UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C.  20549
                                    Form 10-K

              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended                                 Commission file number
   December 31, 1997                                            O-15204

                        NATIONAL BANKSHARES, INCORPORATED
--------------------------------------------------------------------------------
             (Exact name of Registrant as specified in its charter)

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

      100 South Main Street
      Blacksburg, Virginia                                          24060
----------------------------------------                    --------------------
(Address of principal executive offices)                         Zip Code

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

Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act:

                     Common Stock, Par Value $2.50 per Share
--------------------------------------------------------------------------------
                                (Title of Class)

Indicate by  a check  mark  whether the  Registrant (1)  has  filed all  reports
required  to be filed by  Section 13 or 15(d) of  the Securities Exchange Act of
1934 during  the  preceding 12  months  (or for  such  shorter period  that  the
Registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.
    Yes   X        No
        -----        -----

Indicate by check mark if  disclosure of delinquent filers pursuant to  Item 405
of Regulation S-K  is not contained  herein, and will  not be contained, to  the
best of  Registrant's knowledge, in  definitive proxy or  information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.      X
             -------

The  aggregate  market  value  of  voting stock  held  by  nonaffiliates  of the
Registrant as of March 18, 1998 was $96,689,655.  The aggregate market value was
computed based on  a price determined from  transactions known to management  of
the Registrant  since  its  stock  is not  extensively  traded,  listed  on  any
exchange, or  quoted by  NASDAQ.  (In  determining this  amount, the  registrant
assumes that all of its  Directors and principal Officers are affiliates.   Such
assumption shall not be deemed conclusive for any other purposes.)<PAGE>

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

           Class                                  Outstanding at March 18, 1998
------------------------------                   -------------------------------
COMMON STOCK, $2.50 PAR VALUE                              3,792,833



                       DOCUMENTS INCORPORATED BY REFERENCE

Selected information from the Registrants' Annual Report to Stockholders for the
year ended December 31, 1997,  is incorporated by reference into Parts I  and II
of this report.

Selected  information from  the  Registrant's  Proxy  Statement for  the  Annual
Meeting  to be held  April 14, 1998  and filed with the  Securities and Exchange
Commission  pursuant to Regulation 14A,  is incorporated by  reference into Part
III of this report.






































                        (This report contains 40 pages.)
                                              --
                   (The Index of Exhibits are on pages 39-40.)<PAGE>





                        NATIONAL BANKSHARES, INCORPORATED

                       ANNUAL REPORT FOR 1997 ON FORM 10-K


                                TABLE OF CONTENTS


                                                              PAGE
                                                              ----

            PART I

            Item 1.  Business                                 3-29
            Item 2.  Properties                                29
            Item 3.  Legal Proceedings                         29
            Item 4.  Submission of Matters to a Vote of
                      Security Holders                         29
            Executive Officers of the Registrant               30
            PART II

            Item 5.  Market for Registrant's Common
                      Equity and Related Stockholder
                      Matters                                  31
            Item 6.  Selected Financial Data                   31
            Item 7.  Management's Discussion and Analysis
                      of Financial Condition and Results
                      of Operations                            31
            Item 7A. Quantitative and Qualitative
                      Disclosures About Market Risk           31-33
            Item 8.  Financial Statements and
                      Supplementary Data                       34
            Item 9.  Changes in and Disagreements with
                      Accountants on Accounting and
                      Financial Disclosure                     34

            PART III

            Item 10. Directors and Executive Officers of
                       the Registrant                          34
            Item 11. Executive Compensation                    34
            Item 12. Security Ownership of Certain
                       Beneficial Owners and Management        34
            Item 13. Certain Relationships and Related
                       Transactions                            35

            PART IV

            Item 14. Exhibits, Financial Statement
                       Schedules, and Reports on Form 8-K     35-37



                                       -3-<PAGE>

                                     PART I
                                     ------


Item 1.  Business.
-----------------

History and Business

   National Bankshares, Inc.  (Bankshares) is a  bank holding company  organized
under the laws of Virginia in 1986 and registered under the Bank Holding Company
Act (BHCA).   Bankshares conducts  its operations through  its two  wholly-owned
subsidiaries, The National  Bank of Blacksburg (NBB) and Bank of Tazewell County
(BTC), collectively referred to as "the Company".

   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.

The National Bank of Blacksburg

   The National  Bank of  Blacksburg  was originally  chartered as  the Bank  of
Blacksburg in 1891.   Its state charter was converted  to a national charter  in
1922 and it became The National Bank of Blacksburg.  NBB operates a full-service
banking  business from its headquarters  in Blacksburg, Virginia,  and its eight
area branch offices.  NBB offers general  retail and commercial banking services
to individuals, businesses, local government units and institutional  customers.
These products and  services include accepting deposits in  the form of checking
accounts,  money   market  deposit  accounts,  interest-bearing  demand  deposit
accounts, savings  accounts and time  deposits; making real  estate, commercial,
revolving,  consumer  and  agricultural  loans;  offering  letters  of   credit;
providing other consumer financial  services, such as automatic  funds transfer,
collections, night  depository, safe  deposit,  travelers checks,  savings  bond
sales and utility  payment services; and providing other  miscellaneous services
normally  offered  by commercial  banks.    NBB also  conducts  a general  trust
business  in Blacksburg  near  its headquarters  location.   Through  its  trust
operation, NBB offers a variety of personal and corporate trust services.

   NBB  makes   loans  in  all  major  loan  categories,  including  commercial,
commercial and residential real estate, construction and consumer loans.

Bank of Tazewell County

   The  antecedents of BTC  are in  a charter issued  on September  28, 1889 for
Clinch  Valley Bank.   On  December 22,  1893, a  second charter  was issued  in
substantially the same  form for Bank of Clinch Valley.  In 1929, Bank of Clinch
Valley merged with Farmers Bank under the charter of the former, and the name of
the  resulting  institution became  Farmers  Bank  of Clinch  Valley.    Bank of


                                       -4-<PAGE>

Tazewell  County resulted  from the  1964 merger of  Bank of  Graham, Bluefield,
Virginia with  Farmers Bank of Clinch  Valley.  BTC provides  general retail and
commercial banking  services to  individuals,  businesses and  local  government
units.    These services  include commercial,  real  estate and  consumer loans.
Deposit  accounts offered  include  demand  deposit  accounts,  interest-bearing
demand deposit  accounts, money  market deposit  accounts, savings  accounts and
certificates  of  deposit.   Other  services include  automatic  funds transfer,
collections, night  depository, safe  deposit,  travelers checks,  savings  bond
sales  and utility payment  services; and providing  other miscellaneous service
normally offered  by  commercial banks.    BTC  also conducts  a  general  trust
business.

   BTC makes commercial, residential real estate and consumer loans.

Commercial Loans

   NBB  and BTC  make both  secured  and unsecured  loans to  businesses and  to
individuals for business purposes.  Loan requests are granted based upon several
factors including credit history,  past and present relationships with  the bank
and marketability of collateral.   Unsecured commercial loans must  be supported
by a satisfactory balance sheet and income statement.  Business loans made on  a
secured basis may  be secured by  a security interest  in marketable  equipment,
accounts receivable,  business  equipment  and/or  general  intangibles  of  the
business.  In addition, or in the alternative, the loan may be secured by a deed
of trust lien on business real estate.

   The risks associated with commercial loans are related to the strength of the
individual business, the value of loan collateral and the general  health of the
economy.

Residential Real Estate Loans

   Loans  secured by  residential  real  estate  are  originated  by  both  bank
subsidiaries.  Loans  originated by BTC  are typically held  in the bank's  loan
portfolio.  NBB  sells a substantial percentage  of the residential  real estate
loans  it originates  in the  secondary market  on a  servicing released  basis.
There are  occasions when a  borrower or  the real estate  do not  qualify under
secondary market criteria, but  the loan request represents a  reasonable credit
risk.    Also, an  otherwise qualified  borrower may  choose  not to  have their
mortgage loan  sold.   On  these occasions,  if the  loan  meets NBB's  internal
underwriting criteria, the loan  will be closed and  placed in NBB's  portfolio.
In its secondary  market operation,  NBB participates in  insured loan  programs
sponsored  by  the Department  of Housing  and  Urban Development,  the Veterans
Administration and the Virginia Housing Development Authority.

   Residential real  estate  loans  carry risk  associated  with  the  continued
credit-worthiness of the borrower and changes in the value of the collateral.

Construction Loans

   NBB makes loans for the purpose of financing the construction of business and
residential  structures  to   financially  responsibly  business   entities  and
individuals.  These loans are subject  to the same credit criteria as commercial
and residential real estate loans.  Although BTC  offers construction loans, its
involvement in this area of lending is more limited than NBB's due to the nature
of its market area.





                                       -5-<PAGE>

   In  addition to the risks associated with all real estate loans, construction
loans  bear  the risks  that  the  project will  not  be  finished according  to
schedule,  the project will not be finished according to budget and the value of
the collateral may at any point in time be less than the principal amount of the
loan.   Construction loans also bear  the risk that the  general contractor, who
may or may not be the bank's loan customer, is unable to finish the construction
project  as planned  because of  financial pressures  unrelated to  the project.
Loans to customers that  are made as permanent  financing of construction  loans
may likewise  under  certain circumstances  be  affected by  external  financial
pressures on those customers.

Consumer Loans

   NBB and BTC  routinely make consumer loans, both secured  and unsecured.  The
credit history and character of  individual borrowers is evaluated as a  part of
the credit decision.  Loans used to purchase vehicles or other specific personal
property and loans  associated with real estate are usually  secured with a lien
on  the subject  vehicle or property.   NBB  also originates  a small  number of
student loans that are sold to the Student Loan Marketing Association.

   Negative  changes  in a  customer's financial  circumstances  due to  a large
number  of  factors, such  as  illness  or loss  of  employment,  can place  the
repayment of a consumer loan at  risk.  In addition, deterioration in collateral
value can add risk to consumer loans.

Sales and Purchases of Loans

   NBB and BTC will occasionally buy or sell all or a portion  of a loan.  These
purchases and sales  are in addition to the secondary  market mortgage loans and
student loans regularly sold by NBB.  Because the demand for loans, particularly
for commercial loans, is greater in NBB's market area than in BTC's market area,
NBB  regularly sells loans and  participations in loans  to BTC.   BTC's loan to
deposit ratio is at a level where additional loans are desirable, and NBB's loan
to deposit ratio  is at  a level which  its management  considers to be  optimal
without the loans sold to BTC.

   Both banks will consider selling a loan or a participation in a loan, if: (i)
the full amount  of the loan  will exceed the  bank's legal  lending limit to  a
single  borrower;  (ii) the  full  amount  of the  loan,  when  combined with  a
borrower's previously outstanding  loans, will exceed  the bank's legal  lending
limit  to a single  borrower; (iii) the  Board of Directors or  an internal Loan
Committee believes  that a particular  borrower has  a sufficient level  of debt
with the  bank; (iv)  the borrower requests  the sale; (v)  the loan  to deposit
ratio is at or above the optimal level as determined by  bank management; and/or
(vi) the loan  may create too great  a concentration of loans in  one particular
location or in one particular type of loan.

   The banks will consider purchasing a loan, or a participation in a loan, from
another financial institution (including from another subsidiary of the Company)
if the  loan meets all  applicable credit quality  standards and (i)  the bank's
loan to deposit ratio  is at a level where additional  loans would be desirable;
and/or (ii) a common customer requests the purchase.

   The following table sets forth, for the three fiscal years ended December 31,
1997, 1996 and  1995 the percentage  of total operating  revenue contributed  by
each class of similar services which  contributed 15% or more of total operating
revenues of the Company during such periods.




