National Bankshares













































                            1997   Annual   Report<PAGE>









                                      $ In thousands, except per share data.

             Financial Highlights                  1997      1996     1995
                                                  ------    ------   ------
             Net income per share                $   1.73      1.61     1.46
             Cash dividends declared per share       0.68      0.62     0.57
             Book value per share                   14.73     13.56    12.70

             Loans, net                          $214,552   193,598  163,193
             Total securities                     149,974   171,244  187,635
             Total assets                         402,907   388,850  380,915
             Total deposits                       344,867   334,584  330,313
             Stockholders' equity                  54,029    49,801   48,154
















                                      Contents

                                      Community Caring              2
                                      --------------------------------
                                      To Our Stockholders           4
                                      --------------------------------
                                      Selected Consolidated
                                       Financial Data               5
                                      --------------------------------
                                      Management's Discussion and
                                       Analysis                     6
                                      --------------------------------
                                      Independent Auditors' Report  15
                                      --------------------------------
                                      Consolidated Financial
                                       Statements                   16
                                      --------------------------------
                                      Notes to Consolidated
                                       Financial Statements         20
                                      --------------------------------
                                      Corporate Information         44
                                      --------------------------------<PAGE>


Community
  Caring

National Bankshares, Inc.               "Picture of Community Breakfast"
strives to be an exceptional            (Lara Ramsey - Community
community bank holding                   Oranizations and Businesses)
company dedicated to
providing shareholder value        "Picture of Main Street Moments"
by offering financial services     (Carl Gillespie - Board Member and
to customers through               Sandra Viney - Head Teller)
subsidiary financial
institutions and affiliated             "Picture of Boo Party"
companies in an efficient,              (Halloween Party hosted by BTC
friendly, personalized and              for the area pre-school and
cost-effective manner.  We              head start students)
recognize that to do this, our
financial institutions must
retain the ability to make
decisions locally and must         "Picture of Primeline Social"
actively participate in the        (Customers with Primeline Account)
communities they serve.  We
are committed to offering
competitive and fair
employment opportunities
and to maintaining the highest
standards in all aspects of
our business.















NBB
The National Bank

BTC  Bank of Tazewell County


                                      2<PAGE>




                    "Picture of Crystal Artis"
                    (COE Student - Cooperative
                    Office Education)





     "Picture of Wilderness Trail Festival"
     (Phyllis Duncan - North Main Branch Manager)





                    "Picture of Main Street Moments"
                    (Anthony Dawson, T. C. Bowen and
                    Connie Stallard)





     "Picture of Rich Creek Branch Opening"
     (Betty Johnson - Branch Manager)





























                                      3<PAGE>


                             National Bankshares

"Picture of James G. Rakes"

To Our Stockholders:                     technology  and   employee  computer
                                         training.   Late  in the  year,  the
It  is  always  pleasant  to  report     Board  of  Directors   of  Bank   of
positive  financial results  to you,     Tazewell   County  determined   that
and there are a number of highlights     during  1998  BTC  will combine  its
in National Bankshares'  performance     data  processing  with that  of NBB.
for  1997.    Net income  reached  a     Consolidation    will   allow    the
record  $6.56  million, up  from the     Tazewell bank to  take advantage  of
$6.12 million earned in  1996, which     NBB's updated equipment, and it will
was    itself   a    record   total.     permit  both  banks to  realize some
Stockholders shared in this success,     economies of scale.
with annual dividends  in 1997  that
were  9.68%  higher  than  in  1996.     In  April  1997,  The National  Bank
During the past year, the asset size     opened its eighth  branch office  in
of    Bankshares   and    its   bank     Rich  Creek,   Virginia,  the  third
subsidiaries topped the $400 million     office in Giles County.   At the end
mark for  the  first time,  and  the     of the year, NBB agreed  to purchase
Company ended 1997 with  nearly $403     the Galax, Virginia office  of First
million in total assets.                 American Federal Savings  Bank.   We
                                         hope  to  complete that  transaction
Several  areas  that contributed  to     very soon, and to begin offering our
1997's final results deserve special     style of personalized  banking in  a
mention.  A positive 10.82% increase     new, but nearby, market area.
in   net   loans  accomplished   two
important things.  First, funds were     The  year  just  past proved  to  be
shifted    from    the    securities     profitable  for  our  banks and  our
portfolio   into   higher   yielding     customers.   We worked to attain our
loans.  Second,  thousands of  loans     goal   of   being   an   exceptional
were   made   to   individuals   and     community   bank   holding   company
businesses    throughout   Southwest     dedicated to providing value  to our
Virginia,   keeping   the   deposits     stockholders.      We   are   firmly
generated  in our region  at work in     committed to the  belief that  there
our  localities.     Reflecting  the     is  a  bright  future for  community
strong economy, the  quality of  the     banks,   and   therefore   a   great
loan portfolio remained high and the     opportunity  for  a progressive  and
level of  total nonperforming assets     competitive  company  like ours.   I
dropped  significantly,   from  $1.1     would be  remiss if I did  not thank
million  in 1996 to  $0.5 million in     our    directors,    officers    and
1997.    The Company's  already good     employees for their contributions to
capital  level increased  during the     our  success  in  1997, and  I  also
year, and at year end Bankshares and     thank   you   for   your   continued
subsidiaries had over $54 million in     investment    and    confidence   in
stockholders'  equity.    A  healthy     National Bankshares.
capital base is a positive indicator
of  the  strength of  our subsidiary
banks, and, in  addition, it  allows
us to actively consider new business          James G. Rakes
opportunities.                                President and
                                              Chief Executive Officer
While  enjoying  the  prosperity  of
1997,  we  planned  for the  future.
During the year,  The National  Bank
made  a  significant  investment  in
upgraded    information   processing

                                      4<PAGE>


National Bankshares, Inc. and Subsidiaries
Selected Consolidated Financial Data

              $ In thousands, except per share data.  Years ended December 31,
              ----------------------------------------------------------------

                                    1997     1996     1995     1994     1993
                                   ------   ------   ------   ------   ------
    Selected  Interest income     $ 29,797   28,647   28,094   26,062   25,827
    Income    Interest expense      13,106   13,036   12,703   10,684   10,752
    Statement Net interest income   16,691   15,611   15,391   15,378   15,075
    Data:     Provision for loan
               losses                  435      331      282      553      953
              Noninterest income     2,834    2,693    2,382    2,047    2,399
              Noninterest expense   10,031    9,515   10,033    9,725    9,002
              Income taxes           2,499    2,341    1,933    1,844    1,903
              Net income             6,560    6,117    5,525    5,303    5,644

    Per Share Net income          $   1.73     1.61     1.46     1.40     1.49
    Data:     Cash dividends
               declared               0.68     0.62     0.57     0.52     0.45
              Book value per
               share(1)              14.73    13.56    12.70    11.25    10.81

    Selected  Loans, net          $214,552  193,598  163,193  156,289  150,156
    Balance   Total securities     149,974  171,244  187,635  184,231  174,964
    Sheet     Total assets         402,907  388,850  380,915  373,132  357,773
    Data at   Total deposits       344,867  334,584  330,313  327,686  314,001
    End       Stockholders'
    of Year:   equity               54,029   49,801   48,154   42,658   40,951

    Selected  Loans, net          $204,540  177,419  160,643  152,976  149,027
    Balance   Total securities     157,179  177,403  183,994  185,365  154,740
    Sheet     Total assets         395,932  388,045  378,406  369,962  349,747
    Daily     Total deposits       339,439  335,938  330,261  325,167  307,645
    Averages: Stockholders'
               equity(1)            53,712   49,459   45,726   42,402   39,435

    Selected  Return on average
    Ratios:    assets                 1.66     1.58     1.46     1.43     1.61
              Return on average
               equity(1)             12.21    12.37    12.08    12.51    14.31
              Dividend payout
               ratio                 39.31    37.55    37.32    37.13    32.18
              Average equity to
               average assets(1)     13.57    12.75    12.08    11.46    11.28

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

    (Dollars)                            (Dollars)
       Book Value Per Share Graph         Cash Dividends Per Share Graph
     1993   1994  1995   1996  1997       1993  1994   1995  1996   1997
     ----   ----  ----   ----  ----       ----  ----   ----  ----   ----
    $10.81 11.25  12.70 13.56  14.73     $0.45  0.52   0.57  0.62   0.68




                                      5<PAGE>


Management's Discussion and Analysis

($ In thousands, except per share data.)


                               Net Income Graph

($ In millions)

                 1993      1994      1995      1996      1997
                 ----      ----      ----      ----      ----
                 $5.6      5.3       5.5       6.1       6.6


                    Average Equity to Average Assets Graph

                 1993      1994      1995      1996      1997
                 ----      ----      ----      ----      ----
                11.28%    11.46%    12.08%    12.75%    13.57%


PERFORMANCE SUMMARY
     Net  income in 1997 for  National Bankshares, Inc.  (Bankshares) and its
wholly-owned  subsidiaries, The National Bank of Blacksburg (NBB) and Bank of
Tazewell County  (BTC), (the Company),  was $6,560,  an increase  of $443  or
7.24%.   This produced a  return on  average assets and  a return on  average
equity of 1.66% and 12.21%, respectively.
     Net income for the  Company for 1996 was $6,117, an  increase of $592 or
10.71% over 1995.  The return on average assets and return on  average equity
for 1996 were 1.58% and 12.37%, respectively.
     The Company's net income for 1995 was $5,525 which produced  a return on
average assets of 1.46% and a return on average equity of 12.08%.
     Earnings  per share increased steadily over the three year period rising
from $1.46 per share in 1995, to $1.61 in 1996 and $1.73 in 1997.
     The  Company continues to enjoy  good profitability as  indicated by the
return on  average assets and  steadily increasing earnings  per share.   The
decline in the return on average equity in 1997  was due to a net increase in
the  Company's  capital resulting  from  continued  good earnings  offset  by
dividends paid to the  Company's stockholders.  The dividend payout ratio for
1997 was 39.31%, which compares to 37.55% in 1996 and 37.32% in 1995.

NET INTEREST INCOME
     Net interest income for 1997 was $16,691, an increase of $1,080 or 6.92%
over 1996.   In 1996, net interest income was  $15,611, up $220 or 1.43% from
1995 net interest income of $15,391.
     The net yield on earnings assets for 1997 was 4.75%.  In 1996  and 1995,
the net yields on earning assets were 4.59% and 4.63%, respectively.
     Throughout the  three  year period,  management's strategy  was to  fund
increases in the loan portfolio through liquidity generated principally  from
the  securities portfolio.   In  1997, overall  loan growth  remained strong,
particularly in commercial loans and loans to individuals.
     In 1996,  a substantial amount of  loan growth took place  in the highly
rate-competitive commercial  loan area.  This limited  the effect of the loan
growth on net interest income.





                                      6<PAGE>


INTEREST RATE SENSITIVITY
     The Company considers interest rate risk to be a significant market risk
and has  systems in place to measure the exposure  of net interest income and
fair market  values to  adverse movement in  interest rates.   Interest  rate
sensitivity  analyses indicate  repricing  opportunities, and  interest  rate
shock simulations  indicate potential  economic loss  due to  future interest
rate changes.  Management  realizes certain risks are inherent  and minimizes
these by adjusting asset/liability  management responses to changing economic
conditions.
     The  Company  reduces  the volatility  of  its  net  interest income  by
managing the relationship of  interest-rate sensitive assets to interest-rate
sensitive liabilities.  The Company would be impacted by rising interest rate
changes, as  it is liability  sensitive for the  time period up to  one year.
Beyond  one year, the cumulative  interest rate position  is asset sensitive,
indicating that the effect of rising rates would dissipate in the one to five
year time period.
     The  impact  of  rate  fluctuations  is  dependent,  however,  upon  the
magnitude, the length of the rising  or falling rate trend and the  period of
time  rates remain stable  at a  given level.   Based on  the information and
assumptions  in  effect at  December 31,  1997,  management believes  that an
immediate 200 basis point rate shock, up or down, over a  twelve month period
could significantly affect  the Company's annualized  net interest income  or
net economic value if not countered by management's pricing strategies.

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.
     Loan loss and  other industry  indicators related to  asset quality  are
presented in the Loan Loss Data table.






















                                      7<PAGE>


Management's Discussion and Analysis

                                 Loan Loss Data

    ($ In thousands)                      1997        1996       1995
                                         ------      ------     ------
    Provision for loan losses           $     435        331        282

    Net charge-offs to average
     net loans                               0.28%      0.21%      0.13%

    Allowance for loan losses to
     loans, net of unearned
     interest and deferred fees              1.12%      1.31%      1.58%

    Allowance for loan losses to
     nonperforming loans                 2,802.30%    418.02%    365.60%

    Allowance for loan losses to
     nonperforming assets                  479.92%    236.24%    177.37%

    Nonperforming assets to loans,
     net of unearned income
     and deferred fees, plus
     other real estate owned                 0.23%      0.55%      0.89%

    Nonaccrual loans                    $      87        616        718

    Other real estate owned, net              421        474        762
                                        ---------     ------     ------

       Total nonperforming assets       $     508      1,090      1,480
                                        =========     ======     ======

    Accruing loans past due 90 days
     or more                            $     672        458        574

Nonperforming  loans include  nonaccrual loans  and do  not  include accruing
loans past due 90 days or more.  Nonperforming assets for 1997 have decreased
$582 or 53.39% from 1996 and represent the continuation of a declining trend.
Nonperforming assets for 1996 decreased by $390 or 26.35% from the 1995 total
of $1,480.
     Net charge-offs  to average net loans  for 1997 were .28%,  up .07% when
compared  to 1996.    Allocations  for these  net  charge-offs were  made  in
previous periods.  In  1997, overall asset quality  continued to improve  and
general economic  conditions were  favorable.  While  the provision  for loan
loss increased by  $104 or 31.42%, the previously  mentioned loan charge-offs
and the level  of loan growth resulted  in a lower ratio of  the allowance to
loans.
     Net charge-offs  to average net loans  for 1996 were .21%,  up from 1995
when  that ratio was .13%.   While the Company did  experience an increase in
net charge-offs,  there was an overall trend of improving asset quality.  The
provision for loan  losses, which was  up $49 in  1996 or 17.38% over  1995's
provision of $282, was increased to cover 1996's net charge-offs.  See note 5
of  Notes to  Consolidated  Financial Statements  for additional  information
relating  to  nonperforming  assets,  past  due  loans,  impaired  loans  and
allowance for loan losses.



