================================================================================
                                  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 June 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 August 1, 2000
---------------------------------                  -----------------------------
Common Stock, $2.50 Par Value                                  3,512,977


                       (This report contains 34 pages)

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



                                       1
<PAGE>




                   NATIONAL BANKSHARES, INC. AND SUBSIDIARIES

                                    Form 10-Q

                                      Index



                                                                       Page
                                                                       ----

Part I      Financial Information


     Item     1 - Financial Statements

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

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

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

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

              Consolidated Statements of Cash Flows,
               Six Months Ended June, 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
                     June 30, 2000 and December 31, 1999

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

Assets
Cash and due from banks                            $13,116         13,311
Interest-bearing deposits                           10,074          9,219
Federal funds sold                                     150          2,800
Securities available for sale                      120,324        113,845
Securities held to maturity (fair value
 $21,618 in 2000 and $23,496 in 1999)               21,855         23,647
Mortgage loans held for sale                           743            229
Loans:
     Real estate construction loans                 16,191         14,669
     Real estate mortgage loans                     62,624         58,829
     Commercial and industrial loans               156,775        149,386
     Loans to individuals                           77,927         73,825
                                                ----------   ------------

          Total loans                              313,517        296,709
     Less unearned income and deferred fees         (2,307)        (1,916)
                                                ----------   ------------

          Loans, net of unearned income
           and deferred fees                       311,210        294,793
     Less: allowance for loan losses                (3,545)        (3,231)
                                                ----------   ------------

          Loans, net                               307,665        291,562
                                                ----------   ------------

Bank premises and equipment, net                     8,394          8,506
Accrued interest receivable                          4,373          4,014
Other real estate owned, net                           219            447
Other assets                                         4,628          4,554
                                                ----------   ------------

          Total assets                           $ 491,541        472,134
                                                ==========   ============

Liabilities and stockholders' equity
Noninterest-bearing demand deposits                $58,661         54,748
Interest-bearing demand deposits                    83,341         88,385
Savings deposits                                    42,760         44,834
Time deposits                                      240,014        219,220
                                                ----------   ------------

          Total deposits                           424,776        407,187
                                                ----------   ------------

Other borrowed funds                                   514         10,460
Long-term debt                                      10,000            ---
Accrued interest payable                               676            651
Other liabilities                                      621          1,113
                                                ----------   ------------

          Total liabilities                        436,587        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 3,512,977 shares in
      2000 and 3,516,977 in 1999                     8,782          8,792
     Retained earnings                              49,566         47,384
     Accumulated other comprehensive (loss)         (3,394)        (3,453)
                                                ----------   ------------

          Total stockholders' equity                54,954         52,723
Commitments and contingent liabilities
                                                ----------   ------------

          Total liabilities and
           Stockholders' equity                  $ 491,541        472,134
                                                ==========   ============



                                       4
<PAGE>


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

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

Interest income
Interest and fees on loans                          $ 6,846          5,840
Interest on interest-bearing deposits                   124             54
Interest on federal funds sold                           80             26
Interest on securities - taxable                      1,678          1,729
Interest on securities - nontaxable                     558            521
                                                 -----------   ------------

          Total interest income                       9,286          8,170
                                                 -----------   ------------

Interest expense
Interest on time deposits $100,000 or more              811            580
Interest on other deposits                            3,284          2,810
Interest on borrowed funds                              179              2
                                                 -----------   ------------

          Total interest expense                      4,274          3,392
                                                 -----------   ------------

          Net interest income                         5,012          4,778
Provision for loan losses                               313            237
                                                 -----------   ------------

          Net interest income after
           provision for loan losses                  4,699          4,541
                                                 -----------   ------------

Noninterest income
Service charges on deposit accounts                     399            347
Other service charges and fees                           78             65
Credit card fees                                        285            214
Trust income                                            195            210
Other income                                              5             16
Realized securities gains (losses), net                 ---              4
                                                 -----------   ------------

          Total noninterest income                      962            856
                                                 -----------   ------------

Noninterest expense
Salaries and employee benefits                        1,556          1,507
Occupancy and furniture and fixtures                    322            270
Data processing and ATM                                 246            216
FDIC  assessment                                         21              8
Credit card processing                                  222            186
Goodwill amortization                                    10             10
Net costs of other real estate owned                     23              3
Other operating expenses                                694            746
                                                 -----------   ------------