                                       -6-<PAGE>

                                                            Percentage of
      Period             Class of Service                   Total Revenues
      ------             ----------------                   --------------

      December 31, 1997  Interest and Fees on Loans             59.92%
                         Interest on Investments                29.31%

      December 31, 1996  Interest and Fees on Loans             54.98%
                         Interest on Investments                34.61%


      December 31, 1995  Interest and Fees on Loans             51.72%
                         Interest on Investments                38.16%



Market Area

The National Bank of Blacksburg Market Area

   NBB's  primary market  area consists  of the  northern portion  of Montgomery
County  and all  of Giles  County, Virginia.   This area  includes the  towns of
Blacksburg and Christiansburg in Montgomery  County and the towns of Pearisburg,
Pembroke and Rich Creek, in Giles  County.  The local economy is diverse  and is
oriented toward  higher education, retail  and service, light  manufacturing and
agriculture.   For  the years  1997,  1996 and  1995  the unemployment  rate  in
Montgomery  County was 2.6%, 3.3% and 3.0%,  respectively, and the rate in Giles
County  during  those  years was  6.7%  in  1997  and  8.4% in  1996  and  1995.
Montgomery County's largest employer is Virginia Polytechnic Institute and State
University  (VPI & SU) located  in Blacksburg.   VPI & SU  is the Commonwealth's
land grant college and also its largest university.   Employment at VPI & SU has
remained stable over  the past  three years, and  it is  not expected to  change
materially in the next few years.  A second state  supported university, Radford
University, is located  in the western edge  of NBB's service area.   It too has
provided stable employment opportunities in the region.

   Giles County's  primary employer  is the Celco  plant, that  manufactures the
material from which cigarette  filters are made.  In 1995 and 1996 employment at
that plant was  stable, however, in late 1997 temporary  employee furloughs were
announced, and it is anticipated that some percentage of these temporary layoffs
will become permanent.   Several other small manufacturing  concerns are located
in Montgomery and  Giles Counties.  These concerns  manufacture diverse products
and are not dependent upon one sector of the economy.

   Since 1988,  Montgomery County has  developed into a regional  retail center,
with the construction of two  large shopping areas.  Two area hospitals, each of
which are  affiliated with different large health care systems, have in the past
several years constructed  additional facilities and  have attracted  additional
health care providers to Montgomery County,  making it a center for basic health
care services.  VPI &  SU's Corporate Research Center has brought  several small
high tech companies to Blacksburg, and further expansion is planned.

   Montgomery County  has experienced  good growth, with  the total  fair market
value of real estate, measured in constant dollars, increasing 49%  in the years
between  1980 and 1992.  Growth is predicted  to continue through the year 2000;
however, the rate  is likely to be  slower, as the predicted rate  of population
growth  in Montgomery County is expected  to moderate.  Neighboring Giles County
is more rural and had only 22% of Montgomery County's total population in  1990.
Giles  County has  experienced a  slight decline  in  population since  the 1990


                                       -7-<PAGE>

census.   Total  fair market  value of  real estate,  measured in  real dollars,
increased in Giles County by 54% between  1980 and 1992, but declined by 9% over
that twelve-year  period, as measured in  constant dollars.  The  continued slow
decline of Giles County's  population is predicted to continue through  the year
2000.   However, since the total population  of the County reported  in the 1990
census was only 16,366, and the population projected by the Virginia  Employment
Commission for Giles in  the year 2000 is  16,121, the predicted decline  of 245
individuals is not expected to materially impact NBB's business in Giles County.

   NBB's primary  market area offers the  advantages of a good  quality of life,
scenic  beauty, moderate  climate  and the  cultural  attractions of  two  major
universities.  The region  has marketed itself as a  retirement destination, and
it  has had  some  recent success  attracting  retirees, particularly  from  the
Northeast and urban Northern Virginia.   These marketing efforts are expected to
continue.

Bank of Tazewell County Market Area

   Most of BTC's business  originates from Tazewell County, Virginia  and Mercer
County,  West Virginia.   This  includes the  towns of  Tazewell and  Bluefield,
Virginia  and Bluefield, West  Virginia.  BTC's primary  market area has largely
depended on  the coal mining  industry and farming  for its  economic base.   In
recent years, coal companies have mechanized  and this has reduced the number of
individuals required  for 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.  Unemployment  has stabilized, and  real estate values
also remain stable and comparable to other areas in southwest Virginia.

   For  1997, 1996 and 1995 the unemployment  rate for Tazewell County was 9.5%,
9.5% and 10.2%, respectively.  In the same years, Mercer County, West Virginia's
unemployment rate was 5.3%, 5.2% and 5.7%, respectively.

Competition

   The  banking and  financial service  business in  Virginia generally,  and in
NBB's  and  BTC's  market  areas  specifically,  is  highly  competitive.    The
increasingly competitive  environment  is a  result  of changes  in  regulation,
changes in  technology and product delivery systems and the accelerating pace of
consolidation   among  financial   service  providers.     The   Company's  bank
subsidiaries compete for loans and deposits with other commercial banks, savings
and loan  associations, securities and brokerage  companies, mortgage companies,
money market funds, credit unions and other nonbank financial service providers.
Many  of these competitors are  much larger in  total assets and capitalization,
have greater  access to capital markets  and offer a broader  array of financial
services  than NBB  and BTC.   In order  to compete  with these  other financial
service  providers, NBB and  BTC rely upon  service-based business philosophies,
personal  relationships with  customers, specialized  services tailored  to meet
customers' needs  and the  convenience of office  locations.   In addition,  the
banks  are generally  competitive  with other  financial  institutions in  their
market  areas with respect to interest rates  paid on deposit accounts, interest
rates charged on loans and other service charges on loans and deposit accounts.

Registrant's Organization and Employment

   Bankshares,  NBB and BTC are  organized in a  holding company/subsidiary bank
structure.   Bankshares  has no  employees, except  for executive  officers, and
conducts  substantially all  of its  operations through  its subsidiaries.   All


                                       -8-<PAGE>

compensation paid to officers and employees is paid by NBB, except for fees paid
by Bankshares  to President and Chief  Executive Officer James G.  Rakes for his
service as a director of the Company.

   At December 31, 1997, NBB employed  107 full time equivalent employees at its
main  office, operations center  and branch offices.   BTC at  December 31, 1997
employed 69 in its various offices and operational areas.

Certain Regulatory Considerations

   Bankshares, NBB and BTC are subject to various state and federal banking laws
and  regulations  which  impose  specific requirements  or  restrictions  on and
provide for general regulatory  oversight with respect to virtually  all aspects
of operations.   As a result  of the substantial regulatory  burdens on banking,
financial  institutions, including  Bankshares, NBB  and BTC,  are disadvantaged
relative  to other competitors who are not  as highly regulated, and their costs
of doing business  are much higher.   The following  is a  brief summary of  the
material  provisions of  certain statutes,  rules  and regulations  which affect
Bankshares, NBB  and/or BTC.    This summary  is qualified  in  its entirety  by
reference  to the  particular statutory  and regulatory  provisions referred  to
below and  is not intended  to be an  exhaustive description of  the statutes or
regulations which are  applicable to  the businesses of  Bankshares, NBB  and/or
BTC.  Any change in applicable laws  or regulations may have a material  adverse
effect on the business and prospects of Bankshares, NBB and/or BTC.

National Bankshares, Inc.

   Bankshares  is a  bank holding  company within  the meaning  of the  BHCA and
Chapter 13 of  the Virginia Banking Act, as amended  (the Virginia Banking Act).
The activities of Bankshares also are governed by the Glass-Steagall Act of 1933
(the Glass-Steagall Act).

   The  Bank  Holding Company  Act.   The BHCA  is  administered by  the Federal
Reserve Board, and Bankshares is required to file with the Federal Reserve Board
an annual report  and such additional information  as the Federal  Reserve Board
may require pursuant to the BHCA.  The Federal Reserve  Board also is authorized
to  examine  Bankshares and  its  subsidiaries.   The BHCA  requires  every bank
holding company to obtain the prior approval of the Federal Reserve Board before
(i) it or any of its subsidiaries (other than a bank) acquires substantially all
the  assets of any  bank; (ii) it  acquires ownership  or control of  any voting
shares of any bank if after  such acquisition it would own or  control, directly
or  indirectly, more  than 5%  of the voting  shares of  such bank;  or (iii) it
merges or consolidates with any other bank holding company.

   The  BHCA and  the  Change in  Bank  Control Act,  together  with regulations
promulgated  by  the  Federal Reserve  Board,  require  that,  depending on  the
particular circumstances, either Federal Reserve Board approval must be obtained
or  notice must be  furnished to the  Federal Reserve Board  and not disapproved
prior to  any person or company  acquiring "control" of a  bank holding company,
such  as Bankshares,  subject to  certain exemptions.   Control  is conclusively
presumed to exist if an individual or  company acquires 25% or more of any class
of voting securities of Bankshares.  Control is rebuttably presumed  to exist if
a  person  acquires 10%  or more,  but less  than  25%, of  any class  of voting
securities of Bankshares.   The regulations provide a procedure  for challenging
the rebuttable control presumption.

   Under the BHCA,  a bank holding company is generally prohibited from engaging
in, or acquiring direct or indirect control of more than 5% of the voting shares
of  any company  engaged in  nonbanking activities,  unless the  Federal Reserve


                                       -9-<PAGE>

Board,  by order  or regulation,  has found  those activities  to be  so closely
related to banking or managing or  controlling banks as to be a  proper incident
thereto.  Some of the  activities that the Federal Reserve Board  has determined
by regulation to be  proper incidents to the business of  a bank holding company
include  making or  servicing  loans and  certain types  of leases,  engaging in
certain  insurance and  discount brokerage  activities, performing  certain data
processing  services,  acting  in  certain  circumstances   as  a  fiduciary  or
investment  or  financial  adviser,  owning  savings  associations  and   making
investments  in certain corporations  or projects designed  primarily to promote
community welfare.

   The Federal Reserve Board imposes certain capital  requirements on Bankshares
under the  BHCA, including  a  minimum leverage  ratio and  a  minimum ratio  of
"qualifying"  capital  to  risk-weighted   assets.    Subject  to  its   capital
requirements and certain other restrictions, Bankshares can borrow money to make
a  capital  contribution to  NBB  or BTC,  and  such loans  may  be repaid  from
dividends paid from NBB or BTC to Bankshares (although the ability of NBB or BTC
to pay  dividends are subject to regulatory restrictions).  Bankshares can raise
capital for contribution to NBB and BTC by issuing securities  without having to
receive  regulatory  approval, subject  to  compliance  with federal  and  state
securities laws.

   The  Virginia Banking Act.  All Virginia bank holding companies must register
with  the  Virginia State  Corporation  Commission  (the Commission)  under  the
Virginia  Banking Act.    A registered  bank holding  company  must provide  the
Commission with information with respect to the financial condition, operations,
management and  intercompany  relationships  of  the  holding  company  and  its
subsidiaries.   The Commission  also may require  such other  information as  is
necessary to keep itself informed  about whether the provisions of  Virginia law
and the regulations  and orders  issued thereunder by  the Commission have  been
complied with, and  may make examinations  of any bank  holding company and  its
subsidiaries.

   In  March 1994, the Virginia General Assembly adopted an amendment to Chapter
15  of the Virginia Banking  Act to allow bank  holding companies located in any
state to acquire a Virginia bank or bank holding company if the Virginia bank or
bank holding company could acquire a bank holding company in their state and the
Virginia bank or bank  holding company to be acquired has  been in existence and
continuously operated for more than  two years.  This amendment may  permit bank
holding  companies from  throughout  the United  States  to enter  the  Virginia
market, subject to federal and state approval.

   Glass-Steagall Act.  Bankshares is  also restricted in its activities by  the
provisions  of the  Glass-Steagall  Act, which  prohibit Bankshares  from owning
subsidiaries that are engaged principally in the issue, flotation, underwriting,
public  sale or distribution of securities. Bankshares does not presently engage
in securities-related activities in any material respect.