                                      8<PAGE>


National Bankshares, Inc. and Subsidiaries

     While past efforts directed at improving asset quality have been largely
successful, management is unable to estimate when and under what exact  terms
problem credits will be resolved.  With the information available, management
does not anticipate any significant deterioration in asset quality.  However,
changing  economic conditions,  the  timing and  extent  of changes  and  the
ultimate impact on  the Company's  asset quality is  not within  management's
ability to predict with any degree of precision.

NONINTEREST INCOME
     Noninterest income  for 1997 was  $2,834, an  increase of $141  or 5.24%
over  1996.  Noninterest income for  1996 was $2,693, up  $311 or 13.06% from
1995.
     Service charges on deposits for 1997 totalled $1,131, a decrease of  $52
or 4.40% from 1996.  Service charges on deposit accounts in 1996 were up $190
or 19.13% from the previous  year.  The level  of these charges is driven  by
demand  deposit volume,  types of  accounts opened,  service charge  rates in
effect, the level  of charges such  as overdraft fees  and the waiver  policy
concerning these fees.  The decrease for  1997 and the increase for 1996 were
largely attributable to fluctuations in overdraft volumes.
     Other service charges  and fees are composed  of safe deposit  box rent,
charges associated with letters of credit  and other miscellaneous items.  In
1997,  these charges were  $250, a decrease of  $19 or 7.06%  from 1996.  For
1996, these charges totalled $269, an increase of $41 or 17.98% over 1995.
     Trust income for  1997 was $738 which represents an  increase of $135 or
22.39% over  1996.  In 1996,  trust income was  $603, an increase of  $123 or
25.63% over  1995.  Factors affecting  the growth in trust  income include an
increase in the number of accounts  managed, an increase in the average value
of  the accounts  managed and  an increase  in both  the number and  value of
estates settled. Due  to its nature,  estate business volume and  the related
income is not within management's ability to predict.
     Credit card  income is  composed of several  types of fees  and charges,
including  transaction  or  interchange  fees,  merchant  discount  fees  and
overlimit charges.  In 1997, credit card income totalled $606, an increase of
$95 or  18.59% over 1996.   Credit card income for  1996 was $511,  up $61 or
13.56%  over 1995. Credit card income increased  in 1997 largely because of a
higher  volume   of  interchange  transactions,   created  in  part   by  the
introduction of a debit card product.  The increase in credit card income was
offset somewhat by  the discontinuation  early in 1997  of annual  membership
fees charged to customers.  Given the highly  competitive market which limits
the amount of charges set, revenue increases result from growth in the number
of merchant accounts processed and increases in the number of customer credit
and debit card accounts that result in higher transaction volume.
     Net securities gains were $37 in 1997, down $60 or 61.86% from 1996.  In
1996, net securities gains were $97, down 46.70% from 1995.  Gains and losses
can  occur  as a  result of  portfolio  restructuring, called  securities and
certain market  adjustments.  The majority of the gains for 1996 consisted of
market adjustments  to an  allowance  set up  to  cover potential  losses  on
certain bonds held  by BTC.  These bonds were disposed  of in 1997 and a gain
of approximately $10 was recognized.

NONINTEREST EXPENSE
     Noninterest  expense in  1997 totalled  $10,031, up  $516 or  5.42% from
1996.   In 1996, noninterest expense was $9,515, a  decrease of $518 or 5.16%
from 1995.



                                      9<PAGE>


Management's Discussion and Analysis

     Salaries  and benefits increased $120 or  2.27% from 1996.  The increase
resulted from the addition of staff in connection with NBB's opening of a new
branch office early in 1997 and from salary adjustments, promotions and other
normal  compensation related items, offset by a  $119 decrease in net pension
cost.
     In 1996, salaries and benefits expense totalled $5,278, up $244 or 4.85%
from 1995.  This was largely due to  a $177 increase in net pension cost  and
other normal compensation related items.
     Occupancy  and furniture and fixtures expense increased $74 or 8.37% for
1997 when compared to 1996.  This increase was due to higher costs associated
with the new branch office constructed and opened by NBB  and also to regular
planned  maintenance of  facilities.   Management  anticipates occupancy  and
furniture  and fixtures  expense  to continue  to  increase. NBB  expects  to
purchase a branch office in Galax, Virginia in early 1998 and will also start
construction of a new office building during the year.  The expected increase
in occupancy and furniture and fixtures expense will be somewhat moderated by
a future reduction in  expenses for leased  premises. Occupancy and furniture
and  fixtures expense  experienced a slight  decrease in  1996 of  3.91% over
1995.
     Data processing and ATM expense was $578 for 1997, an increase over 1996
of $81 or 16.30%.  This increase was due to costs associated with the upgrade
of information system hardware and software and  costs related to an expanded
microcomputer network.   Data processing  and ATM expense  is also  likely to
increase  in 1998,  as BTC  completes  a planned  upgrade of  its information
system hardware and software  and an expansion of its  microcomputer network.
In 1996,  data processing  and ATM expense  was $497, an  increase of  $35 or
7.58% over  1995.   The expansion  of a  microcomputer network  and increased
costs of  maintenance  on older  equipment  were the  primary causes  of  the
increase.
     The  cost of  Federal Deposit  Insurance increased in  1997 by  $39 over
1996.  While the banks' base premiums  remain at the minimum required by law,
legislation  enacted in  late  1996 levied  an assessment  on  banks for  the
purpose  of financing  certain costs  associated with  the resolution  of the
savings  and loan  crisis.   This additional  levy is  expected to  remain in
effect until  2018-2019.   In 1996, the  Company's affiliates  paid the  base
premium  of $4,  the minimum  payment  required by  law, which  was a  98.94%
decrease from 1995's assessment.
     Credit card processing expense for 1997 was $551, an increase  of $85 or
18.24% over  1996.   This  increase reflects  additional expense  due to  the
introduction of a debit card product, higher merchant processing costs and an
overall  increase  in business  activity.   In  1996, credit  card processing
expense  increased  by $55  or  13.38%,  which was  primarily  the result  of
increased business activity.
     Net costs of other real estate owned for 1997 were $8, a decrease  of $3
or 60.00%  from 1996.   Other  real estate owned  net of  valuation allowance
decreased in 1997 by  $53.  Efforts  to market existing properties  continue,
however, the exact timing, terms and conditions of the sale of the properties
remain unknown.   In 1996, net costs of other real  estate owned decreased by
$190 or 97.44% from 1995,  primarily due to a $119 reduction in the valuation
allowance for other real estate in 1996.
     Other  operating expenses  were $2,465 in  1997, up  $114 or  4.85% from
1996.   The other operating  expense category  in 1996 decreased  by $251  or
9.65% from 1995 and was due primarily to a $111 reduction in merger expenses,
from $268 in 1995 to $157 in 1996.  Other operating expenses in 1995 included
a  contribution to a community development corporation which was not incurred
in 1996.

                                      10<PAGE>


National Bankshares, Inc. and Subsidiaries

INCOME TAXES
     Higher pre-tax income in 1997 resulted in a $158 increase  in income tax
expense when  compared to 1996.   Tax exempt interest income  continues to be
the  primary  difference  between  the "expected"  and  reported  income  tax
expense.   The  Company's effective tax  rates for  1997, 1996  and 1995 were
27.59%, 27.68% and 25.92%, respectively.   The increase in the effective  tax
rate for 1996  was due primarily to  the level of tax exempt  interest income
being comparable to 1995.
     See  note 9 of Notes to Consolidated Financial Statements for additional
information relating to income taxes.

EFFECTS OF INFLATION
     The Company's  consolidated statements  of income generally  reflect the
effects of inflation.  Since  interest rates, loan demand and  deposit levels
are  related to inflation, the resulting changes  are included in net income.
The most  significant item which does not reflect the effects of inflation is
depreciation expense, because historical dollar values used to determine this
expense  do not  reflect  the effect  of  inflation on  the  market value  of
depreciable assets after their acquisition.

BALANCE SHEET
     Total assets at year end 1997 were $402,907 which represents an increase
of $14,057 or 3.62% over the previous year.  The Company's primary methods of
achieving growth are to  seek to increase  deposits at its bank  subsidiaries
and  to grow through  corporate acquisitions and  mergers.  In  both 1997 and
1996,  the  Company  experienced  excess liquidity,  and  because  management
stressed  profitability over  growth,  management's strategy  was to  utilize
those  funds before aggressively  pursuing new deposits.   In  1997 and 1996,
total  average  deposits  grew  by  $3,501  and  $5,677,  respectively, which
represents growth rates of 1.04% and 1.72%, respectively.

                              Total Assets Graph

(Millions)

                 1993      1994      1995      1996      1997
                 ----      ----      ----      ----      ----
                $357.8     373.1     380.9     388.9     402.9

LOANS
     Loans,  net of  unearned income  and deferred fees,  grew by  $20,817 or
10.61%  in 1997.   Commercial loans grew  by $13,860 or 15.84%  with loans to
individuals increasing by $5,644 or 9.25%.
     In  1996,  loans, net  of  unearned income  and deferred  fees,  grew by
$30,355  or 18.31%.    Commercial loans,  which  grew by  $27,910 or  46.82%,
accounted for the largest portion of the increase.
     The Company engages in the origination and sale of mortgage loans in the
secondary  market.   In 1997  and 1996,  the Company  originated  $19,120 and
$17,907,  respectively,  and  sold $19,231  and  $18,271  in  1997 and  1996,
respectively, of mortgage loans.

SECURITIES
     In 1997, bank-owned securities declined by $21,270 or 12.42% compared to
1996.   The  decrease took  place  in the  held to  maturity portfolio  which
declined  by  $24,318 or  22.37%.   Securities  available for  sale increased
$3,048 or 4.87% offsetting  a portion of that decline.  In  1996, total bank-

                                      11<PAGE>


Management's Discussion and Analysis

owned securities were $171,244, a decrease of $16,391 or 8.74% from 1995.  In
1997 and  1996, cash  flows resulting from  the reduction  in the  securities
portfolio were used to fund loan growth.
     The  Company's  investment policy  stresses  safety  with a  program  of
purchasing  high quality securities such as U.S. Treasury and U.S. Government
agency issues, state, county, and municipal bonds, corporate bonds, mortgage-
backed  securities and  other bank  qualified investments.   The  Company has
classified all  of its investment  securities as either  held to maturity  or
available for  sale, as  the Company does  not engage in  trading activities.
Investment strategies  are  adjusted in  response  to market  conditions  and
available investment vehicles.
     At  December  31,  1997   and  1996,  the  Company  had   no  investment
concentrations in any single issues (excluding U.S. Government) that exceeded
ten percent of capital.

DEPOSITS
     At year end 1997, total deposits were $344,867 which represent a $10,283
or a  3.07% increase  over 1996.   At December 31  1996, total  deposits were
$334,584, an increase of 1.29% over 1995.
     Average noninterest-bearing deposits of $44,193 grew by $2,196 or  5.23%
in  1997, $3,164  or 8.15%  in 1996  and $2,109  or 5.74%  in 1995.   Average
interest-bearing deposits were $295,246  in 1997, an increase of  $1,305 over
1996.    In 1996,  average  interest-bearing deposits  of  $293,941 increased
$2,513 from the 1995 total of $291,428.

DERIVATIVES AND MARKET RISK EXPOSURES
     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.  See note 13 of Notes to Consolidated Financial Statements for
additional information  relating to  financial  instruments with  off-balance
sheet  risk.  Management  does not plan  any future involvement  in high risk
derivative  products.    The   Company  has  investments  in  mortgage-backed
securities,  collateralized mortgage obligations,  structured notes and other
similar instruments which are  included in securities available for  sale and
securities held to maturity.  The fair value of these investments at December
31, 1997 approximated $11,144.  See note 3 of Notes to Consolidated Financial
Statements for additional information relating to securities.
     The  Company's securities and loans  are subject to  credit and interest
rate risk  and its deposits  are subject to  interest rate risk.   Management
considers its credit risk when a loan is granted and monitors its credit risk
after  the loan  is granted.   The  Company maintains  an allowance  for loan
losses to absorb losses in the collection of its loans.  See note 5  of Notes
to   Consolidated   Financial   Statements  for   information   relating   to
nonperforming assets, past due  loans, impaired loans and allowance  for loan
losses.    See note  14 of  Notes  to Consolidated  Financial  Statements for
information relating  to concentrations of credit  risk.  The Company  has an
asset/liability  program  to manage  its interest  rate  risk.   This program
provides  management with  information  related to  the  rate sensitivity  of
certain   assets  and  liabilities  and  the  effect  of  changing  rates  on
profitability  and capital accounts.  While this planning process is designed
to  protect the Company  over the long  term, it  does not provide  near term
protection from interest rate  shocks, as interest rate sensitive  assets and
liabilities do not, by their nature, move up or down in tandem in response to

                                      12<PAGE>


National Bankshares, Inc. and Subsidiaries

changes in the overall rate environment.  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.   See note
15  of Notes to Consolidated Financial Statements for information relating to
fair value of financial instruments.