          Total noninterest expense                   3,094          2,946
                                                 -----------   ------------

Income before income tax expense                      2,567          2,451
Income tax expense                                     (698)          (651)
                                                 ------------  -------------

          Net income                                  1,869          1,800





                                       5
<PAGE>



Other comprehensive income (loss),net of
 taxes:
Unrealized gains (losses) on securities
 available for sale                                    (17)         (1,067)
                                                 -----------   ------------

         Comprehensive income                       $ 1,852            733
                                                 ===========   ============

         Net income per share                        $ 0.53           0.50
                                                 ===========   ============

          Weighted average number of common
           shares outstanding                     3,516,428      3,607,919
                                                 ===========   ============




                                       6
<PAGE>



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

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

Interest income
Interest and fees on loans                              $13,385         11,375
Interest on interest-bearing deposits                       126             55
Interest on federal funds sold                              175            107
Interest on securities - taxable                          3,338          3,606
Interest on securities - nontaxable                       1,106          1,116
                                                     -----------   ------------

          Total interest income                          18,130         16,259
                                                     -----------   ------------

Interest expense
Interest on time deposits $100,000 or more                1,452          1,246
Interest on other deposits                                6,363          5,578
Interest on borrowed funds                                  345              4
                                                     -----------   ------------

          Total interest expense                          8,160          6,828
                                                     -----------   ------------

          Net interest income                             9,970          9,431
Provision for loan losses                                   666            469
                                                     -----------   ------------

          Net interest income after
           provision for loan losses                      9,304          8,962
                                                     -----------   ------------

Noninterest income
Service charges on deposit accounts                         761            608
Other service charges and fees                              137            113
Credit card fees                                            504            377
Trust income                                                405            441
Other income                                                 80             59
Realized securities gains (losses), net                     ---             24
                                                     -----------   ------------

          Total noninterest income                        1,887          1,622
                                                     -----------   ------------

Noninterest expense
Salaries and employee benefits                            3,114          3,066
Occupancy and furniture and fixtures                        621            527
Data processing and ATM                                     464            415
FDIC assessment                                              42             24
Credit card processing                                      436            342
Goodwill amortization                                        19             19
Net costs of other real estate owned                         26              6
Other operating expenses                                  1,363          1,473
                                                     -----------   ------------

          Total noninterest expense                       6,085          5,872
                                                     -----------   ------------

Income before income tax expense                          5,106          4,712
Income tax expense                                       (1,385)        (1,233)
                                                     ----------    -----------

          Net income                                      3,721          3,479




                                       7
<PAGE>



Other comprehensive income (loss),net of taxes:
Unrealized gains (losses) on securities
 available for sale                                          59        (2,967)
                                                     -----------  -------------

         Comprehensive income                           $ 3,780           512
                                                     ===========  ============

         Net income per share                            $ 1.06          0.94
                                                     ===========  ============

          Weighted average number of common
           shares outstanding                         3,516,702     3,699,865
                                                     ===========  ============




                                       8
<PAGE>



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

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

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

Net income                       ---     3,479        ---          ---    3,479

Unrealized gains
 (losses) on securities
 available for sale,
 net of tax (1)                  ---       ---     (2,967)         ---   (2,967)

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, June 30, 1999      $ 8,792    45,218       (1,948)    (2,182)  49,880
                            ====================================================

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

Net income                       ---     3,721          ---        ---    3,721

Unrealized gains
 (losses) on securities
 available for sale,
 net of tax (1)                  ---       ---           59        ---       59

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

Stock repurchase (3)             (10)      (62)         ---        ---      (72)

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

Balances, June 30,2000       $ 8,782    49,566       (3,394)       ---   54,954
                            ====================================================

(1)   Tax expense of $30 in 2000 and tax benefit of $1,528 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 and 2,000
      shares at $17.50 per share.



