this  report.  Reference  should be  to the  financial
statements and other information included in this report.

Results of Operations
---------------------

     Net income  for the nine  months ended September  30, 1996 was  $4,554,000
which represents an increase of $310,000 or 7.30% over the first nine months of
1995.   The  improvement in  net income  was  also reflected  by the  return on
average assets  which was 1.57% and  1.51% for the periods  ended September 30,
1996 and  September 30, 1995.   The return on average  equity declined slightly
due to the rising level of internally generated capital.

     Earnings per share at  the end of the third quarter of  1996 was $1.20 per
share, an increase of $0.08 per share over the third quarter of 1995.

     The overall  improvement shown in 1996 was  primarily due to a substantial
increase in  service charges on  deposit accounts coupled  with a reduction  in
federal deposit insurance expense.

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

     Net interest income for the  first nine months of 1996  remained virtually
unchanged  when compared to  the same period  in 1995.   Underlying this result
were changes  in asset mix,  the yield  on interest-earning assets  and funding
costs.  These  changes produced  a seven basis  point decline  in the yield  on
interest-earning assets.  The cost to fund interest-earning assets rose  by six
basis points  due to the  rising rate environment.   The combined result  was a
thirteen basis point drop in the net interest margin.

     This  erosion  in the  net  interest  margin is  expected  to  continue if
increases in interest rates occur.  However, this will be offset to some extent
by  the repricing assets and by growth in interest-earning assets, particularly
loans.   Any decline  in the  net interest margin  will be  further tempered by
NBI's excess  liquidity position  which permits  it to  take a less  aggressive
deposit rate posture in the marketplace.

     As the  course of  interest rates  is largely unknown,  the extent  of any
further decrease in the net interest margin cannot be determined.

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

     The provision for loan losses for  the period ended September 30, 1996 was
$216,000,  a  decrease  of  $9,000 from  the  same  period  the previous  year.
Management,  based on  information currently  available, anticipates  that only
nominal provisions  will be made in  order to prevent any  deterioration in the
ratio  of  the allowance  for  loan  losses to  loans  net  of unearned  income
resulting from loan charge-offs and/or loan portfolio growth.



                                      -17-<PAGE>

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

     Noninterest income at the end of the third quarter of  1996 was $1,831,000
an  increase of  $343,000 or  23.1%  over the  same period  the previous  year.
Service  charges on  deposit accounts  rose by  $137,000 or  18.7% and  was the
result of improved  performance in  both of  NBI's affiliates.   Other  service
charges, credit card fees and trust income improved steadily with the increased
level of  business.   Realized  securities  losses were  $86,000  in 1995  with
securities gains of $6,000 in 1996.

Noninterest Expenses
--------------------

     Noninterest expenses  at the end  of the  first nine months  of 1996  were
$6,961,000, a  decrease of  $169,000  or 2.4%  from the  same  period in  1995.
Salaries and employee benefits increased $161,000 or 4.5% with the remainder of
the  categories  also  experiencing   routine  increases,  except  for  deposit
insurance.   In September of 1995,  the Bank Insurance Fund  announced that the
mandate insurance fund level  had been reached,  which prompted premiums to  be
reduced to nominal amounts.  NBI's affiliates qualified for the minimum premium
of $2,000 per bank per year.

     In  October 1996, The Deposit Insurance  Fund Act of 1996  became law.  It
provided  that  banks  that  had  acquired  certain  failed  savings  and  loan
associations deposits  pay a one  time special assessment.   While NBI  was not
affected  by  that assessment,  all banks  including  NBI's affiliates  will be
required to participate in the funding of interest costs for bonds, issued as a
part of the savings and loan bailout in the 1980's.

     Assessments for this  purpose will begin in 1997  and continue until years
2018-2019 when the bonds mature, ending the assessment.

     Precise rates are not presently available, hence, NBI cannot determine its
exact  future costs.    Management, based  upon  information available  to  it,
believes  the annual  liability will  range from  $40,000 to  $100,000 annually
based on  current deposit  levels.   Since  future deposit  growth attained  by
either normal growth of existing affiliates or new acquisitions is unknown, the
ultimate liability over the covered period cannot be accurately determined.  It
is  not anticipated  that the overall  effect of  this legislation  will have a
material impact on NBI in any year the assessment is in effect.

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

     Total assets at  the end of the  first nine months of 1996  increased 2.2%
from December 31,  1995.  Deposits during this period  grew 1.6%.  Noninterest-
bearing  deposits grew by 5.0%, and interest-bearing deposits by 1.2%.  Savings
deposits declined by 2.2% due to the higher rates offered for time deposits.  