LIQUIDITY
     Liquidity  is  the  ability to  provide  sufficient  cash  flow to  meet
financial commitments and  to fund  additional loan demand  or withdrawal  of
existing deposits.  Sources of liquidity include deposits, loan principal and
interest repayments, sales, calls and maturities of securities and short-term
borrowings.  The Company  maintained an adequate liquidity level  during 1997
and 1996.  Management is not aware  of any trends, commitments or events that
will result in or that are reasonably likely to result in a material increase
or decrease in liquidity.
     Net cash from operating activities of $7,573 in 1997 decreased $395 from
1996  due primarily to  the increase  in net income  offset by  the change in
other  liabilities.    Net  cash  flows  provided  by  operating  activities,
securities and financing activities  for 1997 of $7,573, $21,966  and $7,562,
respectively,  were used  to fund  the net  increases in federal  funds sold,
interest-bearing deposits,  loans made  to customers  and  purchases of  loan
participations of $2,390, $9,637, $17,400 and $6,189, respectively.
     Net  cash from operating activities  of $7,968 in  1996 increased $1,604
from 1995  and was primarily attributable  to the increase in  net income and
the change  in the  mortgage loans  held for sale  category which  fluctuates
based upon loan demand and the timing  of loan sales in the secondary market.
Cash  flows  from  investing activities  in  1996  continued  to reflect  the
shifting  of securities to  the loan  portfolio and  from securities  held to
maturity  to  available for  sale.   Net  cash  flows  provided by  operating
activities, federal  funds sold, securities and financing activities for 1996
of $7,968, $5,815, $15,542 and $1,930, respectively, were used principally to
fund the net increase in loans of $31,633.
     A  pending  acquisition by  NBB of  the Galax  branch of  First American
Federal  Savings  Bank, which  is expected  to close  in  early 1998,  is not
anticipated to  have  a material  impact  on the  Company's  liquidity.   See
"Future Management Considerations."

CAPITAL RESOURCES
     Total stockholders' equity increased $4,228 from 1996 to 1997 and $1,647
from 1995 to 1996.  Net income, less cash dividends on common stock of $2,579
in 1997  and $2,297  in  1996, accounted  primarily for  the  increase.   Net
unrealized gains (losses) on  securities available for sale, net  of deferred
income taxes, were $194 at December 31, 1997, $(248) at December 31, 1996 and
$282  at  December 31,  1995.   These  unrealized  net gains  and  losses are
recorded as a separate component of stockholders' equity and will continue to
be subject  to change in  future years  due to fluctuations  in fair  values,
sales, purchases, maturities and calls of securities classified as  available
for sale.
     The Company  has operated from  a consistently strong  capital position.
The ratio  of total stockholders' equity  to total assets was  13.41% at year
end  1997 compared to 12.81%  at year end  1996 and 12.64% at  year end 1995.
Banks are required  to apply  percentages to various  assets, including  off-
balance  sheet assets, to reflect  their perceived risk.   Regulatory defined
capital is  divided by risk weighted  assets in determining the  bank's risk-
based  capital  ratio.    No  regulatory  authorities have  advised  National
Bankshares, Inc., The National Bank of Blacksburg or Bank  of Tazewell County

                                      13<PAGE>


Management's Discussion and Analysis

of any  specific  leverage ratios  applicable to  them. National  Bankshares,
Inc., The National  Bank of Blacksburg and Bank  of Tazewell County's capital
adequacy ratios exceed regulatory  requirements and provide added flexibility
to  take advantage of business  opportunities as they arise.   See note 10 of
Notes to Consolidated Financial Statements for additional information.

                          Stockholders' Equity Graph

(Millions)

                 1993      1994      1995      1996      1997
                 ----      ----      ----      ----      ----
                $41.0      42.7      48.2      49.8      54.0


RECENT ACCOUNTING PRONOUNCEMENTS
     See  notes 1 and  17 of Notes  to Consolidated  Financial Statements for
information relating to recent accounting pronouncements.

MERGER
     On June 1, 1996, Bankshares issued  1,888,209 shares of its common stock
in  a one-for-one exchange  for all the  outstanding common stock  of Bank of
Tazewell  County,  Tazewell, Virginia.   This  business combination  has been
accounted for  as a  pooling-of-interests 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  Bank of
Tazewell County.   There were no  adjustments of a material  amount resulting
from Bank of Tazewell County's adoption of Bankshares' accounting policies.
     In May  1996, Bankshares  declared  a stock  split of  .11129 per  share
effected  in the form of a stock dividend to the holders of Bankshares 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.
Bank  of Tazewell  County  is well  capitalized  with excess  liquidity,  and
provides the Company with an expanded market place.

FUTURE MANAGEMENT CONSIDERATIONS

     Year 2000
     The Company is  cognizant of the  risks and challenges presented  by the
impact  of  the  century date  change  on  information  processing and  other
computer controlled systems.  The Year 2000 presents two related but distinct
issues  for  financial  institutions.  The  Company's   internal  information
processing and computer controlled  systems must be Year 2000  compliant, and
the subsidiary  banks' compliance efforts  are subject to  regulatory review.
In  addition, banks face credit  risk should their  commercial loan customers
suffer significant business disruptions as a result of the impact of computer
failures in their own operations or in those of their suppliers or customers.
     As  a normal part of business operations, the Company's subsidiaries are
currently in the  process of upgrading  information processing systems  which
will  include the  acquisition  of new  information  processing hardware  and
software.    The primary  goal  of  this  project  is  to  provide  a  shared
information  processing system  for affiliates,  additional capacity  and the
ability to use the most advanced software available from vendors.



                                      14<PAGE>


National Bankshares, Inc. and Subsidiaries

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

     Pending Acquisition
     On  December 26, 1997,  NBB entered  into an  agreement to  purchase the
assets, including real estate and improvements, and assume the liabilities of
the  Galax, Virginia, branch office  of First American  Federal Savings Bank.
The  transaction, which  is subject  to regulatory  approval, is  expected to
close in early 1998.

COMMON STOCK INFORMATION AND DIVIDENDS
     National Bankshares, Inc.'s common stock is traded on a limited basis in
the over-the-counter  market and is not  listed on any exchange  or quoted on
NASDAQ.  Some trades  in the Company's stock are reported on the OTC Bulletin
Board under the trading symbol NKSH.  Local brokerage firms are familiar with
and active in trading in the common stock of National Bankshares, Inc.  As of
December  31, 1997, there were 1,163 stockholders of Bankshares common stock.
The following  is a summary of the  market price per share  and cash dividend
per share of the common stock of National Bankshares, Inc. for 1997 and 1996.
Prices do not  necessarily reflect the prices which would  have prevailed had
there been an active  trading market, nor do they reflect  unreported trades,
which may have been at lower or higher prices.

                          Common Stock Market Prices

                                                        Dividends
                               1997         1996        Per Share
                           -----------   ----------    -----------
                           High    Low   High   Low    1997   1996
                           ----    ---   ----   ---    ----   ----

           First Quarter  $26.25  25.00 $26.50  24.00   ---    ---
           Second Quarter  25.87  23.50  26.25  24.50   .33    .30
           Third Quarter   25.75  23.81  27.00  24.50   ---    ---
           Fourth Quarter  26.50  23.50  26.50  25.00   .35    .32


     Bankshares'  primary source of funds  for dividend payments is dividends
from its subsidiaries, The National  Bank of Blacksburg and Bank  of Tazewell
County.    Bank  regulatory  agencies  restrict  dividend   payments  of  the
subsidiaries as  more fully  disclosed in  note 10  of Notes  to Consolidated
Financial Statements.


















                                      15<PAGE>


Independent Auditors' Report



The Board of Directors and Stockholders
National Bankshares, Inc.:

     We have audited the accompanying consolidated balance sheets of National
Bankshares,  Inc. and subsidiaries as of December  31, 1997 and 1996, and the
related consolidated  statements of income, changes  in stockholders' equity,
and cash flows  for each of the years in the three-year period ended December
31,  1997.  These consolidated financial statements are the responsibility of
the Company's  management.   Our responsibility is  to express an  opinion on
these consolidated  financial statements  based on  our audits.   We  did not
audit the 1995  financial statements of  Bank of  Tazewell County, a  wholly-
owned  subsidiary,  which statements  reflect  total  assets constituting  47
percent and total interest income constituting 43 percent of the related 1995
consolidated totals.  Those  statements were audited by other  auditors whose
report has been furnished  to us, and our  opinion, insofar as it relates  to
the amounts included for Bank of Tazewell County for 1995, is based solely on
the report of the other auditors.

     We conducted our audits in  accordance with generally accepted  auditing
standards.  Those  standards require that  we plan and  perform the audit  to
obtain reasonable assurance about  whether the financial statements are  free
of material misstatement.   An  audit includes  examining, on  a test  basis,
evidence supporting the amounts and disclosures  in the financial statements.
An  audit  also  includes  assessing  the  accounting  principles   used  and
significant estimates made by  management, as well as evaluating  the overall
financial statement presentation.   We believe that our audits and the report
of the other auditors provide a reasonable basis for our opinion.

     In  our  opinion, based  on  our  audits and  the  report  of the  other
auditors,  the consolidated  financial statements  referred to  above present
fairly,  in  all  material  respects,  the  financial  position  of  National
Bankshares,  Inc. and subsidiaries as of December  31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year  period  ended December  31,  1997  in  conformity with  generally
accepted accounting principles.



                                                        KPMG Peat Marwick LLP



Roanoke, Virginia
February 6, 1998













                                      16<PAGE>


National Bankshares, Inc. and Subsidiaries
Consolidated Balance Sheets


$ In thousands except share and per share data.
 December 31, 1997 and 1996                                     1997      1996
                                                               ------    ------
Assets       Cash and due from banks (notes 2 and 15)         $ 12,435    9,989
             Interest-bearing deposits (note 15)                 9,728       91
             Federal funds sold (note 15)                        4,300    1,910
             Securities available for sale (notes 3 and 15)     65,582   62,534
             Securities held to maturity (fair value
              $85,005 in 1997 and $108,755 in 1996)             84,392  108,710
             Mortgage loans held for sale (notes 13, 14 and 15)    405      516
             Loans (notes 4, 5, 14 and 15):
                  Real estate construction loans                 8,510    6,295
                  Real estate mortgage loans                    42,969   43,917
                  Commercial and industrial loans              101,379   87,519
                  Loans to individuals                          66,635   60,991
                                                              --------  -------

                       Total loans                             219,493  198,722

                  Less unearned income and deferred fees        (2,503)  (2,549)
                                                              --------  -------

                       Loans, net of unearned income and
                        deferred fees                          216,990  196,173

                  Less allowance for loan losses (note 5)       (2,438)  (2,575)
                                                              --------  -------

                       Loans, net                              214,552  193,598
                                                              --------  -------

             Bank premises and equipment, net (note 6)           5,739    5,037
             Accrued interest receivable                         3,445    3,510
             Other real estate owned, net (note 5)                 421      474
             Other assets (note 9)                               1,908    2,481
                                                              --------  -------

                       Total assets                           $402,907  388,850
                                                              ========  =======

Liabilities  Noninterest-bearing demand deposits              $ 45,093   44,096
and          Interest-bearing demand deposits                   77,863   73,804
Stockholders'Savings deposits                                   46,773   48,164
Equity       Time deposits (note 7)                            175,138  168,520
                                                              --------  -------

                       Total deposits (note 15)                344,867  334,584
                                                              --------  -------







                                         17<PAGE>


             Other borrowed funds (note 15)                        485      627
             Accrued interest payable                              722      700
             Other liabilities (note 8)                            966    1,495
                                                              --------  -------

                       Total liabilities                       347,040  337,406
                                                              --------  -------

             Common stock subject to ESOP put option (note 8)    1,838    1,643
                                                              --------  -------

             Stockholders' equity (notes 9, 10 and 16):
                  Preferred stock of no par value. Authorized
                   5,000,000 shares; none issued and
                   outstanding                                     ---      ---
                  Common stock of $2.50 par value. Authorized
                   5,000,000 shares; issued and outstanding
                   3,792,833 shares                              9,482    9,482
                  Retained earnings                             46,191   42,210
                  Net unrealized gains (losses) on securities
                   available for sale                              194     (248)
                  Common stock subject to ESOP put option
                   (72,783 shares at $25.25 per share in 1997
                   and 64,796 shares at $25.35 per share in
                   1996) (note 8)                               (1,838)  (1,643)
                                                              --------  -------

                       Total stockholders' equity               54,029   49,801

             Commitments and contingent liabilities (notes 6,
              8, 13 and 16)

                                                              --------  -------
                       Total liabilities and stockholders'
                        equity                                $402,907  388,850
                                                              ========  =======





















See accompanying notes to consolidated financial statements.

                                         18<PAGE>


National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Income

$ In thousands, except per share data. Years ended
December 31, 1997, 1996 and 1995                     1997      1996      1995
                                                    ------    ------    ------

Interest    Interest and fees on loans              $19,553    17,232    15,761
Income      Interest on federal funds sold              451       476       704
            Interest on interest-bearing deposits       230        91       ---
            Interest on securities - taxable          7,776     8,877     9,723
            Interest on securities - nontaxable       1,787     1,971     1,906
                                                    -------   -------   -------

                 Total interest income               29,797    28,647    28,094
                                                    -------   -------   -------

Interest    Interest on time deposits of $100,000
Expense      or more                                  2,335     2,070     1,898
            Interest on other deposits               10,754    10,939    10,770
            Interest on borrowed funds                   17        27        35
                                                    -------   -------   -------

                 Total interest expense              13,106    13,036    12,703
                                                    -------   -------   -------

                 Net interest income                 16,691    15,611    15,391

            Provision for loan losses (note 5)          435       331       282
                                                    -------   -------   -------

                 Net interest income after
                  provision for loan losses          16,256    15,280    15,109
                                                    -------   -------   -------

Noninterest Service charges on deposit accounts       1,131     1,183       993
Income      Other service charges and fees              250       269       228
            Credit card fees                            606       511       450
            Trust income                                738       603       480
            Other income                                 72        30        49
            Realized securities gains, net
             (note 3)                                    37        97       182
                                                    -------   -------   -------

                 Total noninterest income             2,834     2,693     2,382
                                                    -------   -------   -------

Noninterest Salaries and employee benefits (note 8)   5,398     5,278     5,034
Expense     Occupancy and furniture and fixtures        958       884       920
            Data processing and ATM                     578       497       462
            FDIC assessment                              43         4       379
            Credit card processing                      551       466       411
            Goodwill amortization                        30        30        30
            Net costs of other real estate owned          8         5       195
            Other operating expense                   2,465     2,351     2,602
                                                    -------   -------   -------

                 Total noninterest expense           10,031     9,515    10,033
                                                    -------   -------   -------


                                         19<PAGE>


            Income before income tax expense          9,059     8,458     7,458
            Income tax expense (note 9)               2,499     2,341     1,933
                                                    -------   -------   -------

                 Net income                         $ 6,560     6,117     5,525
                                                    =======   =======   =======

                 Net income per share (note 1)      $  1.73      1.61      1.46
                                                    =======   =======   =======














































See accompanying notes to consolidated financial statements.