                                       9
<PAGE>


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

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

Cash flows from operating activities
Net income                                                $ 3,721       3,479

Adjustments to reconcile net income to net cash
 provided by operating activities:
     Provision for loan losses                                666         469
     Depreciation of bank premises and equipment              499         431
     Amortization of intangibles                               76          76
     Amortization of premiums and accretion of
      Discount, net                                            73         241
     Gains on sales of bank premises and equipment             (2)        ---
     Gains on sales and calls of securities
      Available for sale, net                                  15         (24)
     Gains on sales and calls of securities
      held to maturity, net                                   ---          (2)
     Losses on other real estate owned                         17         ---
      (increase) decrease in:
       Mortgage loans held for sale                          (514)      1,875
       Accrued interest receivable                           (359)        (89)
       Other assets                                          (182)       (268)
     Increase (decrease) in:
       Accrued interest payable                                25           2
       Other liabilities                                     (492)        134
                                                       ------------ ----------

          Net cash provided by operating
           activities                                       3,543       6,324
                                                       -----------  ----------

Cash flows from investing activities
Net decrease in federal funds sold                          2,650       5,089
Net (increase) decrease in interest-bearing
 deposits                                                    (855)      7,027
Proceeds from calls and maturities of securities
 available for sale                                         4,563      21,376
Proceeds from sales of securities available for
 sale                                                         451       1,218
Proceeds from calls and maturities of securities
 held to maturity                                           1,778       4,870
Purchases of securities available for sale                (11,476)    (11,944)
Purchases of loan participations                           (1,770)     (4,688)
Collections of loan participations                            880       7,209
Net increase in loans to customers                        (15,923)    (36,855)
Proceeds from disposal of other real estate owned             211         ---
Recoveries on loans charged off                                44          40
Purchase of bank premises and equipment                      (387)     (1,408)
Proceeds from disposal of bank premises and equipment           2           5
                                                       -----------  ----------

          Net cash used in investing
           activities                                     (19,832)     (8,061)
                                                       -----------  ----------




                                       10
<PAGE>



Cash flows from financing activities
Net increase (decrease) in time deposits                   20,794      (1,316)
Net increase (decrease) in other deposits                  (3,205)      1,613
Net decrease in other borrowed funds                           54       8,384
Dividend paid                                              (1,477)     (1,372)
Repurchase of common stock                                    (72)     (7,761)
                                                       -----------  ----------

          Net cash provided by financing
           activities                                      16,094        (452)
                                                       -----------  ----------

Net decrease in cash and due from banks                      (195)     (2,189)
Cash and due from banks at beginning of period             13,311      14,421
                                                       -----------  ----------

Cash and due from banks at end of period                  $13,116      12,232
                                                       ===========  ==========

Supplemental disclosure of cash flow information

Cash paid for interest                                    $ 8,135      $6,826
                                                       ===========  ==========

Cash paid for income taxes                                $ 1,638      $1,410
                                                       ===========  ==========

Loans charged to the allowance for loan losses              $ 396        $304
                                                       ===========  ==========

Other borrowed funds converted to long-term debt          $10,000         ---
                                                       ===========  ==========

Loans transferred to other real estate owned                  ---         $17
                                                       ===========  ==========




                                       11
<PAGE>



                  National Bankshares, Inc. and Subsidiaries

                  Notes to Consolidated Financial Statements

                                  June 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 six months ended June 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
                                           June 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                  666        469      1,400        624

Loans charged off                         (396)      (304)      (978)      (638)

Recoveries                                  44         40        130        255
                                     -------------------------------------------

Balance at the end of period           $ 3,545      2,884      3,231      2,679
                                     ===========================================

Ratio of allowance for loan losses
to the end of period loans net of
unearned income and deferred fees         1.14%      1.06%      1.10%      1.12%
                                     ===========================================

Ratio of net charge-offs (recoveries
to average loans, net of unearned
income and deferred fees(1)                .23%       .21%       .31%       .17%
                                     ===========================================

Ratio of allowance for loan losses
to nonperforming loans(2)              1508.51%  1,802.50%  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.

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

Nonperforming Assets

 Nonaccrual loans                         $235        160        151         28

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

     Total nonperforming loans             235        160        191         28

Foreclosed property                        219        645        447        628
                                       -----------------------------------------

     Total nonperforming assets           $454        805        638        656
                                       =========================================

Ratio of nonperforming assets to loans,
net of unearned income and deferred
fees, plus other real estate owned         .15%       .29%       .22%       .27%
                                       =========================================



                                       13
<PAGE>



Accruing Loans Past Due 90 Days or More

 Past due 90 days or more and
  still accruing                          $523      2,484      1,077        550
                                       =========================================

 Ratio of loans past due 90 days or
  more to loans, net of unearned
  income and deferred fees                 .17%       .91%       .37%       .23%
                                       =========================================