NBB and BTC

   General.  NBB is a  national banking association incorporated under  the laws
of the  United  States and  is  subject to  examination  by the  Office  of  the
Comptroller  of the Currency (the OCC).  Deposits in NBB are insured by the FDIC
up to a maximum amount (generally $100,000 per depositor, subject to aggregation
rules).  The OCC and the FDIC regulate or monitor all areas of NBB's operations,
including security devices  and procedures, adequacy of  capitalization and loss
reserves,  loans,  investments,  borrowings,  deposits,  mergers,  issuances  of
securities, payment  of dividends, interest rates payable  on deposits, interest
rates  or  fees  chargeable  on  loans,  establishment  of  branches,  corporate


                                      -10-<PAGE>

reorganizations  and maintenance of books and records.   The OCC requires NBB to
maintain  certain  capital ratios.    NBB  is required  by  the  OCC to  prepare
quarterly reports on NBB's financial condition and to conduct an annual audit of
its  financial affairs  in  compliance  with  minimum standards  and  procedures
prescribed  by the  OCC.   NBB also  is required  by the  OCC to  adopt internal
control structures and  procedures in order to safeguard  assets and monitor and
reduce risk  exposure.   While appropriate  for safety and  soundness of  banks,
these requirements impact banking overhead costs.

   BTC is organized as a Virginia-chartered banking corporation and is regulated
and supervised by  the Bureau of  Financial Institutions (BFI)  of the  Virginia
State Corporation  Commission.  In addition, as a federally insured bank, BTC is
regulated and  supervised by  the Federal  Reserve Board,  which  serves as  its
primary federal regulator and  is subject to certain regulations  promulgated by
the FDIC.   Under the  provisions of  federal law, federally  insured banks  are
subject,  with  certain exceptions,  to  certain restrictions  on  extensions of
credit to their  affiliates, on investments in the stock  or other securities of
affiliates and on the taking of such stock or securities as  collateral from any
borrower.  In addition, such banks are prohibited from engaging  in certain tie-
in-arrangements in connection  with any extension of credit or  the providing of
any property of service.

   The  Virginia State  Corporation  Commission and  the  Federal Reserve  Board
conduct  regular examinations  of BTC  reviewing the  adequacy of the  loan loss
reserves,  quality  of  the  loans  and  investments,  propriety  of  management
practices, compliance with laws and regulations and  other aspects of the bank's
operations.  In addition to these regular examinations, Virginia chartered banks
must  furnish to the Federal Reserve Board quarterly reports containing detailed
financial statements and schedules.

   Community Reinvestment Act.  NBB and BTC are subject to the provisions of the
Community Reinvestment Act  of 1977  (the CRA), which  requires the  appropriate
federal bank regulatory agency, in connection with its regular examination  of a
bank, to assess  the bank's record in meeting the credit  needs of the community
served by the  bank, including low and moderate-income neighborhoods.  Under the
implementing CRA  regulations, banks have the  option of being assessed  for CRA
compliance under one of several methods.   Small banks are evaluated differently
than  larger banks  and  technically are  not  subject to  some data  collection
requirements.  The focus of the regulations is on the volume and distribution of
a  bank's  loans,  with  particular emphasis  on  lending  activity  in low  and
moderate-income areas and to  low and moderate-income persons.   The regulations
place substantial importance  on a bank's product  delivery system, particularly
branch localities.  The new  regulations require banks, other than small  banks,
to  comply  with  significant  data  collection  requirements.   The  regulatory
agency's  assessment of  the  bank's record  is  made available  to  the public.
Further, such  assessment is required for  any bank which has  applied to, among
other things, establish a new branch  office that will accept deposits, relocate
an existing office, or merge,  consolidate with or acquire the assets  or assume
the liabilities  of a federally  regulated financial institution.   It is likely
that banks'  compliance with the  CRA, as well  as other so-called  fair lending
laws,  will  face ongoing  government scrutiny  and  that costs  associated with
compliance will continue to increase.

   NBB  has received a  CRA rating of  "Outstanding" in its  last examination by
federal bank regulators.  BTC was rated as "Satisfactory".






                                      -11-<PAGE>

   Branching.   In  1986, the  Virginia Banking  Act was  amended to  remove the
geographic restrictions  governing the establishment of  branch banking offices.
Subject to  the approval of  the appropriate  federal and state  bank regulatory
authorities,  BTC as  a state bank,  may establish  a branch  office anywhere in
Virginia.

   National banks, like NBB, are required by the  National Bank Act to adhere to
branch banking laws applicable  to state banks in the  states in which they  are
located.   Under current Virginia  law, NBB  may open branch  offices throughout
Virginia with the prior approval of the  OCC.  In addition, with prior  approval
of one  or more of the  Federal Reserve Board, the Virginia  Commission, the OCC
and the  FDIC,  NBB will  be  able to  acquire  existing banking  operations  in
Virginia.

   On  September 29,  1994,  the Riegle-Neal  Interstate  Banking and  Branching
Efficiency Act of  1994 (the Interstate  Act) became law.   The Interstate  Act,
which  became effective  September 29,  1995, allows  bank holding  companies to
acquire  banks in  any state, without  regard to  state law, except  that if the
state  has a  minimum requirement  for  the amount  of time  a bank  must  be in
existence,  that law  must be  preserved.   Under  the Virginia  Banking Act,  a
Virginia bank or all of the subsidiaries of Virginia holding companies sought to
be  acquired must  have been  in continuous  operation for  more than  two years
before the date of such proposed  acquisition.  The Interstate Act permits banks
to acquire out-of-state  branches through interstate mergers,  beginning June 1,
1997.   States could opt-in to  interstate branching earlier, or  opt-out before
June 1,  1997.  De  novo branching, where  an out-of-state bank  holding company
sets up a new branch in another state, requires a state's specific approval.  An
acquisition or merger  is not permitted  under the Interstate  Act if the  bank,
including its insured depository affiliates,  will control more than 10%  of the
total  amount of  deposits  of insured  depository  institutions in  the  United
States,  or will control 30% or more of  the total amount of deposits of insured
depository institutions in any state.

   Virginia has, by  statute, elected  to opt-in fully  to interstate  branching
under the Interstate  Act, effective July 1, 1995.   Under the Virginia statute,
Virginia state  banks may, with the  approval of the Virginia  State Corporation
Commission,  establish and  maintain a  de novo  branch or  acquire one  or more
branches in  a state  other than  Virginia, either  separately or  as part  of a
merger.  Procedures also  are established to allow out-of-state  domiciled banks
to  establish or acquire branches in Virginia,  provided the "home" state of the
bank permits Virginia banks to establish or acquire branches within its borders.
The activities of  such branches will  be subject to  the same laws  as Virginia
domiciled  banks, unless such activities are prohibited  by the law of the state
where the bank is organized.   The Virginia State Corporation Commission has the
authority to examine and  supervise out-of-state state banks to  ensure that the
branch is operating in a  safe and sound manner and in compliance  with the laws
of   Virginia.    The  Virginia  statute  authorizes  the  Bureau  of  Financial
Institutions to enter into  cooperative agreements with other state  and federal
regulators  for the examination and supervision of out-of-state state banks with
Virginia  operations,  or  Virginia domiciled  banks  with  operations  in other
states.  Likewise, national banks, with the approval of the OCC, may branch into
and  out of  the state  of  Virginia.   Any Virginia  branch of  an out-of-state
national  bank is subject to Virginia law  (enforced by the OCC) with respect to
intrastate   branching,  consumer   protection,  fair   lending   and  community
reinvestment  as if it  were a  branch of a  Virginia bank,  unless preempted by
federal law.





                                      -12-<PAGE>

   The Interstate Act permits  banks and bank holding companies  from throughout
the United States  to enter Virginia markets through the acquisition of Virginia
institutions  and  makes  it easier  for  Virginia  bank  holding companies  and
Virginia  state  and national  banks to  acquire  institutions and  to establish
branches in other states.  Competition in market areas served by the Company may
increase as a result of  the Interstate Act and the Virginia  interstate banking
statutes.

   Deposit Insurance.  The FDIC establishes rates for the payment of premiums by
federally  insured financial institutions.   A Bank Insurance  Fund (the BIF) is
maintained  for commercial banks, with insurance premiums from the industry used
to  offset losses from  insurance payouts when  banks fail.   Beginning in 1993,
insured  depository institutions  like NBB  and BTC  paid for  deposit insurance
under  a risk-based premium system.  Both  NBB and BTC qualified for the minimum
annual premium rate of $2,000 per year  in 1996.  Beginning in 1997, all  banks,
including  NBB and  BTC, were subject  to a  higher FDIC  assessment which funds
interest  payments for  bank  issues to  resolve  problems associated  with  the
savings and  loan industry.  This assessment will continue until 2018-2019.  The
assessment will  vary over the period from 1.29 cents  to 2.43 cents per $100 of
deposits.

   Government Policies.  The operations  of NBB and BTC are affected not only by
general  economic conditions,  but also  by the  policies of  various regulatory
authorities.    In particular,  the Federal  Reserve  Board regulates  money and
credit and interest  rates in  order to influence  general economic  conditions.
These policies have a  significant influence on overall growth  and distribution
of loans, investments and deposits and affect interest rates charged on loans or
paid  for time and  savings deposits.   Federal Reserve Board  monetary policies
have had  a significant effect on  the operating results of  commercial banks in
the past and are expected to continue to do so in the future.

   Limits on Dividends and Other Payments.  As a national bank, NBB, may not pay
dividends from its capital; all  dividends must be paid out of  net profits then
on  hand,  after deducting  expenses, losses,  bad  debts, accrued  dividends on
preferred stock, if any, and  taxes.  In addition, a national bank is prohibited
from declaring a dividend on its shares of common stock until its surplus equals
its stated  capital, unless there has  been transferred to surplus  no less than
one-tenth of the  bank's net profits of (i) the  preceding two consecutive half-
year periods (in the case of an annual dividend) or (ii) the preceding half-year
period (in the case  of a quarterly or  semi-annual dividend).  The approval  of
the OCC is required if the total of all dividends declared by a national bank in
any  calendar year exceeds the  total of its net profits  for that year combined
with its retained  net profits for  the preceding two  years, less any  required
transfers to surplus or to fund the retirement of preferred stock.

   The OCC has  promulgated regulations  that became effective  on December  13,
1990,  which significantly affect the  level of allowable  dividend payments for
national  banks.   The  effect is  to make  the  calculation of  national banks'
dividend-paying   capacity   consistent  with   generally   accepted  accounting
principles.  The allowance for  loan and lease losses will not be  considered an
element of  "undivided profits then on hand" and provisions to the allowance are
treated as expenses  and therefore not  part of "net  profits."  Accordingly,  a
national bank  with an allowance  greater than its  statutory bad debts  may not
include the  excess  in calculating  undivided  profits for  dividend  purposes.
Further,  a national bank  may be able  to use  a portion of  its earned capital
surplus   account  as  "undivided  profits  then  on  hand,"  depending  on  the
composition of that account.




                                      -13-<PAGE>

   As  a state  member bank subject  to the  regulations of  the Federal Reserve
Board,  BTC must  obtain  the approval  of  the Federal  Reserve  Board for  any
dividend  if the  total of  all dividends  declared in  any calendar  year would
exceed the total  of its net profits,  as defined by the  Federal Reserve Board,
for that  year, combined  with its  retained net profits  for the  preceding two
years.   In addition, a state  member bank may not  pay a dividend  in an amount
greater  than its undivided profits then on  hand after deducting its losses and
bad debts.   For this  purpose, bad debts  are generally defined  to include the
principal amount  of loans which are in arrears  with respect to interest by six
months  or more,  unless  such loans  are fully  secured and  in the  process of
collection.  Moreover,  for purposes of this limitation, a  state member bank is
not permitted to add the balance in its allowance for loan losses account to its
undivided profits then on hand; however, it may net  the sum of its bad debts as
so defined  against the  balance in  its allowance for  loan losses  account and
deduct  from undivided profits  only bad debts  as so defined in  excess of that
account.