                                         20<PAGE>


National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity


                                                       Net
                                                   Unrealized   Common
                                                      Gains      Stock
                                                   (Losses) on  Subject
$ In thousands, except per share                   Securities   to ESOP
data.  Years ended December 31,    Common Retained  Available     Put
1997, 1996 and 1995.               Stock  Earnings  For Sale    Option   Total
                                  ------- -------- -----------  ------- -------

Balances, December 31, 1994       $ 9,482   34,927    (1,751)      ---   42,658
Net income                            ---    5,525       ---       ---    5,525
Cash dividends ($.57 per share)       ---   (1,080)      ---       ---   (1,080)
Cash dividends of BTC declared
 prior to merger                      ---     (982)      ---       ---     (982)
Change in net unrealized gains
 (losses) on securities available
 for sale, net of income tax
 expense of $1,047                    ---      ---     2,033       ---    2,033
                                  -------   ------    ------    ------   ------

Balances, December 31, 1995         9,482   38,390       282       ---   48,154
Net income                            ---    6,117       ---       ---    6,117
Cash dividends ($.62 per share)       ---   (1,787)      ---       ---   (1,787)
Cash dividends of BTC declared
 prior to merger                      ---     (510)      ---       ---     (510)
Change in net unrealized gains
 (losses) on securities available
 for sale, net of income tax
 benefit of $273                      ---      ---      (530)      ---     (530)
Common stock subject to ESOP put
 option                               ---      ---       ---    (1,643)  (1,643)
                                  -------   ------    ------    ------   ------

Balances, December 31, 1996         9,482   42,210      (248)   (1,643)  49,801
Net income                            ---    6,560       ---       ---    6,560
Cash dividends ($.68 per share)       ---   (2,579)      ---       ---   (2,579)
Change in net unrealized gains
 (losses) on securities available
 for sale, net of income tax
 expense of $228                      ---      ---       442       ---      442
Change in common stock subject to
 ESOP put option                      ---      ---       ---      (195)    (195)
                                  -------   ------    ------    ------   ------
Balances, December 31, 1997       $ 9,482   46,191       194    (1,838)  54,029
                                  =======   ======    ======    ======   ======






See accompanying notes to consolidated financial statements.



                                         21<PAGE>

<TABLE>
National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<CAPTION>
$ In thousands. Years ended December 31, 1997, 1996 and 1995     1997      1996      1995
                                                                ------    ------    ------
<S>         <C>                                                 <C>       <C>       <C>
Cash Flows  Net income                                          $ 6,560    6,117      5,525
from        Adjustments to reconcile net income to net cash
Operating    provided by operating activities:
Activities      Provision for loan losses                           435      331        282
(Note 12)       Recovery of bond losses                             (10)     (89)       ---
                Provision for deferred income taxes                 300       (4)      (120)
                Depreciation of bank premises and equipment         586      517        535
                Amortization of intangibles                         121      121        145
                Amortization of premiums and accretion of
                 discounts, net                                      11       52        (32)
                (Gains) losses on bank premises and
                 equipment disposals                                  8        7         (9)
                Gains on sales and calls of
                 securities available for sale, net                  (5)      (3)        (2)
                Gains on calls of securities held to
                 maturity, net                                      (22)      (5)      (180)
                (Gains) losses and write-downs on other
                 real estate owned                                   (4)      (9)       168
                (Increase) decrease in:
                      Mortgage loans held for sale                  111      364       (488)
                      Accrued interest receivable                    65      111         88
                      Other assets                                  (76)      40        129
                Increase (decrease) in:
                      Accrued interest payable                       22      (44)       170
                      Other liabilities                            (529)     462        153
                                                                -------  -------    -------

                           Net cash provided by operating
                            activities                            7,573    7,968      6,364
                                                                -------  -------    -------

Cash Flows  Net (increase) decrease in federal funds sold        (2,390)   5,815       (100)
from        Net increase in interest-bearing deposits            (9,637)     (91)       ---
Investing   Proceeds from sales of securities available for
Activities   sale                                                   ---    1,000      1,867
(Note 12)




                                                      22<PAGE>


            Proceeds from calls and maturities of
             securities available for sale                        9,839   21,938      8,134
            Proceeds from calls and maturities of
             securities held to maturity                         35,673   35,569     28,592
            Purchases of securities available for sale          (12,201) (10,397)   (16,432)
            Purchases of securities held to maturity            (11,345) (32,477)   (22,271)
            Purchases of loan participations                     (6,189)  (1,704)       ---
            Collection of loan participations                     1,934    2,448      1,928
            Net increase in loans made to customers             (17,400) (31,633)    (9,197)
            Proceeds from disposal of other real estate owned       216      325        220
            Recoveries on loans charged off                         107      125         83
            Bank premises and equipment expenditures             (1,304)    (882)      (492)
            Proceeds from sale of bank premises and equipment         8      ---          9
                                                                -------  -------    -------

                           Net cash used in investing
                            activities                          (12,689)  (9,964)    (7,659)
                                                                -------  -------    -------

Cash Flows  Net increase in time deposits                         6,618    1,672     18,179
from        Net increase (decrease) in other deposits             3,665    2,599    (15,552)
Financing   Net increase (decrease) in other borrowed funds        (142)     466       (630)
Activities  Cash dividends paid                                  (2,579)  (2,807)    (2,056)
(Note 12)                                                       -------  -------    -------

                           Net cash provided by (used in)
                            financing activities                  7,562    1,930        (59)
                                                                -------  -------    -------

            Net increase (decrease) in cash and due from banks    2,446      (66)    (1,354)
            Cash and due from banks at beginning of year          9,989   10,055     11,409
                                                                -------  -------    -------

            Cash and due from banks at end of year              $12,435    9,989     10,055
                                                                =======  =======    =======





<FN>
See accompanying notes to consolidated financial statements.
</TABLE>

                                                      23<PAGE>

Notes to Consolidated Financial Statements

$ In thousands, except share and per share data.
December 31, 1997, 1996 and 1995

Note 1: Summary of Significant Accounting Policies
    The  accounting  and  reporting  policies  of  National  Bankshares,  Inc.
(Bankshares)  and  its  wholly-owned   subsidiaries,  The  National  Bank  of
Blacksburg  (NBB) and  Bank of  Tazewell County  (BTC), conform  to generally
accepted  accounting  principles and  general  practices  within the  banking
industry (see note 16 for merger with BTC).
    The following is a summary of the more significant accounting policies.

    (A)   Consolidation
          The  consolidated  financial  statements include  the  accounts  of
    National  Bankshares,   Inc.  and   its  wholly-owned   subsidiaries  (the
    Company).  All  significant intercompany  balances  and transactions  have
    been eliminated.

    (B)   Cash and Cash Equivalents
          For purposes  of reporting  cash flows,  cash and  cash equivalents
    include cash on hand and due from banks.

    (C)   Securities
          Securities  available for  sale are  reported at  fair  value, with
    unrealized gains and losses excluded from  net income and reported, net of
    income  taxes,   in  a   separate  component   of  stockholders'   equity.
    Securities held to maturity are stated  at cost, adjusted for amortization
    of  premiums and accretion of  discounts on a basis which approximates the
    level yield method.   The Company  does not engage in  securities trading.
    Gains  and  losses  on  securities  are  accounted  for  on  the completed
    transaction basis by the specific identification method.
          A decline in  the fair value of  any available for sale or  held to
    maturity security  below  cost that  is  deemed  other than  temporary  is
    charged to income resulting  in the establishment of a new cost basis  for
    the security.

    (D)   Loans
          Loans  are stated  at  the  amount  of  funds  disbursed  plus  the
    applicable  amount, if  any, of  unearned  income  and deferred  fees less
    payments  received.   Income  on  installment  loans,  including  impaired
    installment  loans that  have not  been  placed  in nonaccrual  status, is
    recognized on methods which approximate the  level yield method.  Interest
    on all  other loans, including  impaired other  loans that  have not  been
    placed in nonaccrual status, is accrued  based on the balance  outstanding
    times the applicable interest rate.
          Interest is  recognized on the cash basis  for all loans carried in
    nonaccrual status.  Loans generally are  placed in nonaccrual status  when
    the collection  of principal  or interest  is 90  days or  more past  due,
    unless  the  obligation  is  both  well-secured  and  in  the  process  of
    collection.
          Loan  origination and commitment fees  and certain direct costs are
    being  deferred, and  the net  amount  amortized as  an adjustment  to the
    related  loan's  yield.    These  amounts  are  being  amortized  over the
    contractual life of the related loans.
          Effective January  1, 1995, the  Company adopted the  provisions of
    Statement  of   Financial  Accounting  Standards   (Statement)  No.   114,
    "Accounting  by  Creditors  for  Impairment  of  a  Loan,"  as  amended by
    Statement 118, "Accounting by Creditors for  Impairment of a Loan - Income

                                      24<PAGE>

National Bankshares, Inc. and Subsidiaries

    Recognition  and Disclosures."   Statement  114, as  amended by  Statement
    118, requires  that impaired loans within  the scope of  the Statements be
    presented  in the financial  statements at  the present  value of expected
    future  cash flows or  at the  fair value of the  loan's collateral if the
    loan is deemed "collateral dependent."   A valuation allowance is required
    to  the extent  that the measure  of the impaired  loans is less  than the
    recorded  investment.   Statement 114  does not  apply to  large groups of
    small-balance homogeneous loans such as residential real estate  mortgage,
    consumer  installment,  home  equity  and  bank   card  loans,  which  are
    collectively evaluated  for impairment.  Statement  118 allows a  creditor
    to  use existing methods  for recognizing  interest income  on an impaired
    loan.  Adoption of this  Statement did not  have a material impact on  the
    Company's financial position, result of operations or liquidity.
          Mortgage loans  held for sale are  carried at the lower  of cost or
    fair value on an individual loan basis.

    (E)   Allowance for Loan Losses
          The allowance for loan  losses is a valuation allowance  consisting
    of  the  cumulative effect  of the  provision  for  loan losses,  plus any
    amounts  recovered on  loans previously  charged off, minus  loans charged
    off.   The provision  for loan  losses charged  to expense  is the  amount
    necessary in management's  judgement to  maintain the  allowance for  loan
    losses at a level  it believes adequate to absorb losses in the collection
    of its loans.

    (F)   Bank Premises and Equipment
          Bank  premises and equipment are stated at cost, net of accumulated
    depreciation.   Depreciation  is charged  to  expense over  the  estimated
    useful lives of the assets  on the straight-line basis.  Depreciable lives
    include  40 years for  premises, 3-10  years for  furniture and equipment,
    and 5 years for computer software.  Costs  of maintenance and repairs  are
    charged to expense as incurred and improvements are capitalized.

    (G)   Other Real Estate Owned
          Other  real estate, acquired through foreclosure or deed in lieu of
    foreclosure, is  carried at the  lower of the  recorded investment  or its
    fair value,  less estimated costs  to sell (net  realizable value).   When
    the  property  is  acquired, any  excess  of  the loan  balance  over  net
    realizable value is  charged to the allowance  for loan losses.  Increases
    or decreases in the net  realizable value of such  properties are credited
    or charged to income by adjusting the  valuation allowance for other  real
    estate  owned.     Net  costs  of  maintaining  or  operating   foreclosed
    properties are expensed as incurred.

    (H)   Intangible Assets
          Included in other assets  are deposit intangibles of $575  and $666
    at  December 31, 1997  and 1996,  respectively, and  goodwill of  $337 and
    $367  at December 31,  1997 and  1996, respectively.   Deposit intangibles
    are  being amortized on  a straight-line basis over  a ten-year period and
    goodwill is being amortized on a  straight-line basis over a  fifteen-year
    period.







                                      25<PAGE>

Notes to Consolidated Financial Statements

    (I)   Pension Plans
          The  Company sponsors  two separate  defined benefit  pension plans
    which cover  substantially  all  full-time officers  and employees.    The
    benefits  are  based upon  length  of  service and  a  percentage  of  the
    employee's compensation  during the final  years of  employment.   Pension
    costs  are  computed  based  upon the  provisions  of Statement  87.   The
    Company contributes  to the  pension plans amounts deductible  for federal
    income tax purposes.

    (J)   Income Taxes
          Income  taxes  are  accounted for  under  the  asset and  liability
    method.   Deferred  tax assets  and  liabilities  are recognized  for  the
    future tax consequences attributable to differences between the  financial
    statement carrying amounts of  existing assets and  liabilities and  their
    respective  tax bases  and operating  loss and  tax credit  carryforwards.
    Deferred tax assets and liabilities are  measured using enacted tax  rates
    expected to apply to  taxable income in the years in which those temporary
    differences are  expected to  be  recovered  or settled.   The  effect  on
    deferred  tax  assets  and  liabilities  of  a  change  in  tax  rates  is
    recognized in income in the period that includes the enactment date.

    (K)   Trust Assets and Income
          Assets  (other than cash deposits) held by the Trust Departments in
    a fiduciary  or agency  capacity for  customers  are not  included in  the
    consolidated financial statements since such items  are not assets of  the
    Company.  Trust income is recognized on the accrual basis.

    (L)   Net Income Per Share
          Net income per  share is based upon the  weighted average number of
    common shares outstanding (3,792,833 shares in 1997, 1996 and 1995).
          In February  1997, the Financial Accounting  Standards Board issued
    Statement  of  Financial  Accounting  Standards  No.  128,  "Earnings  per
    Share."    Statement  128 establishes  new  standards  for  computing  and
    presenting earnings per share (EPS) and  applies to entities with publicly
    held  common   stock  or  potential  common   stock.     It  replaces  the
    presentation of  primary EPS with a  presentation of basic  EPS.  It  also
    requires dual  presentation of basic  and diluted EPS  on the  face of the
    income  statement  for all  entities with  complex capital  structures and
    requires a  reconciliation of the numerator  and denominator  of the basic
    EPS computation  to  the numerator  and  denominator  of the  diluted  EPS
    computation.
          Basic  EPS excludes  dilution and  is computed  by dividing  income
    available to  common stockholders by the weighted-average number of common
    shares  outstanding for the  period.   Diluted EPS  reflects the potential
    dilution that  could  occur if  securities  or  other contracts  to  issue
    common stock were exercised or converted  into common stock or resulted in
    the issuance  of common  stock that  then shared  in the  earnings of  the
    entity.
          Statement 128 was adopted by the Company at December 31, 1997.  The
    Statement  requires  restatement  of  prior  years  EPS  data   previously
    presented.  Adoption of this Statement did not have any effect on  current
    or  prior years' EPS  data presented due  to the  Company's simple capital
    structure.