Impaired Loans

 Total impaired loans                     $522        265        317        373
                                       =========================================

 Impaired loans with a
  valuation allowance                     $216        145        222        145
 Valuation allowance                      (179)      (145)      (154)      (145)
                                       -----------------------------------------

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

 Impaired loans with no
  valuation allowance                     $306        120         95        228
                                       =========================================

 Average recorded investment
  in impaired loans                       $523        302        292        387
                                       =========================================

 Income recognized on impaired
  loans                                   $ 21          7         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
June 30, 2000 are as follows:

                                                       June 30, 2000

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

Available for sale:

  U.S. Treasury            $  6,245            ---             98        6,147
  U.S. Government
   agencies and
   corporations              54,313              2          3,047       51,268
  State and political
   subdivisions              36,212            123            949       35,386
  Mortgage-backed
   securities                12,587              1            318       12,270
  Corporate debt
   securities                14,344            ---            856       13,488
  Federal Home Loan
   Bank stock                 1,328            ---            ---        1,328
  Other securities              437            ---            ---          437
                          -----------------------------------------------------

     Total securities
      available for sale   $125,466            126          5,268      120,324
                          =====================================================

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

                                                 June 30, 2000

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

Held to Maturity:

  U.S. Government
   agencies and
   corporations            $  5,500            ---            286          5,214
  State and political
   subdivisions              16,030             85             39         16,076
  Mortgage-backed
   securities                   325              3            ---            328
                          ------------------------------------------------------

     Total securities
      held to maturity     $ 21,855             88            325         21,618
                          ======================================================




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

June 30, 2000:
  Total capital(1)
  Bankshares
   Consolidated       $60,995   18.1%    26,910       8.0%     N/A        N/A
  NBB                  30,959   14.2%    17,391       8.0%    21,739      10.0%
  BTC                  27,587   23.1%     9,548       8.0%    11,934      10.0%
  Tier I capital(1)
  Bankshares
   Consolidated       $57,450   17.1%    13,455       4.0%     N/A        N/A
  NBB                  28,701   13.2%     8,696       4.0%    13,043       6.0%
  BTC                  26,300   22.0%     4,774       4.0%     7,161       6.0%
  Tier I capital(2)
  Bankshares
   Consolidated       $57,450   11.7%    19,664       4.0%     N/A        N/A
  NBB                  28,701   10.0%    11,498       4.0%    14,372       6.0%
  BTC                  26,300   13.0%     8,068       4.0%    10,085       6.0%

(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 June 30, 2000,
retained  net income from the  Company's  NBB  affiliate  which was free of such
restriction amounted to approximately $1,581.

      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.

Note (5)    Long-Term Debt

      On February 4, 2000,  the  Company's NBB  affiliate  converted  $10,000 in
short-term  borrowings with the Federal Home Loan Bank to long-term debt.  Terms
of the long-term  debt provide for a 7% fixed rate of interest until maturity on
August 4, 2001.

Note (6)    Net Income Per Share

      Basic net income per share is based upon the  weighted  average  number of
common shares  outstanding  (3,516,702  shares at June 30, 2000 and 3,607,669 at
December 31, 1999). Stock options that could potentially dilute basic net income
per share in the future that were not included in the computation of diluted net
income per share because to do so would have been antidilutive  totaled 5,500 at
June 30, 2000.



                                       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 Six Months
Ended June 30, 2000
------------------------------------------------------------------------------

      Net  income  for the six  months  ended  June 30,  2000 was  $3,721  which
represents  an increase of $242 or 6.96% over the first six months of 1999.  The
annualized  return on average  assets for the six months ended June 30, 2000 was
1.56% and 1.58% for the period ended June 30,  1999.  The  annualized  return on
average  equity was 13.87% for the period ended June 30, 2000 and 11.84% for the
period ended June 30, 1999.

      Earnings per share for the period ended June 30, 2000 was $1.06 per share,
an increase of $0.12 per share over the same period in 1999.

The following table provides selected consolidated financial data.