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

     Nonperforming loans, which include nonaccrual loans and restructured loans
but exclude loans past due 90 days or more and still accruing, totaled $991,000
at  September 30,  1996 and  $933,000  and $719,000  at December  31, 1995  and
September  30,  1995, respectively.    Total  foreclosed properties  and  other
repossessed property which totaled $737,000 at September 30, 1996 have remained
essentially  unchanged.   The  overall composition  of nonperforming  assets at


                                      -18-<PAGE>

September 30, 1996 did not change materially from December 31, 1995.  The ratio
of net charge-offs to  loans net of unearned  income was .19% at September  30,
1996.  At  year-end December  31, 1995,  the ratio was  .13% and  .10% for  the
period ended September 30, 1995.  While on an annualized  basis net charge-offs
year-to-date  1996  are  higher than  those  disclosed  at  December 31,  1995,
management, based  on information  currently available, does  not believe  this
slight  uptick  is the  beginning  of  a significant  downward  trend  in asset
quality.

     While asset quality  trend is generally  favorable at present,  management
cannot predict  the duration of such as it can  be affected by changes in local
and  national  economic conditions,  the future  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 from  operating activities  was $4,916,000.   Net cash  used in  investing
activities was $6,636,000 with the majority of that cash invested in securities
and  loans.   Net  cash  from financing  activities  was $5,658,000  due  to an
increase in  other deposits.  Cash  and due from banks  increased $3,938,000 in
1996 as result of the net effect of the aforementioned activities.

     Management is  not aware  of any  trend,  commitment or  events that  will
result  in or that  are reasonably likely  to result in  a material increase or
decrease in liquidity.   The merger  discussed below had  a positive impact  on
NBI's liquidity.

Capital Resources and Stockholder Information
---------------------------------------------

     Total stockholder equity  increased $2,344,000 or  4.9% from December  31,
1995.   The  following table  sets forth  various ratios  that bank  capital is
measured.  NBI continues to be well capitalized.


                                     September    December 31,   September
                                      30, 1996        1995        30, 1995
                                     =========    ============   =========

   Capital Ratios
   --------------
    Common stockholders' equity        12.97%        12.65%        12.30%   
    Regulatory capital                 13.49%        12.91%        12.73%   
    Risk weighted capital:
      Tier 1                           22.26%        23.53%        23.34%   
      Tier 2                           23.41%        24.78%        24.54%   
    Leverage ratio                     13.07%        12.39%        12.38%   








                                      -19-<PAGE>

Accounting Considerations
-------------------------

     In March 1995, the  Financial Accounting Standards Board  issued Statement
of  Financial  Accounting  Standards  (SFAS)  No.  121,  "Accounting   for  the
Impairment of Long-lived  Assets and for Long-lived Assets to  be Disposed of."
SFAS  No.  121  requires companies  to  review  long-lived  assets and  certain
identifiable  intangibles  to  be held,  used  or  disposed  of for  impairment
whenever events or changes  in circumstances indicate that the  carrying amount
of an asset  may not  be recoverable.   The adoption  of this  statement as  of
January  1,  1996  did not  have  a  significant effect  on  NBI's consolidated
financial statements.

Merger
------

     In  August of 1995, NBI and the Bank of Tazewell County (BTC) entered into
an affiliation  agreement whereby NBI and BTC would merge.  Stockholders of NBI
would  receive an  additional .11129 share  of common  stock for  each of their
shares, and stockholders  of BTC would receive one share  of NBI's common stock
for each of their shares.

     The merger  became effective  after the  close of  business May  31, 1996.
Information contained  in the company's Form 8-k filings listed in Part II Item
6(b) are incorporated by reference herein.

Third Quarter 1996 vs. 1995
---------------------------

     Net Income
     ----------

     Net  Income for the  third quarter of  1996 was $1,565,000  an increase of
     $185,000 or 13.4% over the third quarter of  1995.  Earnings per share was
     $0.41 and $0.36 for the third quarter of 1996 and 1995, respectively.

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

     Net interest income increased  by $106,000 or 2.9% over the  third quarter
     of  1995.   The  improvement was  the  result  of reductions  in  interest
     expense.

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

     Noninterest  income  for the  three months  ended  September 30,  1996 was
     $635,000  which represents  a  $98,000 or  18.2%  increase over  the  same
     quarter in 1995.   Increases in service  charges on deposits,  credit card
     fees and trust  income accounted for the majority of  the overall increase
     and were due to general increase in business activity.

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

     Noninterest expense was down $68,000 from the third quarter of 1995.  This
     decrease  was primarily  attributable  to reduction  in deposit  insurance
     expense.



                                      -20-<PAGE>

                           NATIONAL BANKSHARES, INC.
                                    PART II
                               OTHER INFORMATION


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

              None for the period ended
              September 30, 1996.

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

              None for the period ended
              September 30, 1996.

Item 5.       Other Information

              None

Item 6.       Exhibits and Reports on Form 8-K

              (a) Exhibit 27 - Financial Data Schedule

              (b) 8-K Merger-related Financial Statements August 10, 1996




































                                      -21-<PAGE>

                           NATIONAL BANKSHARES, INC.

                                   SIGNATURES





Pursuant to  the requirements of the  Securities and 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:                                                   
          ---------------     -----------------------------
                              James G. Rakes, President and
                              Chief Executive Officer





   Date:                                                      
          ---------------     -----------------------------
                              Joan C. Nelson, Treasurer

























                                      -22-<PAGE>