                                      26<PAGE>

National Bankshares, Inc. and Subsidiaries

    (M)   Off-Balance Sheet Financial Instruments
          In  the ordinary course of  business, the Company  has entered into
    off-balance  sheet  financial  instruments  consisting of  commitments  to
    extend credit  and standby letters  of credit.  Such financial instruments
    are recorded in the financial statements when they become payable.

    (N)   Fair Value of Financial Instruments
          The  following methods  and assumptions were  used to  estimate the
    fair  value of  each  class  of  financial  instrument  for  which  it  is
    practicable to estimate that value:

          (1)  Cash and Due from Banks, Interest-Bearing Deposits and Federal
               Funds Sold
                    The carrying  amounts are  a reasonable estimate  of fair
               value.

          (2)  Securities
                    The fair  values of  securities are determined  by quoted
               market prices or  dealer quotes.   The fair  value of  certain
               state  and  municipal  securities  is  not  readily  available
               through market  sources other than dealer  quotations, so fair
               value estimates are  based on quoted market prices  of similar
               instruments,  adjusted  for  differences  between  the  quoted
               instruments and the instruments being valued.

          (3)  Loans
                    Fair values  are estimated  for portfolios of  loans with
               similar  financial characteristics.   Loans are  segregated by
               type such as  mortgage loans held  for sale, commercial,  real
               estate - commercial, real estate - construction, real estate -
               mortgage, credit  card and  other consumer loans.   Each  loan
               category is  further segmented into fixed  and adjustable rate
               interest terms and by performing and nonperforming categories.
                    The  fair  value of  performing  loans  is calculated  by
               discounting  scheduled  cash   flows  through  the   estimated
               maturity using estimated  market discount  rates that  reflect
               the credit and  interest rate  risk inherent in  the loan,  as
               well as estimates for  prepayments.  The estimate  of maturity
               is  based   on  the   Company's  historical   experience  with
               repayments   for  each   loan  classification,   modified,  as
               required, by an estimate of the effect of current economic and
               lending conditions.
                    Fair value for  significant nonperforming loans is  based
               on estimated  cash flows  which  are discounted  using a  rate
               commensurate with the risk  associated with the estimated cash
               flows.   Assumptions  regarding  credit risk,  cash flows  and
               discount  rates  are judgmentally  determined  using available
               market information and specific borrower information.

          (4)  Deposits
                    The  fair value  of demand  and savings  deposits is  the
               amount  payable on demand.   The fair value  of fixed maturity
               time deposits  and certificates of deposit  is estimated using
               the  rates   currently  offered  for   deposits  with  similar
               remaining maturities.



                                      27<PAGE>

Notes to Consolidated Financial Statements

          (5)  Other Borrowed Funds
                    Other  borrowed funds  represents treasury  tax  and loan
               deposits.   The carrying amount  is a  reasonable estimate  of
               fair  value because the deposits are generally repaid within 1
               to 120 days from the transaction date.

          (6)  Commitments to Extend Credit and Standby Letters of Credit
                    The  only  amounts  recorded  for commitments  to  extend
               credit,  standby letters  of credit  and  financial guarantees
               written are the deferred  fees arising from these unrecognized
               financial  instruments.   These deferred  fees are  not deemed
               significant  at December 31, 1997  and 1996, and  as such, the
               related fair values have not been estimated.

    (O)   Impairment  of  Long-Lived  Assets  and  Long-Lived  Assets  to  Be
          Disposed Of
          The  Company   adopted  the   provisions  of  Statement   No.  121,
    "Accounting  for the Impairment  of Long-Lived  Assets and  for Long-Lived
    Assets to Be Disposed  Of," on January 1,  1996.  This  Statement requires
    that long-lived  assets and certain  identifiable intangibles be  reviewed
    for impairment whenever  events or changes  in circumstances indicate that
    the carrying  amount of an  asset may not be  recoverable.  Recoverability
    of assets to be held and used is measured by a comparison  of the carrying
    amount of an  asset to future net cash  flows expected to be generated  by
    the asset.  If such assets are considered  to be impaired, the  impairment
    to be recognized is  measured by the  amount by which the carrying  amount
    of the assets exceed the fair value of the assets.  Assets to be  disposed
    of are reported at  the lower of  the carrying  amount or fair value  less
    costs to sell.  Adoption of this Statement did not have a material  impact
    on the Company's financial position, results of operations or liquidity.

    (P)   Transfers and Servicing of  Financial Assets and Extinguishments of
          Liabilities
          The  Company   adopted  the   provisions  of  Statement   No.  125,
    "Accounting  for   Transfers  and  Servicing   of  Financial  Assets   and
    Extinguishments of  Liabilities,"  on January  1,  1997.   This  Statement
    provides accounting  and reporting standards  for transfers and  servicing
    of  financial   assets  and  extinguishments   of  liabilities  based   on
    consistent application of a financial-components approach that focuses  on
    control.   Under that approach,  after a transfer  of financial assets, an
    entity recognizes the financial and servicing  assets it controls and  the
    liabilities it  has incurred, derecognizes  financial assets when  control
    has  been  surrendered, and  derecognizes  liabilities when  extinguished.
    This Statement provides consistent standards  for distinguishing transfers
    of  financial  assets that  are  sales  from  transfers  that are  secured
    borrowings.   This  Statement also  provides implementation  guidance  for
    assessing  isolation  of   transferred  assets  and  for  accounting   for
    transfers   of  partial   interests,   servicing  of   financial   assets,
    securitizations,  transfers  of  sales-type  and  direct  financing  lease
    receivables,   securities  lending   transactions,  repurchase  agreements
    including  "dollar   rolls,"   "wash   sales,"   loan   syndications   and
    participations,  risk  participations  in banker's  acceptances, factoring
    arrangements, transfers of receivables with recourse, and  extinguishments
    of liabilities.   Statement No.  127, "Deferral of  the Effective Date  of
    Certain Provisions  of Statement 125," issued  in December 1996,  deferred
    until January 1, 1998  the effective date (a) of paragraph 15 of Statement
    125 and  (b) for  repurchase agreement,  dollar-roll, securities  lending,

                                      28<PAGE>

National Bankshares, Inc. and Subsidiaries

    and similar transactions, of paragraphs 9-12  and 237(b) of Statement 125.
    Statement 125 was required  to be adopted  on a prospective basis and  its
    adoption  did  not have  a  material  impact  on  the Company's  financial
    position, results of operations or liquidity.

    (Q)   Use of Estimates
          In preparing the  consolidated financial statements,  management is
    required to make certain  estimates, assumptions and loan evaluations that
    affect its  consolidated  financial statements  for  the  period.   Actual
    results could vary significantly from those estimates.
          Changing   economic  conditions,  adverse  economic  prospects  for
    borrowers,  as  well  as  regulatory  agency  action  as a  result  of  an
    examination,  could  cause NBB  and  BTC  to  recognize  additions to  the
    allowance for  loan  losses and  may also  affect  the  valuation of  real
    estate  acquired in  connection with  foreclosures or  in satisfaction  of
    loans.

    (R)   Reclassifications
          Certain   reclassifications  have   been   made  to   prior  years'
    consolidated  financial  statements to  place them  on a  basis comparable
    with the 1997 consolidated financial statements.

Note 2: Restrictions on Cash
    To  comply with Federal  Reserve regulations,  the Company  is required to
maintain  certain  average  reserve  balances.    The daily  average  reserve
requirements were $3,699 and $2,914 for the weeks including December 31, 1997
and 1996, respectively.

Note 3: Securities
    The amortized costs,  gross unrealized gains,  gross unrealized losses and
fair values  for securities available for  sale by major security  type as of
December 31, 1997 and 1996 are as follows:

                                         December 31, 1997
                              ----------------------------------------
                                           Gross     Gross
                              Amortized Unrealized Unrealized   Fair
($ In thousands)                Costs      Gains     Losses    Values
                              --------- ---------- ---------- --------
Available for sale:
 U.S. Treasury                $  6,742       131       (11)     6,862
 U.S. Government agencies
  and corporations              36,252       141      (117)    36,276
 States and political
  subdivisions                   9,540       101        (2)     9,639
 Mortgage-backed securities      4,172        34       (87)     4,119
 Other securities                8,582       121       (17)     8,686
                              --------     -----     ------    ------
    Total securities
     available for sale       $ 65,288       528      (234)    65,582
                              ========     =====     ======    ======







                                      29<PAGE>

Notes to Consolidated Financial Statements

                                         December 31, 1996
                              ----------------------------------------
                                           Gross     Gross
                              Amortized Unrealized Unrealized   Fair
($ In thousands)                Costs      Gains     Losses    Values
                              --------- ---------- ---------- --------
Available for sale:
 U.S. Treasury                $  8,740       116       (66)     8,790
 U.S. Government agencies
  and corporations              33,840       149      (349)    33,640
 States and political
  subdivisions                   8,688        86      (155)     8,619
 Mortgage-backed securities      4,568        12      (128)     4,452
 Other securities                7,074        25       (66)     7,033
                              --------      ----     -----     ------
    Total securities
     available for sale       $ 62,910       388      (764)    62,534
                              ========      ====     =====     ======

    The  amortized  costs  and  fair  values  of  single  maturity  securities
available for sale at December  31, 1997, by contractual maturity,  are shown
below.  Expected  maturities may differ  from contractual maturities  because
borrowers may  have the right to  call or prepay obligations  with or without
call or prepayment  penalties.  Mortgage-backed securities included  in these
totals are allocated based upon estimated cash flows at December 31, 1997.

                                              December 31, 1997
                                              ------------------
                                              Amortized   Fair
     ($ In thousands)                           Costs    Values
                                              --------- --------
     Due in one year or less                  $  8,952     8,926
     Due after one year through five years      25,758    25,894
     Due after five years through ten years     21,950    22,099
     Due after ten years                         7,826     7,801
     No maturity                                   802       862
                                              --------    ------

                                              $ 65,288    65,582
                                              ========    ======

    The  amortized costs, gross  unrealized gains, gross unrealized losses and
fair values  for securities  held to  maturity by major  security type  as of
December 31, 1997 and 1996 are as follows:

                                                December 31, 1997
                                     ----------------------------------------
                                                  Gross      Gross
                                     Amortized Unrealized Unrealized   Fair
       ($ In thousands)                Costs      Gains     Losses    Values
                                     --------- ---------- ---------- --------
       Held to maturity:
        U.S. Treasury                $ 7,527          27      (41)     7,513
        U.S. Government agencies
         and corporations             36,853         167     (362)    36,658
        States and political
         subdivisions                 32,949         696      (32)    33,613
        Mortgage-backed securities       630          28      ---        658
        Other securities               6,433         131       (1)     6,563
                                     -------       -----     ----     ------
           Total securities held
            to maturity              $84,392       1,049     (436)    85,005
                                     =======       =====     ====     ======

                                      30<PAGE>

National Bankshares, Inc. and Subsidiaries

                                                December 31, 1996
                                     ----------------------------------------
                                                  Gross      Gross
                                     Amortized Unrealized Unrealized   Fair
       ($ In thousands)                Costs      Gains     Losses    Values
                                     --------- ---------- ---------- --------
       Held to maturity:
        U.S. Treasury                $ 11,547          36     (148)    11,435
        U.S. Government agencies
         and corporations              54,804         215     (604)    54,415
        States and political
         subdivisions                  34,144         530     (105)    34,569
        Mortgage-backed securities        767          29      ---        796
        Other securities                7,448         103      (11)     7,540
                                     --------       -----    -----    -------

           Total securities held
            to maturity              $108,710         913     (868)   108,755
                                     ========       =====    =====    =======

    The amortized costs and  fair values of single maturity securities held to
maturity  at December  31, 1997,  by contractual  maturity, are  shown below.
Expected maturities may differ  from contractual maturities because borrowers
may  have the right  to call  or prepay obligations  with or without  call or
prepayment penalties.   Mortgage-backed  securities included in  these totals
are allocated based upon estimated cash flows at December 31, 1997.

                                                  December 31, 1997
                                                  -------------------
                                                  Amortized    Fair
          ($ In thousands)                          Costs     Values
                                                  ---------  --------
          Due in one year or less                  $ 18,150    18,128
          Due after one year through five years      44,924    45,225
          Due after five years through ten years     17,074    17,308
          Due after ten years                         4,244     4,344
                                                   --------    ------

                                                   $ 84,392    85,005
                                                   ========    ======


    There were no sales  of securities held to  maturity during 1997,  1996 or
1995.
    The carrying  value  of securities  pledged  to  secure public  and  trust
deposits, and for other purposes as required or permitted by law, was $21,257
at December 31, 1997 and $18,446 at December 31, 1996.