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

Interest income                 $ 18,130      16,259       33,603      31,828
Interest expense                   8,160       6,828       14,203      13,928
Net interest income                9,970       9,431       19,400      17,900
Provision for loan losses            666         469        1,400         624
Noninterest income                 1,887       1,622        3,512       3,174
Noninterest expense                6,085       5,872       11,868      11,061
Income taxes                       1,385       1,233        2,556       2,591
Net income                        $3,721       3,479        7,088       6,798
Return on average assets           1.56%       1.58%         1.56%       1.61%
Return on average equity (1)      13.87%      11.84%        12.61%      11.66%
Basic net income per share        $ 1.06         .94         1.96        1.79
Book value per share              $15.64       14.80        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 June 30,
      1999.



                                       18
<PAGE>



Net Interest Income

      Net interest income at the end of the first six months of 2000 was $9,970,
an increase of $539 or 5.72% 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.

                                    June 30,                December 31,
                                 2000     1999           1999          1998
                             ---------------------------------------------------
Yield on earning assets          8.32%    8.10%          8.18%         8.25%
Cost to fund earning assets      3.61%    3.26%          3.33%         3.50%
                             ---------------------------------------------------

Net interest margin              4.71%    4.84%          4.85%         4.75%
                             ===================================================

      As can be seen by the table shown above,  the yield on earning  assets for
the six months  ended June 30, 2000 has  increased  by 14 basis  points from the
year-ended  December 31, 1999. The cost to fund earning  assets  increased by 28
basis points.  These  elements  combined to produce a 14 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.

                                      June 30,               December 31,
                                 2000     1999           1999          1998
                             ---------------------------------------------------
Yield on earning assets          8.32%    8.10%          8.18%         8.25%
Cost of interest-bearing
 liabilities                     4.44%    4.18%          4.18%         4.48%
                             ---------------------------------------------------

Net interest spread              3.88%    3.92%          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 26 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  1.14% at June 30,  2000.  This  compares  to  1.06% at June 30,  1999.  The
provision for the first six months of 2000 was $666 up $197 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 June 30,  2000 was  $1,887,  an
increase of $265 or 16.34% over the same period in 1999.

      Service  charges  on  deposit  accounts  were  $761 at June 30,  2000,  an
increase of $153 or 25.16%  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 $24 when June 30, 2000 and 1999 are
compared.

      Credit card fees  increased by $127 or 33.69% when the first six months of
2000 and 1999 are compared.  Continued growth in volume was the primary cause of
this increase.

      Trust income  decreased by 8.16% when  compared to the first six 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 $21 for the first six months of 2000.

      Net  securities  gains  and  losses  decreased  $24 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 six  months of 2000 were  $6,085,  an
increase  of $213 or 3.63%  over the first  six  months  of 1999.  This  nominal
increase  was  due in part  to  management's  efforts  to  contain  controllable
expenses.

      Salaries  and  fringe  benefits  were  $3,114  at the end of the first six
months of 2000.  This  represents an increase of $48 or 1.57% over the first six
months of 1999.

      Occupancy expenses increased by $94 or 17.84% when the first six 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 $49 or 11.81%.  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 $94 or 27.49% in the first six months of
2000. Increases in overall volume contributed to this increase.

      Other expenses at June 30, 2000 were $1,363,  which  represents a decrease
of $110 or 7.47% 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.

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

Loans, net                        $ 307,665     270,386     291,562      236,578

Total securities                    142,179     146,524     137,492      166,754

Total assets                        491,541     445,362     472,134      445,166

Total deposits                      424,776     382,993     407,187      382,696

Stockholders' equity                 54,954      49,880      52,723       58,503

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

Loans, net                        $ 297,919     250,981     266,431      225,613

Total securities                    140,092     160,418     151,424      152,432

Interest-bearing assets             452,477     421,317     426,753      398,340

Total assets                        478,364     444,256     454,189      420,988

Total deposits                      412,126     382,576     391,583      359,970

Interest-bearing liabilities        367,985     328,696     340,111      310,634

Stockholders' equity                 53,813      57,093      56,196       58,282


      Total  average  assets at June 30,  2000 were  $478,364,  an  increase  of
$34,108 or 7.68% from June 30, 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.



                                       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  $3,543  primarily  due to  earnings.  Cash  used  in
investing activities totaled $19,832.  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 $16,094.  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  $2,231 or 4.23% from December 31,
1999.  The  principal  reason  for  the  increase  was net  income.  Accumulated
comprehensive  loss  decreased  $59  during  the  first  six  months  of 2000 to
$(3,394).  Offsetting  decreases  were the payment of a dividend  $1,477 and the
repurchase of 4,000 shares of common stock for $72.