   In  addition, the  Federal Reserve  Board is  authorized to  determine, under
certain  circumstances relating  to the  financial condition  of a  state member
bank, that the payment of  dividends would be an unsafe or  unsound practice and
to prohibit  payment thereof.  The  payment of dividends that  depletes a bank's
capital  base could be deemed to constitute  such an unsafe or unsound practice.
The  Federal  Reserve  Board has  indicated  that  banking  organizations should
generally pay dividends only out of current operating earnings.

   Virginia  law  also  imposes  restrictions  on  the ability  of  BTC  to  pay
dividends.  A Virginia state bank is permitted to  declare a dividend out of its
"net  undivided profits", after providing for all expenses, losses, interest and
taxes accrued or  due by the bank.  In addition, a deficit in capital originally
paid in must be restored to its initial level, and no dividend can be paid which
could  impair the bank's paid in capital.   The Bureau of Financial Institutions
further has authority to limit the payment of dividends by a Virginia bank if it
determines the limitation is in  the public interest and is necessary  to ensure
the bank's financial soundness.

   The  Federal Deposit Insurance  Corporation Improvement Act  of 1991 (FDICIA)
provides  that  no   insured  depository  institution   may  make  any   capital
distribution  (which would  include  a  cash  dividend)  if,  after  making  the
distribution,  the institution  would not  satisfy  one or  more of  its minimum
capital requirements.

   Capital  Requirements.   The  Federal Reserve  Board  has adopted  risk-based
capital  guidelines in final  form which are  applicable to  Bankshares and BTC.
The  Federal  Reserve  Board  guidelines  redefine  the  components of  capital,
categorize  assets into different  risk classes and  include certain off-balance
sheet items  in the calculation of  risk-weighted assets.  The  minimum ratio of
qualified total  capital to risk-weighted assets  (including certain off-balance
sheet items, such as standby letters of credit)  is 8.0%.  At least half of  the
total capital must be comprised of Tier 1 capital  for a minimum ratio of Tier 1
Capital to risk-weighted assets of 4.0%.  The remainder may consist of a limited
amount of  subordinated debt, other  preferred stock, certain  other instruments
and  a limited  amount of loan  and lease  loss reserves.   The OCC  has adopted
similar regulations applicable to NBB.

   In addition, the Federal Reserve Board has established minimum leverage ratio
(Tier 1 capital to total assets less intangibles) guidelines that are applicable
to Bankshares  and BTC.  The  OCC has adopted similar  regulations applicable to
NBB.  These guidelines  provide for a minimum ratio of 4.0%  for banks that meet
certain specified  criteria, including  that they  have  the highest  regulatory


                                      -14-<PAGE>

CAMEL rating and  are not  anticipating or experiencing  significant growth  and
have well-diversified  risk.  All  other banks will  be required to  maintain an
additional cushion  of  at least  100  to 200  basis  points, based  upon  their
particular  circumstances and risk profiles.   The guidelines  also provide that
banks  experiencing internal growth or  making acquisitions will  be expected to
maintain strong capital  positions substantially above  the minimum  supervisory
levels, without significant reliance on intangible assets.

   Bank regulators  from time to time  have indicated a desire  to raise capital
requirements  applicable to  banking organizations  beyond current  levels.   In
addition,  the  number of  risks  which may  be  included in  risk-based capital
restrictions, as  well as the measurement  of these risks, is  likely to change,
resulting in increased  capital requirements for banks.  Bankshares, NBB and BTC
are unable to predict whether higher capital ratios would be imposed and, if so,
at what levels and on what schedule.

Legislative Developments

   The difficulties encountered nationwide by financial institutions during 1990
and  1991 prompted federal legislation  designed to reform  the banking industry
and  to  promote the  viability of  the industry  and  of the  deposit insurance
system.   FDICIA, which  became  effective on  December 19,  1991, bolsters  the
deposit  insurance fund, tightens bank regulation and trims the scope of federal
deposit insurance as summarized below.

   FDIC Funding.  The legislation bolsters the  bank deposit insurance fund with
$70 billion  in borrowing authority and increases to $30 billion from $5 billion
the amount the FDIC can borrow from the U.S.  Treasury to cover the cost of bank
failures.   The loans, plus interest, would be repaid by premiums that banks pay
on domestic deposits over the next fifteen years.

   Prompt  Corrective Action.  Among  other things, FDICIA  requires the federal
banking agencies  to take "prompt corrective action" in respect to banks that do
not meet minimum capital  requirements.  FDICIA establishes five  capital tiers:
"well capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized."

   If a depository institution's principal  federal regulator determines that an
otherwise  adequately  capitalized  institution  is  in  an  unsafe  or  unsound
condition or is engaging  in an unsafe or  unsound practice, it may require  the
institution to submit a  corrective action plan, restrict  its asset growth  and
prohibit   branching,  new  acquisitions  and   new  lines  of   business.    An
institution's  principal  federal  regulator  may  deem the  institution  to  be
engaging  in  an  unsafe  or  unsound  practice  if  it  receives  a  less  than
satisfactory  rating for asset quality, management, earnings or liquidity in its
most recent examination.

   Among  other possible sanctions,  an undercapitalized  depository institution
may  not pay dividends and is  required to submit a  capital restoration plan to
its principal  federal  regulator.   In  addition, its  holding  company may  be
required to guarantee compliance with the capital restoration plan under certain
circumstances.  If an undercapitalized depository institution fails to submit or
implement an  acceptable capital  restoration plan,  it can  be subject  to more
severe sanctions, including an order  to sell sufficient voting stock to  become
adequately  capitalized.   More  severe sanctions  and  remedial actions  can be
mandated  by the  regulators if  an institution  is considered  significantly or
critically undercapitalized.




                                      -15-<PAGE>

   In addition,  FDICIA requires regulators  to draft a  new set of  non-capital
measures  of  bank  safety, such  as  loan  underwriting  standards and  minimum
earnings levels.  The legislation also requires regulators to perform annual on-
site  bank  examinations, places  limits  on real  estate lending  by  banks and
tightens  auditing requirements.  In  April 1995, the  regulators adopted safety
and soundness  standards  as required  by  FDICIA in  the  following areas:  (i)
operational and managerial; (ii) asset quality earnings and stock valuation; and
(iii) employee compensation.

   Deposit  Insurance.  FDICIA reduces  the scope of  federal deposit insurance.
The most  significant change ended the  "too big to fail"  doctrine, under which
the  government protects all deposits  in most banks,  including those exceeding
the  $100,000  insurance  limit.   The  FDIC's  ability  to reimburse  uninsured
deposits--those over $100,000  and foreign deposits--has  been sharply  limited.
Since  December   1993,  the   Federal  Reserve   Board's  ability   to  finance
undercapitalized banks with  extended loans  from its discount  window has  been
restricted.  In addition, only the best  capitalized banks will be able to offer
insured  brokered  deposits  without  FDIC  permission  or  to  insure  accounts
established under employee pension plans.

   As of  September 29, 1996, "The Depository Insurance Fund Act of 1996" became
law.   This legislation provided  for a one  time assessment  on banks that  had
previously  acquired  certain  deposits  from  savings  and  loan  institutions.
Neither NBB  or BTC were subject to that special assessment.  Beginning in 1997,
all banks  were subject to  increased assessments  that are designed  to finally
resolve problems associated with the savings and loan industry.

Other Legislative and Regulatory Concerns

   Other legislative and regulatory proposals  regarding changes in banking  and
the  regulation   of  banks,  thrifts  and  other   financial  institutions  are
periodically  considered by  the  executive branch  of  the federal  government,
Congress  and various  state governments,  including Virginia.   New  proposals,
could  significantly change the regulation  of banks and  the financial services
industry.  It cannot be predicted what might be proposed or adopted on how these
proposals would affect the Company.

Other Business Concerns

   The banking industry is particularly sensitive to interest rate fluctuations,
as the spread between the rates  which must be paid on deposits and  those which
may be charged  on loans is an important component of  profit.  In addition, the
interest which can be earned on a bank's invested funds has a significant effect
on profits.   Rising interest rates  typically reduce the demand  for new loans,
particularly  the real  estate loans  which represent  a significant  portion of
NBB's  and  BTC's  loan demand,  as  well  as certain  NBB  loans  in which  BTC
participates.














                                      -16-<PAGE>

               STATISTICAL DISCLOSURE BY NATIONAL BANKSHARES, INC.
                           AND SUBSIDIARIES (BANKSHARES)

  I.    DISTRIBUTION OF ASSETS, LIABILITIES  AND STOCKHOLDERS' EQUITY;  INTEREST
        RATES AND INTEREST DIFFERENTIAL
        ---------------------------------------------------------------------

        A.   AVERAGE BALANCE SHEETS

             The following  table presents,  for the years  indicated, condensed
             daily average balance sheet information.
              ($ in thousands)

                                                           December 31,
                                                     -------------------------
             ASSETS                                  1997       1996      1995
             ------                                  ----       ----      ----
             Cash and due from banks              $  9,954       9,842    10,189
             Interest bearing deposits               4,165       1,651       ---
             Federal funds sold                      8,181       8,903    12,105
             Securities available for sale:
                Taxable                             54,213      65,992    41,695
                Nontaxable                           6,312       6,679       930
             Securities held to maturity:
                Taxable                             67,046      79,599   105,701
                Nontaxable                          29,608      25,133    35,668
             Mortgage loans held for sale              413         850       723
             Loans, net                            204,540     177,419   159,920
             Other assets                           11,500      11,977    11,475
                                                  --------     -------   -------

                  Total assets                    $395,932     388,045   378,406
                                                  ========     =======   =======

             LIABILITIES AND STOCKHOLDERS' EQUITY
             ------------------------------------
             Noninterest-bearing demand
              deposits                            $ 44,193      41,997    38,833
             Interest-bearing demand deposits       75,519      76,017    77,545
             Savings deposits                       47,781      49,783    54,698
             Time deposits                         171,946     168,141   159,185
                                                  --------     -------   -------

                  Total deposits                   339,439     335,938   330,261

             Short-term borrowings                     319         433       593
             Other liabilities                       2,462       2,215     1,826
                                                  --------     -------   -------

                Total liabilities                  342,220     338,586   332,680

             Stockholders' equity                   53,712      49,459    45,726
                                                  --------     -------   -------
                Total liabilities and
                 stockholders' equity             $395,932     388,045   378,406
                                                  ========     =======   =======