Note 4: Loans to Officers and Directors
    In  the  normal course  of business,  loans  have been  made to  executive
officers and  directors of Bankshares  and its subsidiaries.   As of December
31,  1997  and 1996,  there  were  direct  loans to  executive  officers  and
directors of  $1,351 and $2,567, respectively.  In addition, there were loans
of $3,566 and $2,145 at December  31, 1997 and 1996, respectively, which were
endorsed by directors and/or executive officers or had been made to companies
in which directors and/or executive officers had an equity interest.
    The  following  schedule  summarizes  amounts  receivable  from  executive
officers  and  directors  of  Bankshares  and  its  subsidiaries,  and  their
immediate families or associates:

                                      31<PAGE>

Notes to Consolidated Financial Statements

                                                   Year ended
                                                  December 31,

         ($ In thousands)                             1997
                                                     ------
         Aggregate balance, beginning of year       $ 4,712
         Additions                                    4,852
         Collections                                 (4,647)
                                                    -------

         Aggregate balance, end of year             $ 4,917
                                                    =======

Note  5: Nonperforming Assets,  Past Due Loans,  Impaired Loans and Allowance
for Loan Losses

    Nonperforming assets consist of the following:
                                                       December 31,
                                               ----------------------------

         ($ In thousands)                       1997       1996       1995
                                               ------     ------     ------
         Nonaccrual loans                     $     87       616        718

         Other real estate owned, net              421       474        762
                                              --------    ------     ------

            Total nonperforming assets        $    508     1,090      1,480
                                              ========    ======     ======

         Accruing loans past due 90 days or
          more                                $    672       458        574

    There were  no material commitments to  lend additional funds to customers
whose loans were classified as nonperforming at December 31, 1997.
    The following  table shows  the interest  that would  have been  earned on
nonaccrual loans if they had been  current in accordance with their  original
terms  and the recorded  interest that was  earned and included  in income on
these loans:

                                                 Years ended December 31,
                                               ----------------------------

         ($ In thousands)                       1997       1996       1995
                                               ------     ------     ------
         Scheduled interest:
          Nonaccrual loans                    $      8        68         59
                                              ========   =======     ======

         Recorded interest:
          Nonaccrual loans                    $      1        24          5
                                              ========   =======     ======

    Changes in  the valuation allowance  for other  real estate  owned are  as
follows:


                                      32<PAGE>

National Bankshares, Inc. and Subsidiaries


                                                 Years ended December 31,
                                                ---------------------------

        ($ In thousands)                         1997      1996       1995
                                                ------    ------     ------
        Balances, beginning of year            $     96       91        49
        Provision for other real estate owned       ---        5       124
        Write-offs                                  (28)     ---       (82)
                                               --------    -----      ----

        Balances, end of year                  $     68       96        91
                                               ========    =====      ====

    At December 31,  1997, the recorded  investment in  loans which have  been
identified as impaired loans, in accordance with Statement 114, totaled $177.
Of this  amount, $124 related  to loans with  no valuation allowance  and $53
related  to  loans with  a  corresponding  valuation allowance  of  $53.   At
December  31,  1996,  the  recorded  investment  in  loans  which  have  been
identified as impaired  loans totaled $725.  Of this  amount, $354 related to
loans  with  no  valuation  allowance  and  $371  related  to  loans  with  a
corresponding valuation allowance of $290.
    For the year ended  December 31, 1997, the average recorded investment  in
impaired  loans  was  approximately  $458,  and  the  total  interest  income
recognized on  impaired loans was $23  of which $12 was recognized  on a cash
basis.  For the year ended December 31, 1996, the average recorded investment
in  impaired  loans was  approximately $800,  and  the total  interest income
recognized on impaired loans  was $33 of which  $23 was recognized on a  cash
basis.
    Changes in the allowance for loan losses are as follows:

                                                 Years ended December 31,
                                               ----------------------------

         ($ In thousands)                       1997       1996       1995
                                               ------     ------     ------
         Balances, beginning of year           $ 2,575      2,625      2,551
         Provision for loan losses                 435        331        282
         Recoveries                                107        125         83
         Loans charged off                        (679)      (506)      (291)
                                               -------     ------     ------

         Balances, end of year                 $ 2,438      2,575      2,625
                                               =======     ======     ======

Note 6: Bank Premises and Equipment
    Bank   premises  and   equipment   stated  at   cost,   less   accumulated
depreciation, are as follows:

                                                         December 31,
                                                      --------------------

       ($ In thousands)                                1997          1996
                                                      ------        ------
       Premises                                      $  6,148        5,787
       Furniture and equipment                          4,458        3,936
       Construction-in-progress                            33          249
                                                     --------       ------
                                                       10,639        9,972
       Less accumulated depreciation                   (4,900)      (4,935)
                                                     --------       ------

           Total bank premises and equipment         $  5,739        5,037
                                                     ========       ======

                                      33<PAGE>

Notes to Consolidated Financial Statements

    The Company  leases a  branch  facility as  well as  certain other  office
space under noncancellable  operating leases  that expire over  the next  six
years.  The future minimum lease payments under these leases (with initial or
remaining lease terms  in excess of one year) as of  December 31, 1997 are as
follows:  $78 in 1998, $38 in 1999, $13 in years 2000, 2001 and 2002 and  $10
in 2003.

Note 7: Time Deposits
    Included  in time  deposits are  certificates  of  deposit and  other time
deposits of  $100 or more in the aggregate amounts of $42,547 at December 31,
1997 and $37,414 at  December 31, 1996.  At December  31, 1997, the scheduled
maturities  of time  deposits are as  follows: $128,929  in 1998,  $19,451 in
1999, $19,338 in 2000, $3,419 in 2001 and $4,001 in 2002.

Note 8: Employee Benefit Plans
    NBB has a Retirement Accumulation Plan  qualifying under IRS Code  Section
401(k).  Eligible participants in the plan can contribute up to  10% of their
total annual compensation to the plan.  Employee contributions are matched by
NBB  based on  a  percentage  of  an  employee's  total  annual  compensation
contributed to  the plan.   For the years  ended December 31,  1997, 1996 and
1995, NBB contributed $87, $83 and $78, respectively, to the plan.
    Bankshares has a nonleveraged Employee  Stock Ownership Plan  (ESOP) which
enables employees of the sole participating employer, NBB, who have  one year
of service and who have attained the age of 21 prior to the plan's  January 1
and July 1 enrollment dates to own Bankshares common stock.  Contributions to
the ESOP  are determined annually  by the  Board of Directors.   Contribution
expense amounted  to $219,  $200 and  $163 for the  years ended  December 31,
1997, 1996 and 1995, respectively.   Dividends on ESOP shares are  charged to
retained  earnings.  As of December 31,  1997, the number of allocated shares
held by the ESOP was 50,615 and the number of unallocated  shares was 22,168.
All  shares held  by the  ESOP are  treated as  outstanding in  computing the
Company's net income  per share.   Bankshares or  the ESOP has  the right  of
first refusal  for any shares distributed  to a participant in  the event the
participant elects  to sell the shares.  Upon  reaching age 55 with ten years
of plan participation, a vested participant has the right to diversify 50% of
his  or her  allocated  ESOP shares  and  Bankshares or  the  ESOP, with  the
agreement of the Trustee, would  be obligated to purchase those shares.   The
ESOP contains a put option which allows  a withdrawing participant to require
Bankshares or the ESOP, if the  plan administrator agrees, to purchase his or
her  allocated  shares  if  the  shares  are  not  readily  tradeable  on  an
established market at the time of its distribution.  Since the shares are not
readily tradeable, at  December 31, 1997, 72,783 shares of  stock held by the
ESOP,  at  their estimated  fair value,  which is  based  on the  most recent
available independent valuation, is recorded outside of stockholders' equity.
Bankshares does not anticipate any material cash requirements in each  of the
next  five  years  relating  to  the purchase  of  shares  held  by  the ESOP
participants.
    The Company  also sponsors  two separate  noncontributory defined  benefit
pension plans which  cover substantially  all of its  employees. The  pension
plans' benefit  formulas generally  base payments  to retired employees  upon
their  length of service and  a percentage of  qualifying compensation during
their final  years of employment.  The NBB pension plan's assets are invested
principally in  U.S. Government agency obligations (47%),  mutual funds (25%)
and  equity securities  (28%).   BTC's  pension  plan's assets  are  invested
principally  in BTC  certificates of  deposit (22%),  U.S. Government  agency
obligations (36%), U.S. Treasury  securities (11%), money market  funds (24%)
and equity securities (7%).

                                      34<PAGE>

National Bankshares, Inc. and Subsidiaries

    The plans' funded status at December 31, 1997 and 1996 is as follows:

                                                             December 31,
                                                           ----------------

         ($ In thousands)                                   1997      1996
                                                           ------    ------
         Actuarial present value of benefit obligations:
          Accumulated benefit obligation, including
           vested benefits of $3,027 in 1997 and $3,148
           in 1996                                         $ 3,150     3,252
                                                           =======   =======
         Projected benefit obligation for service
          rendered to date                                  (4,967)   (5,160)
         Plan assets at fair value                           4,337     3,950
                                                           -------   -------

            Projected benefit obligation in excess of
             plan assets                                      (630)   (1,210)

         Unrecognized net transition asset                    (205)     (228)
         Unrecognized net loss from past experience
          different from that assumed                          459       989
         Prior service cost not yet recognized in net
          pension cost                                         231       246
                                                           -------   -------

            Net accrued pension cost (includes accrued
             pension cost of $352 in 1997 and $346 in
             1996 included in other liabilities, and
             prepaid pension cost of $207 in 1997 and
             $143 in 1996 included in other assets)        $  (145)     (203)
                                                           =======   =======

    Net pension cost includes the following (income) expense components:

                                                   Years ended December 31,
                                                  --------------------------

         ($ In thousands)                          1997      1996      1995
                                                  ------    ------    ------
         Service cost-benefits earned during
          the year                                $  281       327       223
         Interest cost on projected benefit
          obligation                                 367       353       288
         Actual return on plan assets               (327)     (185)     (304)
         Net amortization and deferral               (37)      (92)       19
                                                  ------    ------     -----

            Net pension cost                      $  284       403       226
                                                  ======    ======     =====








                                      35<PAGE>

Notes to Consolidated Financial Statements

    Assumptions used in accounting  for the pension  plans as of December  31,
1997, 1996 and 1995 are as follows:

                                       NBB                     BTC
                             -----------------------  ----------------------

                              1997     1996    1995    1997    1996    1995
                             ------   ------  ------  ------  ------  ------
        Weighted average
         discount rate         7.50%   7.75%   7.00%   7.50%   7.00%    7.00%

        Expected long-term
         rate of return        9.00%   9.00%   9.00%   9.00%   9.00%    7.50%

        Rate of increase in
         future compensation   5.00%   5.00%   5.00%   5.00%   5.00%    5.00%

Note 9: Income Taxes
    Total income taxes were allocated as follows:

                                                  Years ended December 31,
                                                 --------------------------

         ($ In thousands)                         1997      1996      1995
                                                 ------    ------    ------
         Income                                  $ 2,499     2,341    1,933
         Stockholders' equity, for net
          unrealized gains (losses) on
          securities available for sale
          recognized for financial reporting
          purposes                                   228      (273)   1,047
                                                 -------    ------    -----

            Total income taxes                   $ 2,727     2,068    2,980
                                                 =======    ======    =====

    The  components  of  federal income  tax  expense  attributable to  income
before income tax expense are as follows:

                                                  Years ended December 31,
                                                 --------------------------

         ($ In thousands)                         1997      1996      1995
                                                 ------    ------    ------
         Current                                 $ 2,199     2,345     2,053
         Deferred                                    300        (4)     (120)
                                                 -------    ------    ------

            Total income tax expense             $ 2,499     2,341     1,933
                                                 =======    ======    ======

    Taxes resulting from securities  transactions amounted to a tax expense of
$13 for the year ended December 31, 1997, $33 for the year ended December 31,
1996 and $62 for the year ended December 31, 1995.
    The following is a  reconciliation of  the "expected" income tax  expense,
computed by applying the U.S. Federal income tax rate of 34% to income before
income tax expense, with the reported income tax expense:





                                      36<PAGE>

National Bankshares, Inc. and Subsidiaries

                                                  Years ended December 31,
                                                 --------------------------

         ($ In thousands)                         1997      1996      1995
                                                 ------    ------    ------
         Expected income tax expense (34%)       $ 3,080     2,876     2,536
         Tax-exempt interest income                 (700)     (756)     (744)
         Nondeductible interest expense               90        99        88
         Other, net                                   29       122        53
                                                 -------    ------    ------

            Reported income tax expense          $ 2,499     2,341     1,933
                                                 =======    ======    ======

    The  tax effects of  temporary differences  that give  rise to significant
portions  of the deferred tax assets and deferred tax liabilities at December
31, 1997 and 1996 are presented below:

                                                             December 31,
                                                            ---------------

         ($ In thousands)                                    1997     1996
                                                            ------   ------
         Deferred tax assets:
           Loans, principally due to allowance for loan
            losses and unearned fee income                 $   344       545
           Other real estate owned, principally due to
            valuation allowance                                 23        33
           Deferred compensation and other liabilities,
            due to accrual for financial reporting
            purpose                                            114       138
           Deposit intangibles and goodwill                     42        35
           Nonaccrual interest on loans                        ---        23
           Community development corporation related tax
            credit                                              26        30
           Net unrealized losses on securities available
            for sale                                           ---       128
                                                           -------   -------

             Total gross deferred tax assets                   549       932
             Less valuation allowance                          ---       ---
                                                           -------   -------

                   Net deferred tax assets                     549       932
                                                           -------   -------
         Deferred tax liabilities:
           Bank premises and equipment, principally due
            to differences in depreciation                     (16)      (12)
           Securities, due to differences in discount
            accretion                                          (77)      (43)
           Other assets                                        (62)      (55)
           Net unrealized gains on securities available
            for sale                                          (100)      ---
                                                           -------   -------

                   Total gross deferred liabilities           (255)     (110)
                                                           -------   -------
                   Net deferred tax asset included in
                    other assets                           $   294       822
                                                           =======   =======


                                      37<PAGE>

Notes to Consolidated Financial Statements

    The Company  has  determined that  a  valuation  allowance for  the  gross
deferred tax assets is not necessary at December 31, 1997 and 1996 due to the
fact that  the realization  of the  entire gross deferred  tax assets  can be
supported by the  amount of taxes paid during the  carryback period available
under current tax laws.