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 June 30, 2000,  4,000 shares have been purchased for a total of $72.
Two  thousand  shares  were  purchased  at  $18.50  per  share and the other two
thousand at $17.50 per share.



                                       23
<PAGE>



Selected Affiliate Bank Data

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

                                                     June 30, 2000
                                                 ----------------------

($000's, except for % data)                     NBB               BTC
                                               ----               ----
Assets                                       $ 290,910           198,339

Deposits                                       251,932           172,886

Net Income                                       2,272             1,411

Return on Average Assets                          1.62%             1.43%

Return on Average Equity                         16.67%            11.77%


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.



                                       24
<PAGE>

<TABLE>

The following table sets forth selected quarterly consolidated financial data.

<CAPTION>

                                                         For the Quarter-Ended
($000's, except per share        June 30,       March 31,    December 31,   September 30,      June 30,
and percent data)                  2000           2000           1999            1999            1999
                              -------------   ------------   ------------   -------------    ------------
<S>                           <C>             <C>            <C>            <C>              <C>

Interest income                  $ 9,286        $ 8,844          8,928           8,416           8,170
Interest expense                   4,274          3,886          3,869           3,506           3,392
Net interest income                5,012          4,958          5,059           4,910           4,778
Provision for loan loss              313            353            560             371             237
Noninterest income                   962            925            934             956             856
Noninterest expense                3,094          2,991          2,971           3,025           2,946
Income taxes                         698            687            657             666             651
Net income                       $ 1,869        $ 1,852          1,805           1,804           1,800
 Return on average assets           1.54%         1.58%           1.53%           1.60%          1.61%
 Return on average equity          13.97%        13.98%          13.50%          13.64%         12.55%
Basic net income per share       $  0.53         $ 0.53           0.51            0.51            0.50

<CAPTION>

                                                  Daily Averages for the Quarter Ended
($000's, except per share        June 30,       March 31,    December 31,   September 30,      June 30,
and percent data)                  2000           2000           1999            1999            1999
                              -------------   ------------   ------------   -------------    ------------
<S>                           <C>             <C>            <C>            <C>              <C>
Loans, net                     $ 302,561      $ 293,287        288,045         277,588         260,077
Total securities                 139,993        139,350        140,066         145,064         153,227
Total assets                     485,516        470,378        445,384         452,176         447,683
Total deposits                   419,506        404,746        408,803         392,710         385,610
Stockholders' equity              53,649         53,142         53,468          52,908          57,361


</TABLE>


                                       25
<PAGE>


Results of Operations for the Three Months Ended June 30, 2000

      Net income for the quarter  ended June 30,2000 was $1,869,  an increase of
$69 over the same quarter in 1999.

      The annualized return on average assets for the second quarter of 2000 was
1.54%  compared to 1.61% for the quarter  ended June 30, 1999.  This decline was
primarily  the  result of growth  in  average  assets  coupled  with a  moderate
increase in net income.

      The  annualized  return on average  equity for the three months ended June
30, 2000 was 13.97% compared to 12.55% for the quarter ended June 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  $234 when the second  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 second quarter of 2000 was $313. 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 June 30, 2000 was $962 an
increase of $106 or 12.4%.

      Services  charges  on  deposits  increased  $52.  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 second quarter of 1999. Various
factors  contributed  to  the  decrease  among  which  were  volume  and  market
conditions.

Noninterest Expense

      Noninterest expenses were $3,094 for the three months ended June 30, 2000,
an increase of $148 or 5.0% over the same period in 1999.

      Salaries and fringe benefits  increased $49 or 3.25% when the three months
ended June 30, 2000 and 1999 are compared.

      Occupancy expenses  increased $52 when the two periods are compared.  This
increase  was in part due to the opening of a new  corporate  office and banking
facility in the third quarter of 1999 and ongoing renovations.

      Data processing  expense increased $30, much of which was due to increases
in internet banking expense.

      Other  operating  expenses  declined by $52.  Refer to comments  regarding
franchise taxes in the year-to-date discussion of noninterest expense.

Balance Sheet

      Total average assets at June 30, 2000 were $485,516 an increase of $15,138
or 3.21% over the first  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.




                                       26
<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  Income  -  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.