                                      -17-<PAGE>
<TABLE>
B. ANALYSIS OF NET INTEREST EARNINGS

   The following table shows the major categories of interest-earning assets and interest-bearing liabilities,
   the interest  earned or  paid, the  average yield  or rate on  the daily  average balance  outstanding, net
   interest income and net yield on average interest-earning assets for the years indicated.
<CAPTION>
                              December 31, 1997           December 31, 1996          December 31, 1995
                          -------------------------  --------------------------  --------------------------
                                            Average                     Average                     Average
                          Average           Yield/   Average            Yield/   Average            Yield/
  ($ in thousands)        Balance Interest   Rate    Balance  Interest   Rate    Balance  Interest   Rate
                          ------- --------  -------  -------  --------  -------  -------  --------  -------
  <S>                     <C>     <C>       <C>      <C>      <C>       <C>      <C>      <C>       <C>
  Interest-earning
   assets:
  Loans, net (1)(2)(3)   $204,953   19,667   9.60%    178,269   17,339   9.73%    160,643   15,897   9.90%
  Taxable securities      121,259    7,776   6.41%    145,591    8,877   6.10%    147,396    9,723   6.60%
  Nontaxable
   securities (1)          35,920    2,708   7.54%     31,812    2,971   9.34%     36,598    2,856   7.80%
  Federal funds sold        8,181      470   5.75%      8,903      567   6.37%     12,105      704   5.82%
  Interest bearing
   deposits                 4,165      230   5.52%      1,651       91   5.51%        ---      ---    ---
                         --------   ------   ----     -------   ------   ----     -------   ------   ----
  Total interest-
   earning assets        $374,478   30,851   8.24%    366,226   29,845   8.15%    356,742   29,180   8.18%
                         ========   ======   ====     =======   ======   ====     =======   ======   ====
  Interest-bearing
   liabilities:
  Interest-bearing
   demand deposits       $ 75,519    3,073   4.07%     76,017    2,182   2.87%     77,545    2,353   3.03%
  Savings deposits         47,781    1,571   3.29%     49,783    1,646   3.31%     54,698    1,798   3.29%
  Time deposits           171,946    8,445   4.91%    168,141    9,181   5.46%    159,185    8,517   5.35%
  Short-term borrowings       319       17   5.33%        433       27   6.24%        593       35   5.90%
  Long-term debt              ---      ---    ---         ---      ---    ---         ---      ---    ---
                         --------   ------   ----     -------   ------   ----     -------   ------   ----
  Total interest-
   bearing liabilities   $295,565   13,106   4.43%    294,374   13,036   4.43%    292,021   12,703   4.35%
                         ========   ======   ====     =======   ======   ====     =======   ======   ====
  Net interest income
   and interest rate
   spread                           17,745   3.81%              16,809   3.72%              16,477   3.83%
                                    ======   ====               ======   ====               ======   ====
  Net yield on average
   interest-earning
   assets                                    4.74%                       4.59%                       4.62%
                                             ====                        ====                        ====

(1)     Interest on nontaxable  loans and securities is computed on a fully taxable equivalent basis using   a
        Federal income tax rate of 34%.
(2)     Loan fees of $339 in 1997, $374 in 1996 and $305 in 1995 are included in total interest income.
(3)     Nonaccrual loans are included in average balances for yield computations.

</TABLE>
                                                     -18-<PAGE>
<TABLE>
C.      ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE

        The Company's primary source  of revenue is net interest  income, which is the difference  between the
        interest and fees earned  on loans and investments and the interest paid  on deposits and other funds.
        The  Company's net interest income  is affected by  changes in the amount  and mix of interest-earning
        assets and interest-bearing liabilities and by changes in yields earned on interest-earning assets and
        rates paid on interest-bearing liabilities.  The following table sets forth, for the  years indicated,
        a  summary of the changes  in interest income  and interest expense resulting  from changes in average
        asset and liability balances (volume) and changes in average interest rates (rate).
<CAPTION>
                                              1997 Over 1996                   1996 Over 1995
                                      -------------------------------  -------------------------------
                                        Changes Due To                   Changes Due To
                                      -------------------              -------------------
                                                           Net Dollar                       Net Dollar
       ($ in thousands)               Rates(2)  Volume(2)    Change    Rates(2)  Volume(2)    Change
                                      --------  ---------  ----------  --------  ---------  ----------
       <S>                            <C>       <C>        <C>         <C>       <C>        <C>
       Interest income:(1)
         Loans                        $ (200)      2,528       2,328    (276)      1,718        1,442
         Taxable securities              441      (1,542)     (1,101)   (728)       (118)        (846)
         Nontaxable securities          (617)        354        (263)    518        (403)         115
         Federal funds sold              (53)        (44)        (97)     62        (199)        (137)
         Interest bearing deposits       ---         139         139     ---          91           91
                                      ------      ------      ------   -----      ------       ------
         Increase(decrease) in
          income on interest-
          earning assets              $ (429)      1,435       1,006    (424)      1,089          665
                                      ------      ------      ------   -----      ------       ------
       Interest expense:
         Interest-bearing demand
          deposits                    $  905         (14)        891    (125)        (46)        (171)
         Savings deposits                 (9)        (66)        (75)     10        (162)        (152)
         Time deposits                  (940)        204        (736)    178         486          664
         Short-term borrowings            (4)         (6)        (10)      2         (10)          (8)
                                      ------      ------      ------   -----      ------       ------
         Increase(decrease) in
          expense of interest-
          bearing liabilities         $  (48)        118          70      65         268          333
                                      ------      ------      ------   -----      ------       ------
       Increase (decrease) in net
        interest income               $ (381)      1,317         936    (489)        821          332
                                      ======      ======      ======   =====      ======       ======


(1)   Taxable equivalent basis using a Federal income tax rate of 34%.
(2)   Variances caused by  the change  in rate  times the change  in volume  have been allocated  to rate  and
      volume changes proportional to the relationship of the absolute dollar amounts of the change in each.
</TABLE>

                                                     -19-<PAGE>
<TABLE>
 II.  INVESTMENT PORTFOLIO

      A.   BOOK VALUE OF INVESTMENTS

           The amortized  costs and fair values of securities available for sale as of December 31, 1997, 1996
           and 1995 were as follows:
<CAPTION>
                                                                             December 31,
                                                         ----------------------------------------------------
                                                               1997              1996              1995
                                                         ----------------  ----------------  ----------------
                                                         AMORTIZED  FAIR   AMORTIZED  FAIR   AMORTIZED  FAIR
      ($ in thousands)                                     COSTS   VALUES    COSTS   VALUES    COSTS   VALUES
                                                         --------- ------  --------- ------  --------- ------
      <S>                                                <C>       <C>     <C>       <C>     <C>       <C>
      Securities available for sale:
       U.S. Treasury                                      $ 6,742    6,862    8,740   8,790    14,991  15,322
       U.S. Government agencies and corporations           36,252   36,276   33,840  33,640    42,586  42,809
       States and political subdivisions                    9,540    9,639    8,688   8,619     7,613   7,567
       Mortgage-backed securities (1)                       4,172    4,119    4,568   4,452     4,748   4,645
       Other securities                                     8,582    8,686    7,074   7,033     5,505   5,527
                                                          -------   ------   ------  ------    ------  ------
          Total securities available for sale             $65,288   65,582   62,910  62,534    75,443  75,870
                                                          =======   ======   ======  ======    ======  ======

<CAPTION>
           The amortized costs of securities held  to maturity as of December 31, 1997, 1996 and 1995  were as
           follows:
                                                                                    December 31,
                                                                           ------------------------------
      ($ in thousands)                                                     1997         1996         1995
                                                                           ----         ----         ----
      <S>                                                                  <C>          <C>          <C>
      Securities held to maturity:
       U.S. Treasury                                                      $ 7,527       11,547       19,330
       U.S. Government agencies and corporations                           36,853       54,804       49,938
       States and political subdivisions                                   32,949       34,144       36,428
       Mortgage-backed securities (1)                                         630          767          961
       Other securities                                                     6,433        7,448        5,108
                                                                          -------      -------      -------
          Total securities held to maturity                               $84,392      108,710      111,765
                                                                          =======      =======      =======

      (1)  The majority  of  Mortgage-backed  Securities  and  Collateralized  Mortgage  Obligations  held  at
           December 31, 1997 were  backed by U.S. agencies.  Certain holdings  are required to be periodically
           subjected to  the Financial Institution  Examination Council's (FFIEC) high  risk mortgage security
           test.   These tests address possible  fluctuations in the average life  and price sensitivity which
           are the primary  risks associated with this  type of security.   Such tests are usually  subject to
           regulatory review.

      Except for U.S. Government securities,  the Company has no  securities with any issuer that exceeds  10%
      of stockholders' equity.


</TABLE>
                                                     -20-<PAGE>
<TABLE>
B.    MATURITIES AND ASSOCIATED YIELDS

      The following table presents the maturities  for those securities available for sale and held to matrity
      as of December 31, 1997 and weighted average yield for each range of maturities.

<CAPTION>
                                                               Maturities and Yields
                                                                 December 31, 1997
                                            ---------------------------------------------------------
      ($ in thousands except for % data)    < 1 Year 1-5 Years 5-10 Years > 10 Years   None      Total
                                            -------- --------- ---------- ----------   ----      -----
      <S>                                   <C>      <C>       <C>        <C>          <C>       <C>
      Available for Sale
      ------------------
        U.S. Treasury                        $   995    3,867      2,000       ---       ---    $ 6,862
                                                5.12%    7.10%      5.92%      ---%      ---%      6.47%
        U.S. Agencies                          6,476   17,395     11,403     1,001       ---     36,275
                                                5.60%    6.19%      7.16%     7.35%      ---%      6.42%
        Mortgage-backed securities               ---      ---        622     3,501       ---      4,123
                                                 ---%     ---%      5.82%     6.03%      ---%      6.00%
        Taxable Securities                       ---    1,099      1,337       769       ---      3,205
                                                 ---%    6.64%      7.09%     7.63%      ---%      7.07%
        Nontaxable Securities                    ---    2,263      3,696       473       ---      6,432
                                                 ---%    6.68%      7.06%     7.38%      ---%      6.95%
        Corporate                              1,204    1,521      3,041     2,057       ---      7,823
                                                5.98%    6.72%      6.76%     7.07%      ---%      6.71%
        Other securities                         ---      ---        ---       ---       862        862
                                                 ---%     ---%       ---%      ---%    13.51%     13.51%
                                            ------------------------------------------------------------
         Total                                 8,675   26,145     22,099     7,801       862     65,582
                                                5.60%    6.42%      6.93%     6.71%    13.51%      6.59%
                                            ============================================================
      Held To Maturity
      ----------------
        U.S. Treasury                          3,000    6,035        ---       ---       ---      9,035
                                                4.89%    6.04%       ---%      ---%      ---%      5.66%
        U.S. Agencies                         10,249   16,614      8,480       ---       ---     35,343
                                                5.24%    5.99%      6.80%      ---%      ---%      5.97%
        Mortgage-backed securities               ---       42        192       395       ---        629
                                                 ---%    6.65%      7.67%     8.08%      ---%      7.86%
        Taxable Securities                       411    1,274      1,267     1,659       ---      4,611
                                                6.72%    6.99%      7.50%     7.40%      ---%      7.25%
        Nontaxable Securities                  2,990   17,954      6,664     1,697       ---     29,305
                                                8.59%    7.47%      8.24%     7.90%      ---%      7.79%
        Corporate                              1,500    3,005        471       493       ---      5,469
                                                5.80%    6.98%      7.50%     8.00%      ---%      6.79%
        Other securities                         ---      ---        ---       ---       ---        ---
                                                 ---%     ---%       ---%      ---%      ---%       ---%
                                            ------------------------------------------------------------
         Total                                18,150   44,924     17,074     4,244       ---     84,392
                                                5.81%    6.68%      7.44%     7.73%      ---%      6.70%
                                            ============================================================
(1)   Rates shown represent weighted average yield on a fully taxable basis.

</TABLE>
                                                     -21-<PAGE>

III.  LOAN PORTFOLIO
      --------------

      The   Company  concentrates  its  lending  activities  in  commercial  and
      industrial   loans,  real  estate  mortgage  loans  both  residential  and
      business, and loans to  individuals.  The following tables set forth (i) a
      comparison of the Company's  loan portfolio by major category  of loans as
      of  the  dates  indicated  and  (ii)  the  maturities  and  interest  rate
      sensitivity of the loan portfolio at December 31, 1997.