Note 10: Restrictions on Payments of Dividends and Capital Requirements
    Bankshares' principal source of  funds for dividend  payments is dividends
received from its  subsidiary banks.  For the years  ended December 31, 1997,
1996 and 1995, dividends  received from subsidiary banks were  $2,712, $1,901
and $1,055, respectively.
    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 December 31,
1997, retained  net income  which was  free of such  restriction amounted  to
approximately $7,828.
    Bankshares and its  subsidiaries are subject to various regulatory capital
requirements administered by the  bank regulatory agencies.  Failure  to meet
minimum  capital requirements  can initiate  certain mandatory,  and possibly
additional discretionary,  actions by  regulators that, if  undertaken, could
have  a  direct  material  effect  on  the Company's  consolidated  financial
statements.   Under capital adequacy guidelines and  the regulatory framework
for  prompt corrective  action,  Bankshares and  its  subsidiaries must  meet
specific  capital  guidelines that  involve  quantitative  measures of  their
assets, liabilities  and certain off-balance-sheet items  as calculated under
regulatory accounting  practices.  Bankshares' and  its subsidiaries' capital
amounts and  classification  are also  subject  to qualitative  judgments  by
regulators about components, risk weightings and other factors.
    Quantitative  measures  established   by  regulation  to   ensure  capital
adequacy require Bankshares and its subsidiaries to  maintain minimum amounts
and ratios (set  forth in the  table below) of total  and Tier I  capital (as
defined in the regulations) to risk weighted assets (as defined), and of Tier
I capital (as defined) to average  assets (as defined).  Management believes,
as  of  December 31,  1997,  that Bankshares  and its  subsidiaries  meet all
capital adequacy requirements to which they are subject.
    Bankshares' and  its subsidiaries' actual  regulatory capital amounts  and
ratios are also presented in the following tables.

















                                      38<PAGE>
National Bankshares, Inc. and Subsidiaries

                                                          To Be Well
                                                         Capitalized
                                                         Under Prompt
                                          For Capital     Corrective
                                           Adequacy         Action
                             Actual        Purposes       Provisions
                          -------------  -------------  -------------
($ In thousands)          Amount  Ratio  Amount  Ratio  Amount  Ratio
                          ------  -----  ------  -----  ------  -----
December 31, 1997
 Total capital (to risk
  weighted assets)
 Bankshares consolidated  $57,198 23.3%  19,652  8.0%     N/A    N/A
 NBB                       28,825 17.4%  13,232  8.0%   16,540  10.0%
 BTC                       28,313 34.7%   6,527  8.0%    8,159  10.0%

 Tier I capital (to risk
  weighted assets)
 Bankshares consolidated  $54,760 22.3%   9,826  4.0%     N/A    N/A
 NBB                       27,084 16.4%   6,616  4.0%    9,924   6.0%
 BTC                       27,616 33.9%   3,264  4.0%    4,895   6.0%

 Tier I capital (to
  average assets)
 Bankshares consolidated  $54,760 13.7%  15,988  4.0%     N/A    N/A
 NBB                       27,084 12.1%   8,985  4.0%   11,231   5.0%
 BTC                       27,616 15.8%   7,003  4.0%    8,754   5.0%


                                                          To Be Well
                                                         Capitalized
                                                         Under Prompt
                                          For Capital     Corrective
                                           Adequacy         Action
                             Actual        Purposes       Provisions
                          -------------  -------------  -------------
($ In thousands)          Amount  Ratio  Amount  Ratio  Amount  Ratio
                          ------  -----  ------  -----  ------  -----
December 31, 1996
 Total capital (to risk
  weighted assets)
 Bankshares consolidated  $53,193 23.0%  18,497  8.0%     N/A    N/A
 NBB                       26,175 16.3%  12,855  8.0%   16,069  10.0%
 BTC                       27,007 38.3%   5,642  8.0%    7,052  10.0%

 Tier I capital (to risk
  weighted assets)
 Bankshares consolidated  $50,618 21.9%   9,249  4.0%     N/A    N/A
 NBB                       24,171 15.0%   6,428  4.0%    9,641   6.0%
 BTC                       26,436 37.5%   2,821  4.0%    4,231   6.0%

 Tier I capital (to
  average assets)
 Bankshares consolidated  $50,618 13.0%  15,620  4.0%     N/A    N/A
 NBB                       24,171 11.2%   8,636  4.0%   10,795   5.0%
 BTC                       26,436 15.1%   6,984  4.0%    8,730   5.0%

    As  of  December  31,  1997,  the   most  recent  notifications  from  the
appropriate   regulatory   authorities   categorized   Bankshares   and   its
subsidiaries  as adequately  capitalized under  the regulatory  framework for
prompt  corrective action.    To be  categorized  as adequately  capitalized,
Bankshares and its subsidiaries must maintain minimum  total risk-based, Tier

                                      39<PAGE>
Notes to Consolidated Financial Statements

I risk-based, and  Tier I leverage ratios  as set forth in the  table.  There
are  no  conditions or  events  since  those  notifications  that  management
believes have changed Bankshares' and its subsidiaries' category.

Note 11: Parent Company Financial Information
    Condensed financial information  of National Bankshares, Inc. (Parent)  is
presented below:
                           Condensed Balance Sheets

                                                     December 31,
                                                  -----------------
($ In thousands, except share and
 per share data)                                   1997       1996
                                                  ------     ------
Assets        Cash due from subsidiaries         $     69         20
              Investment in subsidiaries, at
               equity                              55,807     51,434
              Refundable income taxes due
               from subsidiaries                       22         25
                                                 --------    -------

                   Total assets                  $ 55,898     51,479
                                                 ========    =======

Liabilities   Other liabilities                  $     31         35
and                                              --------    -------
Stockholders' Common stock subject to ESOP
Equity         put option (note 8)                  1,838      1,643
                                                 --------    -------
              Stockholders' equity (notes 9,
               10 and 16):
                 Preferred stock of no par
                  value.  Authorized
                  5,000,000 shares; none
                  issued and outstanding              ---        ---
                 Common stock of $2.50 par
                  value.  Authorized
                  5,000,000 shares; issued
                  and outstanding 3,792,833
                  shares                            9,482      9,482
                 Retained earnings                 46,191     42,210
                 Net unrealized gains
                  (losses) on securities
                  available for sale                  194       (248)
                 Common stock subject to ESOP
                  put option (72,783 shares at
                  $25.25 per share in 1997 and
                  64,796 shares at $25.35 per
                  share in 1996) (note 8)          (1,838)    (1,643)
                                                 --------    -------

                   Total stockholders' equity      54,029     49,801

                 Commitments and contingent
                  liabilities (notes 6, 8,
                  13 and 16)
                                                 --------    -------
                   Total liabilities and
                    stockholders' equity         $ 55,898     51,479
                                                 ========    =======


                                      40<PAGE>
National Bankshares, Inc. and Subsidiaries

                        Condensed Statements of Income

                                          Years ended December 31,
                                        ----------------------------

($ In thousands)                         1997       1996       1995
                                        ------     ------     ------
Income   Dividends from subsidiaries
          (note 10)                     $2,712      1,901      1,055

Expenses Other expenses                    125        232        285
                                        ------     ------     ------

         Income before income tax
          benefit and equity in
          undistributed net income
          of subsidiaries                2,587      1,669        770

         Applicable income tax
          benefit                           42         41         97
                                        ------     ------     ------

         Income before equity in
          undistributed net income
          of subsidiaries                2,629      1,710        867

         Equity in undistributed net
          income of subsidiaries         3,931      4,407      4,658
                                        ------     ------     ------

            Net income                  $6,560      6,117      5,525
                                        ======     ======     ======





























                                      41<PAGE>
Notes to Consolidated Financial Statements

                      Condensed Statements of Cash Flows

                                          Years ended December 31,
                                        ----------------------------

($ In thousands)                         1997       1996       1995
                                        ------     ------     ------
Cash Flows Net income                  $ 6,560      6,117      5,525
from       Adjustments to reconcile
Operating   net income to net cash
Activities  provided by operating
            activities:
             Equity in undistributed
              net income of
              subsidiaries              (3,931)    (4,407)    (4,658)
             Decrease in other assets      ---        ---          3
             Decrease in refundable
              income taxes due from
              subsidiaries                   3         88        162
             Decrease in other
              liabilities                   (4)        (5)        (9)
                                       -------     ------     ------

                Net cash provided by
                 operating activities    2,628      1,793      1,023
                                       -------     ------     ------

Cash Flows Cash dividends paid          (2,579)    (1,787)    (1,080)
from                                   -------     ------     ------
Financing
Activities      Net cash used in
                 financing activities   (2,579)    (1,787)    (1,080)
                                       -------     ------     ------

           Net increase (decrease) in
            cash                            49          6        (57)
           Cash due from subsidiary
            at beginning of year            20         14         71
                                       -------     ------     ------
           Cash due from subsidiary
            at end of year             $    69         20         14
                                       =======     ======     ======

Note 12: Supplemental Cash Flow Information
     The Company paid $13,084,  $13,080 and $12,533 for interest  and $2,719,
$1,839 and $1,942 for income  taxes, net of refunds, in 1997,  1996 and 1995,
respectively.   Noncash investing activities consisted of $679, $506 and $291
of loans  charged against  the allowance  for loan losses  in 1997,  1996 and
1995,  respectively.  Noncash investing activities also included $159 in 1997
and  $28  in  1996 of  loans  transferred to  other  real estate  owned.   In
addition,  for the  years ended  December 31,  1997, 1996  and 1995,  noncash
investing  activities included changes  in net  unrealized gains  (losses) on
securities  available  for sale  of  $670, ($803)  and  $3,080, respectively,
changes in deferred  tax assets included in other assets  of ($228), $273 and
($1,047),  respectively, and  changes  in net  unrealized  gains (losses)  on
securities  available  for sale  included  in stockholders'  equity  of $442,
($530) and $2,033, respectively.  Securities, classified as held to maturity,
totaling approximately $30,200, were  transferred to securities available for
sale in 1995.  This  was in accordance with the one-time  reassessment of the
classification of  securities allowed  by the Financial  Accounting Standards
Board.


                                      42<PAGE>
National Bankshares, Inc. and Subsidiaries

Note 13: Financial Instruments with Off-Balance Sheet Risk
     The Company is a  party to financial instruments with  off-balance sheet
risk in the  normal course of  business to  meet the financing  needs of  its
customers.  These financial instruments include commitments  to extend credit
and  standby  letters  of credit.    Those  instruments  involve, to  varying
degrees, elements  of credit risk in  excess of the amount  recognized in the
consolidated  balance sheets.    The contract  amounts  of those  instruments
reflect the extent  of involvement the Company  has in particular  classes of
financial instruments.
     The Company's exposure to credit loss, in the event of nonperformance by
the other party to the financial instrument for commitments  to extend credit
and standby letters of  credit, is represented  by the contractual amount  of
those  instruments.   The Company  uses the  same  credit policies  in making
commitments  and  conditional obligations  as  it does  for  on-balance sheet
instruments.
     The  Company may  require collateral  or other  security to  support the
following financial instruments with credit risk:

                                                    December 31,
                                                --------------------

      ($ In thousands)                           1997          1996
                                                ------        ------
      Financial instruments whose contract
       amounts represent credit risk:
        Commitments to extend credit           $37,700         32,087
                                               =======         ======

        Standby letters of credit              $ 1,949          1,380
                                               =======         ======

        Mortgage loans sold with potential
         recourse                              $19,231         18,271
                                               =======         ======

     Commitments to  extend credit are  agreements to  lend to a  customer as
long as there  is no violation of any condition  established in the contract.
Commitments generally  have  fixed  expiration  dates  or  other  termination
clauses and may require payment of a fee.  Since many of the  commitments are
expected to expire  without being drawn upon, the total commitment amounts do
not  necessarily represent future  cash requirements.   The Company evaluates
each  customer's creditworthiness  on a  case-by-case basis.   The  amount of
collateral obtained, if required by the Company upon extension  of credit, is
based on management's  credit evaluation  of the customer.   Collateral  held
varies but may  include accounts receivable,  inventory, property, plant  and
equipment and  income-producing commercial properties.   Extensions of credit
arising from these commitments are predominantly variable rate in nature; the
principal  exception being construction loans  which are at  fixed rates, but
have terms generally less than one year.
     Standby letters  of  credit are  conditional commitments  issued by  the
Company to guarantee the  performance of a  customer to a  third party.   The
credit risk involved in issuing letters  of credit is essentially the same as
that involved in  extending loans to customers.   Collateral held varies  but
may include accounts receivable, inventory, property, plant and equipment and
income-producing commercial properties.
     The Company  originates  mortgage loans  for  sale to  secondary  market
investors subject to contractually specified and limited recourse provisions.
In  1997, the  Company  originated $19,120  and  sold $19,231  to  investors,


                                      43<PAGE>
Notes to Consolidated Financial Statements

compared to $17,907 originated and $18,271 sold in 1996.  Every contract with
each  investor contains certain recourse  language.  In  general, the Company
may be  required to repurchase  a previously sold  mortgage loan if  there is
major noncompliance with defined loan origination or documentation standards,
including fraud,  negligence or material misstatement in  the loan documents.
Repurchase may also be required if necessary governmental loan guarantees are
canceled  or never  issued, or if  an investor is  forced to buy  back a loan
after it has been resold as a part of a loan pool.  In addition, the  Company
may have  an obligation to repurchase  a loan if the  mortgagor has defaulted
early  in  the loan  term.   This potential  default period  is approximately
twelve months after sale of a loan to the investor.