                                       27
<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 June  30,  2000
approximated $3,852.

Interest Rate Sensitivity

      The  Company's  securities  and  loans and its  deposits  are  subject  to
interest rate risk. The Company's profitability in the near term may temporarily
be affected, either positively by a falling interest rate scenario or negatively
by a period of rising  rates.  The table below sets forth,  as of June 30, 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.



                                       28
<PAGE>

<TABLE>

<CAPTION>


                    Interest Rate                                                  June 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)                        $ 52,547      11,870      34,282     140,780     71,496     310,975
 Federal funds sold                                            150         ---         ---         ---        ---         150
 Interest bearing deposits                                  10,074         ---         ---         ---        ---      10,074
 Securities available for sale (3)                           3,950         699       2,130      29,545     84,000     120,324
 Securities held to maturity (3)                             1,491         829       4,538      13,478      1,519      21,855
 Mortgage loans held for sale                                  743         ---         ---         ---        ---         743
                                                      ------------------------------------------------------------------------
   Total interest-earning assets                          $ 68,955      13,398      40,950     183,803    157,015     464,121
                                                      ========================================================================

Interest-bearing liabilities:
Interest-bearing demand deposits                          $ 83,341         ---         ---         ---        ---      83,341
Savings deposits                                            42,760         ---         ---         ---        ---      42,760
Time deposits                                               33,071      35,733      93,479      77,731        ---     240,014
Other borrowed funds                                           514         ---         ---      10,000        ---      10,514
                                                      ------------------------------------------------------------------------
   Total interest-bearing liabilities                     $159,686      35,733      93,479      87,731        ---     376,629
                                                      ========================================================================
Cumulative ratio of interest-
 Sensitive assets to interest-
 sensitive liabilities                                         .43         .42         .43         .82       1.23         ---
                                                      ========================================================================
Cumulative interest-sensitivity gap                        $(90,731)   (113,066)   (165,595)   (69,523)    87,492         ---
                                                      ========================================================================
</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 June 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.




                                       29
<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 six months  ended June 30,
2000.

($000's, except for percent data)
                                         Return on              Return on
   Rate Shift        Net Income        Average Equity         Average Assets
================================================================================
        300           $5,581                  9.07%                  1.06%
        200            6,306                 10.50%                  1.23%
        100            7,027                 11.91%                  1.41%
     (-)100            8,457                 14.61%                  1.76%
     (-)200            9,166                 15.91%                  1.93%
     (-)300            9,534                 16.66%                  2.02%


      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.




                                       30
<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 June 30, 2000.

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

                 Three Class 1 Directors  of the Company  were elected by a vote
                 of the security holders for a term of three years each.

                 (a)  This matter was submitted to a vote at the Company's
                      Annual Meeting of Stockholders held on April 11, 2000.

                 (b)  The name of each director elected at the meeting follows:
                        Paul A. Duncan
                        L. A. Bowman
                        Cameron L. Forrester

                      The name of each director  whose term of office  continued
                      after the meeting is listed:
                        Charles L. Boatwright
                        Alonzo A. Crouse
                        James A. Deskins, Sr.
                        William T. Peery
                        James G. Rakes
                        Jeffrey R. Stewart

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

                      Election of directors

                      Director                  Votes For         Votes Against
                      --------                  ---------         -------------
                      Paul A. Duncan            2,650,419            33,004
                      L. A. Bowman              2,671,107            12,316
                      Cameron L. Forrester      2,668,881            14,542

Item 5.          Other Information

                 None

Item 6.          Exhibits and Reports on Form 8-K

                 (a)  Exhibit 27 - Financial Data Schedule

                 (b)  Reports on Form 8-K filed  during the three  months  ended
                      June 30, 2000:

                      -  Form 8-K dated May 17, 2000  detailing  a planed  stock
                         repurchase is incorporated herein.
                      -  Form 8-K  dated  May 30,  2000  announcing  a change in
                         public accounting firm is incorporated herein.
                      -  Form 8-K/A dated June 9, 2000  amending Form 8-K  dated
                         May 30, 2000

                                       31
<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:
            ------------            ------------------------------------
                                    James G. Rakes, Chairman
                                    President and Chief Executive Officer



     Date:
            ------------            ------------------------------------
                                    J. Robert Buchanan, Treasurer
                                    (principal financial officer)

                                       32
<PAGE>