      A.   TYPES OF LOANS

                                                   December 31,
                                      ----------------------------------------
           ($ in thousands)           1997     1996     1995    1994      1993
                                      ----     ----     ----    ----      ----
           Commercial and industrial
            loans                   $101,379  87,519   59,609   59,213   67,359
           Real estate mortgage
            loans                     42,969  43,917   45,589   44,447   40,236
           Real estate construction
            loans                      8,510   6,295    6,007    5,643    3,967
           Loans to individuals       66,635  60,991   56,920   52,031   43,084
                                    -------- -------  -------  -------  -------
            Total loans              219,493 198,722  168,125  161,334  154,646

           Less unearned income and
            deferred fees             (2,503) (2,549)  (2,307)  (2,494)  (1,907)
                                    -------- -------  -------  -------  -------
            Total loans, net of
             unearned income         216,990 196,173  165,818  158,840  152,739

           Less allowance for loans
            losses                    (2,438) (2,575)  (2,625)  (2,551)  (2,583)
                                    -------- -------  -------  -------  -------
            Total loans, net        $214,552 193,598  163,193  156,289  150,156
                                    ======== =======  =======  =======  =======

      B.   MATURITIES AND INTEREST RATE SENSITIVITIES



                                                  December 31, 1997
                                       --------------------------------------
                                                             After
            ($ in thousands)           <1 Year   1-5 Years  5 Years     Total
                                       -------   ---------  -------     -----
            Commercial and
             industrial                $49,984     36,935    14,460    101,379
            Real estate
             construction                8,510        ---       ---      8,510
            Less loans with
             predetermined interest
             rates                      (9,718)   (13,447)  (13,262)   (36,427)
                                       -------    -------   -------    -------
            Loans with adjustable
             rates                     $48,776     23,488     1,198     73,462
                                       =======    =======   =======    =======





                                      -22-<PAGE>

  C.  RISK ELEMENTS

      1.   Nonaccrual, Past Due and Restructured Loans

           The  following table presents aggregate amounts for nonaccrual loans,
           restructured  loans, other real estate  owned, net and accruing loans
           which are contractually past  due ninety days or more  as to interest
           or principal payments.
                                                       December 31,
                                            ----------------------------------
            ($ in thousands)                1997    1996   1995    1994   1993
                                            ----    ----   ----    ----   ----
            Nonaccrual loans:
              Commercial and industrial    $   55     121    270     ---    710
              Real estate mortgage             32     495    418     390  1,123
              Real estate construction        ---     ---    ---     ---    ---
              Loans to individuals            ---     ---     30      30     31
                                           ------   -----  -----   -----  -----
                                           $   87     616    718     420  1,864
            Restructured loans:
              Commercial and industrial       ---     ---    ---     229    598
                                           ------   -----  -----   -----  -----
             Total nonperforming loans     $   87     616    718     649  2,462
            Other real estate owned, net      421     474    762   1,150    225
                                           ------   -----  -----   -----  -----
             Total nonperforming assets    $  508   1,090  1,480   1,799  2,687
                                           ======   =====  =====   =====  =====
            Accruing loans past due 90
            days or more:
              Commercial and industrial    $   82      14     11       4     45
              Real estate mortgage            358     252    250     219    198
              Real estate construction        ---     ---    ---      87    243
              Loans to individuals            232     192    313     180    128
                                           ------   -----  -----   -----  -----
                                           $  672     458    574     490    614
                                           ======   =====  =====   =====  =====

           The  effect of  nonaccrual and restructured  loans on interest income
           is presented below:

             ($ in thousands)                            1997    1996     1995
                                                         ----    ----     ----
             Scheduled interest:
               Nonaccrual loans                         $   8       68     59
               Restructured loans                         ---      ---    ---
                                                        -----    -----   ----
              Total scheduled interest                  $   8       68     59
                                                        -----    -----   ----
             Recorded interest:
               Nonaccrual loans                         $   1       24      5
               Restructured loans                         ---      ---    ---
                                                        -----    -----   ----
              Total recorded interest                   $   1       24      5
                                                        =====    =====   ====

           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 ninety days or more
           past due,  unless  the obligation  is both  well-secured and  in  the
           process of collection.

                                      -23-<PAGE>

      2.   Potential Problem Loans

           At December  31, 1997,  the recorded  investment in loans  which have
           been identified as impaired loans totaled $177,000.  Of  this amount,
           $124,000 related  to loans  with no  valuation allowance and  $53,000
           related   to  loans  with  a  corresponding  valuation  allowance  of
           $53,000.  For the year-ended December 31, 1997, the  average recorded
           investment  in impaired  loans  was  approximately $458,000  and  the
           total interest  income recognized  on impaired  loans was $23,000  of
           which $12,000 was recognized on a cash basis.

           At December  31, 1996,  the recorded  investment in loans  which have
           been identified as impaired loans totaled $725,000.  Of  this amount,
           $354,000 related  to loans with  no valuation allowance and  $371,000
           related   to  loans  with  a  corresponding  valuation  allowance  of
           $290,000.    For  the  year  ended  December 31,  1996,  the  average
           recorded  investment  in impaired  loans was  approximately $800,000,
           and  the  total interest  income  recognized  on impaired  loans  was
           $33,000 of which $23,000 was recognized on a cash basis.

      3.   Foreign Outstandings

           At  December  31,  1997,  1996  and  1995,  there  were   no  foreign
           outstandings.

      4.   Loan Concentrations

           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  Celco.   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  million and  $71
           million, 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  million and  $49 million,  respectively, in  loans
           for  college  housing  and  professional  office  buildings.    Loans
           secured by  residential real  estate were  approximately $65  million
           and $60 million  at December 31, 1997  and 1996, respectively.   This

                                      -24-<PAGE>

           represents  approximately  30%  and  31% of  the  loan  portfolio  at
           December   31,  1997  and   1996,  respectively.   Loans  secured  by
           automobiles  were  approximately  $34  million  and  $29  million  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.













































                                      -25-<PAGE>
<TABLE>
 IV.  SUMMARY OF LOAN LOSS EXPERIENCE
      -------------------------------

      A.   ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES

           The following tabulation shows average  loan balances at the end  of each period; changes  in the
           allowance  for loan  losses arising  from loans charged  off and  recoveries on  loans previously
           charged off  by  loan  category; and  additions  to the  allowance  which  have been  charged  to
           operating expense:
<CAPTION>

                                                                           December 31,
                                                          ----------------------------------------------
           ($ in thousands)                               1997      1996       1995      1994       1993
                                                          ----      ----       ----      ----       ----
           <S>                                            <C>       <C>        <C>       <C>        <C>
           Average loans outstanding                    $204,540    177,419   159,920    152,976   149,027
                                                        ========    =======   =======    =======   =======
           Balance at beginning of year                    2,575      2,625     2,551      2,583     2,327

           Charge-offs:
            Commercial and industrial loans                  257         95        23         72       231
            Real estate mortgage loans                       ---         11         9        192       285
            Real estate construction loans                   ---        ---       ---         53       ---
            Loans to individuals                             422        400       259        322       246
                                                        --------    -------   -------    -------   -------
            Total loans charged off                          679        506       291        639       762
                                                        --------    -------   -------    -------   -------
           Recoveries:
            Commercial and industrial loans                   70          4        10          7        10
            Real estate mortgage loans                       ---         64        16          4         5
            Real estate construction loans                   ---        ---       ---        ---       ---
            Loans to individuals                              37         57        57         43        50
                                                        --------    -------   -------    -------   -------
            Total recoveries                                 107        125        83         54        65
                                                        --------    -------   -------    -------   -------
           Net loans charged off                             572        381       208        585       697
                                                        --------    -------   -------    -------   -------
           Additions charged to operations                   435        331       282        553       953
                                                        --------    -------   -------    -------   -------
           Balance at end of year                       $  2,438      2,575     2,625      2,551     2,583
                                                        ========    =======   =======    =======   =======
           Net charge-offs to average net loans
            outstanding                                     0.28%      0.21%     0.13%      0.38%     0.47%
                                                        ========    =======   =======    =======   =======

           Factors influencing  management's  judgment  in  determining  the amount  of  the  loan  loss
           provision charged  to  operating  expense  include  the quality  of  the  loan  portfolio  as
           determined by management, the historical loan loss  experience, diversification as to type of
           loans in the portfolio,  the amount of secured as compared with unsecured loans and the value
           of  underlying  collateral, banking  industry standards  and  averages, and  general economic
           conditions.

</TABLE>

                                                    -26-<PAGE>
<TABLE>
      B.   ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES

           The  allowance for loan  losses has  been allocated according  to the amount  deemed necessary to
           provide  for  anticipated losses  within  the categories  of  loans  for the  years  indicated as
           follows:
<CAPTION>
                                                       December 31,
               ----------------------------------------------------------------------------------------------
                      1997               1996               1995              1994                1993
               ------------------ ------------------ ------------------ ------------------ ------------------
                         Percent             Percent            Percent           Percent             Percent
                            of                 of                 of                 of                 of
                         Loans in           Loans in           Loans in           Loans in           Loans in
                           Each               Each               Each               Each               Each
                         Category           Category           Category           Category           Category
  ($ in        Allowance to Total Allowance to Total Allowance to Total Allowance to Total Allowance to Total
   thousands)    Amount   Loans    Amount     Loans   Amount     Loans    Amount   Loans    Amount    Loans
               --------- -------- --------- -------- --------- -------- --------- -------- --------- --------
 <S>           <C>       <C>      <C>       <C>      <C>       <C>      <C>       <C>      <C>       <C>
 Commercial
  and
  industrial
  loans         $  213     46.18%     403     44.04%     411     35.46%     679     36.70%      860    43.56%

 Real estate
  mortgage
  loans             67     19.58%     305     22.10%     363     27.12%     364     27.55%      373    26.02%

 Real estate
  construction
  loans            ---      3.88%      51      3.17%     100      3.57%      37      3.50%       54     2.56%

 Loans to
  individuals      416     30.36%     504     30.69%     271     33.85%     569     32.25%      685    27.86%

 Unallocated     1,742              1,312              1,480                902                 611
                ------    ------   ------    ------   ------    ------   ------    ------    ------   ------

                $2,438    100.00%   2,575    100.00%   2,625    100.00%   2,551    100.00%    2,583   100.00%
                ======    ======   ======    ======   ======    ======   ======    ======    ======   ======








</TABLE>
                                                    -27-<PAGE>

V.    DEPOSITS

      A.   AVERAGE AMOUNTS OF DEPOSITS AND AVERAGE RATES PAID

           Average amounts  and average rates paid  on deposit  categories in
           excess of 10% of average total deposits are presented below:

                                             December 31,
                          --------------------------------------------------
                                1997             1996             1995
                          ---------------- ----------------  ---------------
                                   Average          Average          Average
                          Average   Rates  Average   Rates   Average  Rates
       ($ in thousands)   Amounts   Paid   Amounts    Paid   Amounts   Paid
                          -------  ------- -------  -------  ------- -------
      Noninterest-bearing
       demand deposits    $ 44,193   ---     41,997    ---    38,833    ---

      Interest-bearing
       demand deposits      75,519  4.07%    76,017   2.87%   77,545   3.03%

      Savings deposits      47,781  3.29%    49,783   3.31%   54,698   3.29%

      Time deposits        171,946  4.91%   168,141   5.46%  159,185   5.35%
                          -------- -----    -------  -----   -------  -----

       Average total
        deposits          $339,439  4.43%   335,938   4.43%  330,261   4.35%
                          ======== =====    =======  =====   =======  =====


      B.   TIME DEPOSITS OF $100,000 OR MORE

           The  following table  sets forth time  certificates of deposit and
           other time deposits of $100,000 or more:


                                            DECEMBER 31, 1997
                            -----------------------------------------------
                                       Over 3      Over 6
                               3       Months      Months
                             Months   Through 6  Through 12  Over 12
      ($ in thousands)      or Less    Months      Months    Months   Total
                            -------   ---------  ----------  -------  -----
      Certificates of
       deposit              $13,098       7,055      12,685    6,399  39,237
      Other time deposits       232         ---         172    2,906   3,310
                            -------      ------      ------   ------  ------
        Total time
         deposits of
         $100,000 or more   $13,330       7,055      12,857    9,305  42,547
                            =======      ======      ======   ======  ======










                                     -28-<PAGE>

 VI.  RETURN ON EQUITY AND ASSETS
      ---------------------------

      The ratio of net income to average stockholders'  equity and to average
      total assets, and certain other ratios are presented below:

                                                        December 31,
                                                  ------------------------
                                                  1997      1996      1995
                                                  ----      ----      ----
      Return on average assets                    1.66%      1.58%     1.46%
      Return on average equity(1)                12.21%     12.37%    12.08%
      Dividend payout ratio                      39.31%     37.55%    37.32%
      Average equity to average assets(1)        13.57%     12.75%    12.08%

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

Item 2.  Properties
-------------------

 Bankshares' headquarters, including  the Main Office of NBB, are  located at
100 South Main Street, Blacksburg, Virginia.   In addition to the Main Office
location, NBB owns seven branch  offices: two in the Town of  Blacksburg; one
in the Town  of Christiansburg; one  in Montgomery County;  and three in  the
County  of Giles.   NBB  leases office space  near the  Main Office  which is
occupied by  NBB's  trust, marketing,  audit,  compliance and  credit  review
departments.   An  additional property  was acquired in  1996 to  provide for
additional office space.  Construction of  an office building on this site is
expected to begin in 1998, reducing the future need for leased properties.