Note 14:  Concentrations of Credit Risk
     The  Company does  a general banking  business, serving  the commercial,
agricultural  and personal  banking  needs of  its  customers.   NBB's  trade
territory,  commonly referred  to  as  the  New  River  Valley,  consists  of
Montgomery and Giles  Counties, Virginia and  portions of adjacent  counties.
NBB's  operating results  are  closely correlated  with  the economic  trends
within this area which are,  in turn, influenced by the area's  three largest
employers, Virginia  Polytechnic Institute  and State  University, Montgomery
County Schools and  Celanese.   Other industries  include a  wide variety  of
manufacturing,  retail  and  service  concerns.    Most   of  BTC's  business
originates  from  the  communities  of  Tazewell  and  Bluefield  and   other
communities in Tazewell County, Virginia and in Mercer County, West Virginia.
BTC's  service area  has largely  depended on  the coal  mining  industry and
farming  for  its economic  base.    In  recent  years, coal  companies  have
mechanized  and reduced the  number of persons  engaged in  the production of
coal.  There  are still a  number of support  industries for the coal  mining
business  that continue  to provide  employment in  the area.   Additionally,
several new businesses  have been established in the area and Bluefield, West
Virginia has  begun to emerge  as a  regional medical center.   The  ultimate
collectibility  of the  loan  portfolios and  the  recovery of  the  carrying
amounts  of repossessed  property are  susceptible to  changes in  the market
conditions of these areas.
     At  December  31,  1997 and  1996,  approximately  $80,000 and  $71,000,
respectively,  of the  loan  portfolio were  concentrated in  commercial real
estate.  This represents approximately  37% and 36% of the loan  portfolio at
December 31, 1997 and 1996, respectively.  Included in commercial real estate
at  December 31,  1997  and  1996  was  approximately  $50,000  and  $49,000,
respectively, in loans for college housing and professional office buildings.
Loans  secured  by residential  real  estate were  approximately  $65,000 and
$60,000  at  December  31, 1997  and  1996,  respectively.   This  represents
approximately 30%  and 31% of  the loan  portfolio at December  31, 1997  and
1996, respectively.  Loans secured by  automobiles were approximately $34,000
and  $29,000 at December  31, 1997 and  1996, respectively.   This represents
approximately  16% of  the loan  portfolio at  December 31,  1997 and  15% at
December 31, 1996.
     The Company  has established operating  policies relating to  the credit
process  and collateral in  loan originations.   Loans  to purchase  real and
personal property are  generally collateralized by  the related property  and
with  loan amounts established based on certain percentage limitations of the
property's total stated or appraised value.   Credit approval is primarily  a
function  of collateral  and the  evaluation of  the creditworthiness  of the
individual  borrower or  project  based on  available financial  information.
Interest-bearing deposits with banks represent deposits with the Federal Home
Loan Bank of Atlanta.  Management considers the concentration of credit  risk
to be minimal.



                                      44<PAGE>
National Bankshares, Inc. and Subsidiaries

Note 15: Fair Value of Financial Instruments
     The  estimated fair  values of  the Company's  financial  instruments at
December 31, 1997 and 1996 are as follows:

                                           December 31,
                            ------------------------------------------

                                    1997                  1996
                            --------------------  --------------------
($ In thousands)            Carrying   Estimated  Carrying  Estimated
                             Amount   Fair Value   Amount   Fair Value
                            --------  ----------  --------  ----------
Financial assets:
   Cash and due from banks  $ 12,435      12,435     9,989      9,989
   Interest-bearing
    deposits                   9,728       9,728        91         91
   Federal funds sold          4,300       4,300     1,910      1,910
   Securities                149,974     150,587   171,244    171,289
   Mortgage loans held for
    sale                         405         405       516        516
   Loans, net                214,552     215,285   193,598    192,201
                            --------     -------   -------    -------

     Total financial assets $391,394     392,740   377,348    375,996
                            ========     =======   =======    =======

Financial liabilities:
   Deposits                  344,867     344,589   334,584    331,758
   Other borrowed funds          485         485       627        627
                            --------     -------   -------    -------

     Total financial
      liabilities           $345,352     345,074   335,211    332,385
                            ========     =======   =======    =======


     Fair value  estimates are made  at a  specific point in  time, based  on
relevant market  information and information about  the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one  time the Company's entire holdings of  a particular
financial instrument.   Because no market exists for a significant portion of
the Company's  financial  instruments,  fair  value estimates  are  based  on
judgements  regarding  future  expected  loss  experience,  current  economic
conditions, risk  characteristics of various financial  instruments and other
factors.  These  estimates are subjective in nature and involve uncertainties
and matters of  significant judgement and therefore cannot be determined with
precision. Changes in assumptions could significantly affect these estimates.
     Fair value  estimates are  based on  existing  on-and off-balance  sheet
financial instruments without attempting to estimate the value of anticipated
future business  and  the  value  of assets  and  liabilities  that  are  not
considered financial instruments.  Significant assets that are not considered
financial  assets  include  deferred tax  assets  and the  bank  premises and
equipment.  In addition,  the tax ramifications related to the realization of
the unrealized gains  and losses can have a significant  effect on fair value
estimates and have not been considered in the estimates.

Note 16: Business Combination and Pending Acquisition
     On June 1,  1996, Bankshares issued 1,888,209 shares of its common stock
in a one-for-one  exchange for all  the outstanding common  stock of Bank  of
Tazewell  County, Tazewell,  Virginia.   This  business combination  has been


                                      45<PAGE>
Notes to Consolidated Financial Statements

accounted for  as a  pooling-of-interests 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  Bank of
Tazewell County.   There were no  adjustments of a material  amount resulting
from Bank of Tazewell County's adoption of Bankshares' accounting policies.
     In May  1996, Bankshares  declared  a stock  split of  .11129 per  share
effected in the form of a stock dividend to the  holders of Bankshares 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:


                                       Six months     Year ended
                                      ended June 30,  December 31,
         ($ In thousands)                 1996           1995
                                         ------         ------

         Revenues:
          National Bankshares, Inc.      $ 9,286        17,848
          Bank of Tazewell County          6,166        12,628
                                         -------       -------

            Combined                     $15,452        30,476
                                         =======       =======

         Net Income:
          National Bankshares, Inc.      $ 1,883         3,256
          Bank of Tazewell County          1,106         2,269
                                         -------       -------

            Combined                     $ 2,989         5,525
                                         =======       =======


   On  December 26,  1997,  NBB  entered  into an  agreement  to purchase  the
assets, including real estate and improvements, and assume the liabilities of
the  Galax, Virginia, branch  office of First  American Federal Savings Bank.
The  transaction, which  is subject  to regulatory  approval, is  expected to
close  in early 1998  and is not  expected to have  a material impact  on the
Company's results of operations or liquidity.

Note 17: Future Accounting Considerations
   In  June  1997, the  Financial  Accounting  Standards Board  (FASB)  issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income."   Statement 130  establishes standards for  reporting and display of
comprehensive  income  and  its  components (revenues,  expenses,  gains  and
losses) in a full set of general purpose financial statements.  Statement 130
was issued to  address concerns  over the practice  of reporting elements  of
comprehensive income directly in equity.
   This Statement  requires all items that are required to be recognized under
accounting standards as components of  comprehensive income be reported in  a
financial  statement that  is displayed  in equal  prominence with  the other
financial  statements.   It  does  not  require a  specific  format for  that
financial statement  but  requires  that  an  enterprise  display  an  amount
representing  total comprehensive  income for  the period  in  that financial
statement.     Enterprises  are   required  to   classify  items   of  "other

                                      46<PAGE>
National Bankshares, Inc. and Subsidiaries

comprehensive  income" by their nature in the financial statement and display
the  accumulated  balance  of  other  comprehensive  income  separately  from
retained earnings and additional  paid-in-capital in the equity section  of a
statement of  financial position.  It  does not require per  share amounts of
comprehensive income to be disclosed.
   Statement 130  is effective for fiscal  years beginning  after December 15,
1997.   Earlier application is  permitted.  Comparative  financial statements
provided for earlier periods are required  to be reclassified to reflect  the
provisions  of  this  statement.    Publicly  traded  enterprises that  issue
condensed financial statements for  interim periods are required to  report a
total for comprehensive income in those financial statements.
   Adoption of  Statement 130 on  January 1, 1998 will not  have any effect on
the  Company's  consolidated  financial  position, results  of  operation  or
liquidity.  However, Statement  130 will have an  effect on future  financial
statement  displays  presented  by the  Company  since  the  Company has  net
unrealized gains (losses) on securities available for sale,  an item of other
comprehensive income, which  is included  in the  consolidated statements  of
changes in stockholders' equity.
   In  June  1997, the  FASB  issued  Statement  No.  131, "Disclosures  about
Segments   of  an  Enterprise  and   Related  Information."    Statement  131
establishes standards for the  way public business enterprises are  to report
information  about  operating segments  in  annual  financial statements  and
requires  those enterprises  to report  selected information  about operating
segments  in interim  financial  reports issued  to  shareholders.   It  also
establishes standards  for related  disclosures about products  and services,
geographic  areas  and  major customers.    Statement  131  is effective  for
financial  statements for periods  beginning after December 15,  1997.  It is
not anticipated  that Statement 131 will have  any material effect on current
or prior period disclosures presented by the Company.
   In  February  1998,   the  FASB  issued  Statement  No.  132,   "Employers'
Disclosures  about  Pensions  and   Other  Postretirement  Benefits."    This
Statement  standardizes the  disclosure requirements  for pensions  and other
postretirement benefits,  requires additional  information on changes  in the
benefit obligations and fair values of assets and eliminates certain existing
disclosure  requirements.    Statement  132  is effective  for  fiscal  years
beginning  after December 15, 1997 and will  impact future disclosures of the
Company's defined benefit pension plans.























                                      47<PAGE>
National Bankshares, Inc. Board of Directors









(Picture of National Bankshares, Inc. Board of Directors)






                         Paul  A.  Duncan,  Holiday  Motor  Corp., President;
                         Alonzo A. Crouse, Bank of Tazewell County, Executive
                         Vice President, Secretary  and Cashier; R.E. Dodson,
                         Bank   of  Tazewell  County,   President  and  Chief
                         Executive  Officer;  Charles  L.   Boatwright,  Vice
                         Chairman of  the Board, Physician;  James G.  Rakes,
                         National  Bankshares,  Inc.,   The  National   Bank,
                         President  and Chief  Executive Officer;  William T.
                         Peery,  Cargo  Oil Co.,  Inc., President;  Robert E.
                         Christopher,  Jr., Chairman  of the  Board, Retired;
                         Jeffrey  R.  Stewart,  Educational Consultant;  T.C.
                         Bowen, Jr., Attorney

































                                      48<PAGE>
The National Bank and Bank of Tazewell County Boards of Directors

(Picture of The     James G. Rakes, National  Bankshares, Inc., The National
National Bank       Bank,  President and  Chief  Executive Officer;  Charles
Board of Directors) L.  Boatwright, Vice  Chairman of  the  Board, Physician;
                    Robert  E.  Christopher,  Jr.,  Chairman of  the  Board,
                    Retired; L. Allen Bowman, Litton Poly-Scientific, Retired
                    President;  Jeffrey  R.  Stewart, Educational Consultant;
                    Paul  A.   Duncan, Holiday Motor Corp., President;  James
                    M.  Shuler,  Companion  Animal  Clinic, Inc.,  President,
                    Virginia House of  Delegates, Delegate;  Paul P.  Wisman,
                    Grundy  National  Bank,  Vice  President of  Investments,
                    Nicewonder  Investments,  Manager  of  Assets; J.  Lewis
                    Webb, Jr., Dentist



(Picture of Bank    Alonzo A. Crouse, Bank of Tazewell County, Executive Vice
of Tazewell County  President,  Secretary   and  Cashier;   James  G.  Rakes,
Board of Directors) National Bankshares,  Inc., The National  Bank, President
                    and Chief Executive Officer; William T. Peery,  Cargo Oil
                    Co., Inc.  President; R.  E.  Dodson,  Bank  of  Tazewell
                    County, President and  Chief Executive  Officer; James S.
                    Gillespie, Jr., Jim Sam  Gillespie Farm, President;  T.C.
                    Bowen,  Jr., Chairman  of the Board,  Attorney; James  A.
                    Deskins, Deskins  Super Market,  Inc., President; Carl C.
                    Gillespie,  Honorary  Chairman  of the  Board,  Attorney;
                    Jack H. Harry, Harry's Enterprises, Inc., President; J.M.
                    Pope,  Retired,   Charles  E.  Green,  III,   Registered
                    Representative, The Equitable  Life Assurance Society  of
                    the  United  States;  E.P.Greever,  Retired;  William  H.
                    VanDyke, Candlewax Smokeless Fuel Co., Vice President


The National Bank Advisory Boards

Montgomery County Advisory Board  Dan  A. Dodson, W. Clinton Graves, James J.
Owen, Arlene A. Saari, James C. Stewart, T. Cooper Via


Giles Advisory  Board Paul B. Collins,  John H. Givens, Jr.,  Ross E. Martin,
Kenneth L. Rakes, Scarlet B. Ratcliffe, H.M. Scanland, Jr., Buford Steele






















                                      49<PAGE>
Corporate Information

National Bankshares, Inc. Officers
   James G. Rakes                            Joan C. Nelson
   President and Chief Executive Officer     Corporate Officer

   J. Robert Buchanan                        Shelby M. Evans
   Treasurer                                 Corporate Compliance Officer

   Marilyn B. Buhyoff                        David K. Skeens
   Secretary and Counsel                     Corporate Auditor

   F. Brad Denardo
   Corporate Officer

Annual Meeting
The Annual Meeting of Stockholders will be held on Tuesday, April 14, 1998 at
3:00 p.m. at the Best Western Red Lion  Inn, 900 Plantation Road, Blacksburg,
Virginia.

Corporate Stock
The common stock of National Bankshares, Inc. is traded over the counter, and
certain  trades  are reported  on  the OTC  Bulletin Board  under  the symbol
"NKSH."

Financial Information
Investors   and  analysts  seeking   financial  information   about  National
Bankshares, Inc. should contact:
   James G. Rakes                  or        J. Robert Buchanan
   President and Chief Executive Officer     Treasurer
   (540)552-2011 or                          (540)552-2011 or
   (800)552-4123                             (800)552-4123

Written requests  may be directed  to:   National Bankshares, Inc.,  P.O. Box
90002, Blacksburg, VA 24062-9002.

Stockholder Services and Stock Transfer Agent
Stockholders  seeking  information  about  National  Bankshares,  Inc.  stock
accounts should contact:
   Marilyn B. Buhyoff
   Secretary and Counsel
   (540)552-2011 or (800)552-4123

The  National  Bank  of Blacksburg  serves  as  transfer  agent for  National
Bankshares, Inc. stock.

Written  requests  and  requests for  stock  transfers  may  be directed  to:
National Bankshares, Inc., P.O. Box 90002, Blacksburg, VA 24062-9002.

A copy of  National Bankshares,  Inc.'s annual report  to the Securities  and
Exchange Commission  on Form  10-K will  be furnished  without charge  to any
stockholder upon written request.

Corporate Office    National Bankshares, Inc.
                    100 South Main Street
                    Blacksburg, VA 24060
                    P.O. Box 90002
                    Blacksburg, VA 24062-9002




                                      50<PAGE>