 Bank  of Tazewell  County owns  the land and  building of  six of  its seven
offices.  The bank leases the land and building  for its seventh office.  The
Main Office  is located at Main Street, Tazewell, Virginia.  Three additional
branches are located  in Tazewell, one in North Tazewell  and two are located
in Bluefield, Virginia.  Management believes that its existing facilities are
adequate to meet present needs and any anticipated growth.

 NBB owns  all its computer and data processing hardware and is a licensee of
the software it utilizes.  BTC  at present owns all of its computer  and data
processing hardware  and is a licensee  of the software it  utilizes.  During
1997, the Company implemented  a major hardware and software upgrade  at NBB.
It is  management's plan in  1998 to consolidate BTC's  data processing using
NBB's recently upgraded system.

Item 3.  Legal Proceedings
--------------------------

 Bankshares, NBB nor  BTC are not currently involved  in any material pending
legal proceedings,  other than  routine litigation  incidental  to NBB's  and
BTC's banking business.

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

 There were  no matters submitted  to a vote  of security holders during  the
fourth quarter of the year ended December 31, 1997.



                                     -29-<PAGE>

                     EXECUTIVE OFFICERS OF THE REGISTRANT
                     ------------------------------------

Pursuant to General  Instruction G(3)  of Form  10-K, the  following list  is
included as an  unnumbered item  in Part I  of this report  in lieu of  being
included in  the Proxy Statement for the Annual Meeting of Stockholders to be
held on April 14, 1998.

The  following is  a list  of names  and ages  of all  executive  officers of
Bankshares;  their terms  of office  as officers;  the positions  and offices
within  Bankshares  held  by  each   officer;  and  each  person's  principal
occupation or employment during the past five years.

                                                         YEAR ELECTED AN
           NAME        AGE  OFFICES AND POSITIONS HELD   OFFICER/DIRECTOR
           ----        ---  --------------------------   ----------------
    James G. Rakes      53 President and Chief                 1986
                           Executive Officer, National
                           Bankshares, Inc.; and
                           President and Chief
                           Executive Officer of The
                           National Bank of Blacksburg
                           since 1983.
    J. Robert Buchanan  46 Treasurer, National                 1998
                           Bankshares, Inc.; Senior
                           Vice President/Chief
                           Financial Officer of The
                           National Bank of Blacksburg,
                           since January 1, 1998; and
                           Senior Vice President,
                           Treasurer and Chief
                           Financial Officer, Premier
                           Bankshares Corporate since
                           1991.
    Marilyn B. Buhyoff  49 Secretary & Counsel,                1989
                           National Bankshares, Inc.;
                           and Senior Vice President/
                           Administration since 1992,
                           of The National Bank of
                           Blacksburg.
    F. Brad Denardo     45 Corporate Officer, National         1989
                           Bankshares, Inc.; and
                           Executive Vice President/
                           Loans since 1989 of The
                           National Bank of Blacksburg.

    Joan C. Nelson      47 Corporate Officer, National         1993
                           Bankshares, Inc.; Treasurer,
                           National Bankshares Inc.,
                           from 1993 to 1998; Cashier
                           since 1993 and Senior Vice
                           President/Operations since
                           1989 of The National Bank of
                           Blacksburg.


Except  for J.  Robert Buchanan  and Joan  C. Nelson,  each of  the executive
officers listed above  have served Bankshares and/or its  subsidiaries in the
aforementioned executive capacity for the past five years.


                                     -30-<PAGE>

                                   PART II
                                   -------


Item 5.  Market for Registrant's Common Equity and Related
Stockholder Matters
----------------------------------------------------------

 There  is  no  established  trading   market  for  the  stock   of  National
Bankshares, Inc.   As of March 18,  1998, the total number  of holders of the
Registrant's common stock was 1,151.

 Information concerning Market  Price and Dividend  Data is  set forth  under
"Common  Stock  Information and  Dividends" on  page  14 of  Bankshares' 1997
Annual Report to Stockholders and is incorporated herein by reference.


Item 6.  Selected Financial Data
--------------------------------

 The  table entitled  "Selected  Consolidated Financial  Data"  on page  5 of
Bankshares' 1997  Annual Report  to  Stockholders is  incorporated herein  by
reference.


Item  7.   Management's Discussion  and Analysis  of Financial  Condition and
Results of Operations
-----------------------------------------------------------------------------

 The  information contained under  "Management's Discussion  and Analysis" on
pages  6 through  14 of  Bankshares' 1997  Annual Report  to Stockholders  is
incorporated herein by reference.


Item 7A. Quantitative and Qualitative Disclosures About Market Risk
-------------------------------------------------------------------

 See "Analysis of  Interest Rate Sensitivity"  set forth  below.   Additional
information is set forth under the section "Interest Rate Senstitity" on page
6  and the section "Derivatives and Market  Risk Exposure" on pages 11 and 12
of  Bankshares' 1997 Annual Report to Stockholders and is incorporated herein
by reference.


ANALYSIS OF INTEREST RATE SENSITIVITY

The table  below sets  forth, as  of December 31,  1997, the  distribution of
repricing   opportunities  of  the   Company's  interest-earning  assets  and
interest-bearing  liabilities,  the  interest  rate  sensitivity  gap  (i.e.,
interest rate sensitive assets less interest rate sensitive liabilities), the
cumulative  interest   rate  sensitivity  gap  ratio   (i.e.,  interest  rate
sensitivity gap divided by total interest-earning  assets) and the cumulative
interest rate sensitivity  gap ratio.  The table sets  forth the time periods
during which  interest-earning assets  and interest-bearing liabilities  will
mature or may reprice in accordance with their contracted terms.






                                     -31-<PAGE>

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

An interest  rate sensitivity gap  is considered positive when  the amount of
interest  rate sensitive assets exceeds the amount of interest rate sensitive
liabilities.   A gap is considered negative  when the amount of interest rate
sensitive liabilities exceeds the  amount of interest rate sensitive  assets.
During a period of rising interest rates, a negative gap would generally tend
to affect adversely net interest income while a  positive gap would generally
tend to  result in an  increase in net interest  income.  During  a period of
declining  interest rates, a negative  gap would generally  tend to result in
increased net interest income, while a  positive gap would generally tend  to
affect adversely net  interest income.  The Company's future  earnings may be
adversely affected  by a sharp  upturn in  interest rates as  the Company  is
liability sensitive for  a period extending  beyond one year.   In a  falling
rate  environment, earnings  might  benefit to  a  certain degree  from  this
position, because  assets at higher rate  levels would reprice  downward at a
slower  rate than interest sensitive liabilities.   Over the one to five year
period,  the Company's  cumulative interest-sensitivity position  reflects an
asset  sensitive position.    This  would  mean  the  Company  would  benefit
initially from falling rates but would be adversely affected by rising rates.
This  would depend,  however, on  the  length of  time rates  were rising  or
falling and  the length of time rates remained stable at the level ultimately
reached.
































                                     -32-<PAGE>
<TABLE>
An interest-sensitivity table  showing all major interest  sensitive asset and liability categories  for the
time intervals indicated and cumulative "gaps" for each interval is set forth on the following table.

<CAPTION>
                 INTEREST RATE                                      December 31, 1997
                                                 ------------------------------------------------------
              SENSITIVITY TABLE (1)              Interest-sensitive (days)
                                                 --------------------------     1-5      >5
    ($ in thousands)                              1-90     91-180   181-365    Years    Years     Total
                                                  ----     ------   -------    -----    -----     -----
   <S>                                            <C>      <C>      <C>        <C>      <C>       <C>
   Interest-earning assets:
    Commercial and industrial loans             $ 27,324     5,399   17,207    36,936   14,460   101,326
    Real estate mortgage loans                     1,514     4,100   10,045    14,843   12,239    42,741
    Real estate construction loans                 5,773     1,833      885       ---      ---     8,491
    Loans to individuals                          22,545     2,949    5,967    29,983    2,901    64,345
                                                --------   -------  -------    ------   ------   -------
      Total loans, net of unearned income (2)   $ 57,156    14,281   34,104    81,762   29,600   216,903

    Federal funds sold                             4,300       ---      ---       ---      ---     4,300
    Interest bearing deposits                      9,728       ---      ---       ---      ---     9,728
    Securities available for sale                 10,168     3,661   10,097    29,164   12,492    65,582
    Securities held to maturity                   15,758    10,056    9,334    28,593   20,651    84,392
    Mortgage loans held for sale                     405       ---      ---       ---      ---       405
                                                --------   -------  -------    ------   ------   -------
      Total interest-earning assets             $ 97,515    27,998   53,535   139,519   62,743   381,310
                                                ========   =======  =======   =======   ======   =======

   Interest-bearing liabilities:
    Interest-bearing demand deposits            $ 77,863       ---      ---       ---      ---    77,863
    Savings deposits                              46,773       ---      ---       ---      ---    46,773
    Time deposits                                 45,021    30,768   53,531    45,320      498   175,138
    Other borrowings                                 485       ---      ---       ---      ---       485
                                                --------   -------  -------    ------   ------   -------
      Total interest-bearing liabilities        $170,142    30,768   53,531    45,320      498   300,259
                                                ========   =======  =======    ======   ======   =======
   Cumulative ratio of interest-
    sensitive assets to interest-
    sensitive liabilities                            .57       .62      .70      1.06     1.27      1.27
                                                ========   =======  =======    ======   ======   =======
   Cumulative interest-sensitivity gap          $(72,627)  (75,397) (75,393)   18,806   81,051    81,051
                                                ========   =======  =======    ======   ======   =======


(1)   The Company  is sensitive to interest rate  changes, as liabilities  generally reprice or mature
      before interest-earning  assets.  The above  gap  table  reflects the  Company's  rate-sensitive
      position at December 31,  1997, and is not necessarily reflective of its position throughout the
      year.   The carrying amounts of interest-rate sensitive assets  and liabilities are presented in
      the periods  in  which they  reprice to  market  rates  or mature  and are  summed  to show  the
      interest-rate sensitivity gap.
(2)   Excludes nonaccrual loans.
</TABLE>
                                                    -33-<PAGE>

Item 8.  Financial Statements and Supplementary Data
----------------------------------------------------

 The  following  consolidated financial  statements  of the  Registrant  and the
Independent Auditors'  Report set  forth on pages  15 through 41  of Bankshares'
1997 Annual Report to Stockholders are incorporated herein by reference:

 1.   Independent Auditors' Report

 2.   Consolidated Balance Sheets - December 31, 1997 and 1996

 3.   Consolidated Statements  of Income -  Years Ended December  31, 1997, 1996
      and 1995

 4.   Consolidated Statements of Changes  in Stockholders' Equity -  Years Ended
      December 31, 1997, 1996 and 1995

 5.   Consolidated Statements of  Cash Flows -  Years Ended  December 31,  1997,
      1996 and 1995

 6.   Notes to Consolidated Financial Statements  - December 31, 1997,  1996 and
      1995

Item 9.    Changes In  and  Disagreements  With Accountants  on  Accounting  and
Financial Disclosure
-----------------------------------------------------------------------------

 None.


                                    PART III
                                    --------

Item 10.  Directors and Executive Officers of the Registrant
------------------------------------------------------------

 Executive Officers of Bankshares as of December 31, 1997 are listed on  page 30
herein.

 Information with respect  to the directors of  Bankshares is set out  under the
caption  "Election of  Directors"  on pages  2  through 4  of Bankshares'  Proxy
Statement  dated March  18, 1998,  which information  is incorporated  herein by
reference.

Item 11.  Executive Compensation
--------------------------------

 The information set forth under  "Executive Compensation" on pages 5  through 9
of Bankshares' Proxy  Statement dated March 18,  1998 is incorporated  herein by
reference.

Item 12.  Security Ownership of Certain Beneficial Owners and Management
------------------------------------------------------------------------

 The information  set forth  under "Voting  Securities and  Stock Ownership"  on
page 1 and  under "Election of  Directors" on pages  2 through 4  of Bankshares'
Proxy Statement dated March 18, 1998 is incorporated herein by reference.



                                      -34-<PAGE>

Item 13.  Certain Relationships and Related Transactions
--------------------------------------------------------

 The  information  contained  under  "Certain  Transactions  With  Officers  and
Directors" on  page 11 of  Bankshares' Proxy Statement  dated March 18,  1998 is
incorporated herein by reference.


                                     PART IV
                                     -------

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K
-------------------------------------------------------------------------

 (a)  The following documents are filed as part of this report:

                                                           1997 Annual Report
                                                        To Stockholders Page(s)*
                                                        ------------------------

      1.   Financial Statements:
           --------------------

           Independent Auditors' Report                            15

           Consolidated Balance Sheets -
             December 31, 1997 and 1996                            16

           Consolidated Statements of
             Income - Years ended December
             31, 1997, 1996 and 1995                               17

           Consolidated Statements of Changes
             in Stockholders' Equity - Years
             ended December 31, 1997, 1996 and
             1995                                                  18

           Consolidated Statements of Cash
             Flows - Years ended December 31,
             1997, 1996 and 1995                                   19

           Notes to Consolidated
             Financial Statements - December
             31, 1997, 1996 and 1995                              20-41

      2.   Financial Statement Schedules:
           -----------------------------

           Independent Auditor's Report of
             Cook & Associates, LLP covering
             the financial statements of Bank
             of Tazewell County as of and for
             the years ended December 31, 1995
             and 1994, is filed as an Exhibit
             and is incorporated by reference
             herein.                                            Exhibit 99

* Incorporated by reference from  the indicated pages of  the 1997 Annual Report
  to Stockholders.

                                      -35-<PAGE>

      3.   Exhibits:
           --------
                                                         PAGE NO. IN
        EXHIBIT NO.           DESCRIPTION             SEQUENTIAL SYSTEM
        -----------           -----------             -----------------

            3(i)    Articles of Incorporation, as   (incorporated
                    amended, of National            herein by
                    Bankshares, Inc.                reference to
                                                    Exhibit 3(a) of
                                                    the Annual Report on
                                                    Form 10K for
                                                    fiscal year ended
                                                    December 31, 1993)
           3(ii)    Bylaws, as amended, of National
                    Bankshares, Inc.
            4(i)    Specimen copy of certificate    (incorporated
                    for National Bankshares, Inc.   herein by
                    common stock, $2.50 par value   reference to
                                                    Exhibit 4(a) of
                                                    the Annual Report on
                                                    Form 10K for
                                                    fiscal year ended
                                                    December 31, 1993)

            4(i)    Article Four of the Articles of (incorporated
                    Incorporation of National       herein by
                    Bankshares, Inc. included in    reference to
                    Exhibit No. 3(a))               Exhibit 4(b) of
                                                    the Annual Report on
                                                    Form 10K for
                                                    fiscal year ended
                                                    December 31, 1993)
         10(ii)(B)  Computer software license       (incorporated
                    agreement dated June 18, 1990,  herein by
                    by and between Information      reference to
                    Technology, Inc. and The        Exhibit 10(e) of
                    National Bank of Blacksburg     the Annual Report on
                                                    Form 10K for
                                                    fiscal year ended
                                                    December 31, 1992)
        *10(iii)(A) Employment Agreement dated      (incorporated
                    January 1, 1992, by and between herein by
                    National Bankshares, Inc. and   reference to
                    James G. Rakes                  Exhibit 10(a) of
                                                    the Annual Report on
                                                    Form 10K for
                                                    fiscal year ended
                                                    December 31, 1992)
        *10(iii)(A) Capital Accumulation Plan       (incorporated
                    (included in Exhibit No. 10(a)) herein by
                                                    reference to
                                                    Exhibit 10(b) of
                                                    the Annual Report on
                                                    Form 10K for
                                                    fiscal year ended
                                                    December 31, 1992)



                                      -36-<PAGE>

                                                         PAGE NO. IN
        EXHIBIT NO.           DESCRIPTION             SEQUENTIAL SYSTEM
        -----------           -----------             -----------------

        *10(iii)(A) Employee Lease Agreement dated  (incorporated
                    May 7, 1992, by and between     herein by
                    National Bankshares, Inc. and   reference to
                    The National Bank of Blacksburg Exhibit 10(c) of
                                                    the Annual Report on
                                                    Form 10K for
                                                    fiscal year ended
                                                    December 31, 1992)
           13(i)    1997 Annual Report to
                    Stockholders (such Report,
                    except to the extent
                    incorporated herein by
                    reference, is being furnished
                    for the information of the
                    Commission only and is not
                    deemed to be filed as part of
                    this Report on Form 10-K)
           21(i)    Subsidiaries of National
                    Bankshares, Inc.

             27     Financial Data Schedule
             99     Independent Auditor's Report of
                    Cook & Associates, LLP on
                    financial statements of Bank of
                    Tazewell County as of and for
                    the years ended December 31,
                    1995 and 1994

* Indicates a  management contract  or compensatory  plan required  to be  filed
  herein.

 (b)  Reports on Form  8-K filed during the  last quarter of the  period covered
      by this report:
      ----------------------------------------------------------------------

      None.

 (c)  Exhibits required by Item 601 of Regulation S-K:
      -----------------------------------------------

      See Item 14(a)3 above.

 (d)  Financial Statement Schedules required by Regulation S-X:
      --------------------------------------------------------

      See Item 14(a)2 above.










                                      -37-<PAGE>
                                   SIGNATURES
                                   ----------

 Pursuant to the requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  National Bankshares, Inc. has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

                               NATIONAL BANKSHARES, INC.

                       BY:     /s/James G. Rakes
                               ------------------------------
                               James G. Rakes, President
                               and Chief Executive Officer

                     DATE:     March 20, 1998
                               ------------------------------

                       BY:     /s/J. Robert Buchanan
                               ------------------------------
                               J. Robert Buchanan
                               Treasurer

                     DATE:     March 27, 1998
                               ------------------------------

 Pursuant  to the  requirements of  the Securities  Exchange  Act of  1934, this
report has been signed by the following persons on  behalf of the Registrant and
in the capacities and on the date indicated.


       NAME                      DATE           TITLE
       ----                      ----           -----
       /s/C. L. Boatwright       March 23, 1998 Director and Vice
       ------------------------- -------------- Chairman of the Board
       C. L. BOATWRIGHT
       /s/T. C. Bowen, Jr.       March 20, 1998 Director
       ------------------------- --------------
       T. C. BOWEN, JR.
       /s/A. A. Crouse           March 20, 1998 Director
       ------------------------- --------------
       A. A. CROUSE
       /s/R. E. Christopher, Jr. March 23, 1998 Director and Chairman of
       ------------------------- -------------- the Board
       R. E. CHRISTOPHER, JR.

                                                Director
       ------------------------- --------------
       R. E. DODSON
                                                Director
       ------------------------- --------------
       P. A. DUNCAN
       /s/W. T. Peery            March 20, 1998 Director
       ------------------------- --------------
       W. T. PEERY
       /s/J. G. Rakes            March 20, 1998 President and Chief
       ------------------------- -------------- Executive Officer -
       J. G. RAKES                              National Bankshares, Inc.
       /s/J. R. Stewart          March 23, 1998 Director
       ------------------------- --------------
       J. R. STEWART


                                      -38-<PAGE>
                                INDEX TO EXHIBITS
                                -----------------


                                                          PAGE NO. IN
        EXHIBIT NO.            DESCRIPTION             SEQUENTIAL SYSTEM
        -----------            -----------             -----------------
           3(i)     Articles of Incorporation, as    (incorporated
                    amended, of National Bankshares, herein by
                    Inc.                             reference to
                                                     Exhibit 3(a) of
                                                     the Annual Report on
                                                     Form 10K for
                                                     fiscal year ended
                                                     December 31, 1993)

           3(ii)    Bylaws, as amended of National
                    Bankshares, Inc.
           4(i)     Specimen copy of certificate for (incorporated
                    National Bankshares, Inc. common herein by
                    stock, $2.50 par value           reference to
                                                     Exhibit 4(a) of
                                                     the Annual Report on
                                                     Form 10K for
                                                     fiscal year ended
                                                     December 31, 1993)
           4(i)     Article Fourth of the Articles   (incorporated
                    of Incorporation of National     herein by
                    Bankshares, Inc. included in     reference to
                    Exhibit No. 3(a))                Exhibit 4(b) of
                                                     the Annual Report on
                                                     Form 10K for
                                                     fiscal year ended
                                                     December 31, 1993)

         10(ii)(B)  Computer software license        (incorporated
                    agreement dated June 18, 1990,   herein by
                    by and between Information       reference to
                    Technology, Inc. and The         Exhibit 10(e) of
                    National Bank of Blacksburg      the Annual Report on
                                                     Form 10K for
                                                     fiscal year ended
                                                     December 31, 1992)
        *10(iii)(A) Employment Agreement dated       (incorporated
                    January 1, 1992, by and between  herein by
                    National Bankshares, Inc. and    reference to
                    James G. Rakes                   Exhibit 10(a) of
                                                     the Annual Report on
                                                     Form 10K for
                                                     fiscal year ended
                                                     December 31, 1992)
        *10(iii)(A) Capital Accumulation Plan        (incorporated
                    (included in Exhibit No. 10(a))  herein by
                                                     reference to
                                                     Exhibit 10(b) of
                                                     the Annual Report on
                                                     Form 10K for
                                                     fiscal year ended
                                                     December 31, 1992)



                                      -39-<PAGE>

                                                          PAGE NO. IN
        EXHIBIT NO.            DESCRIPTION             SEQUENTIAL SYSTEM
        -----------            -----------             -----------------
        *10(iii)(A) Employee Lease Agreement dated   (incorporated
                    May 7, 1992, by and between      herein by
                    National Bankshares, Inc. and    reference to
                    The National Bank of Blacksburg  Exhibit 10(c) of
                                                     the Annual Report on
                                                     Form 10K for
                                                     fiscal year ended
                                                     December 31, 1992)

           13(i)    1997 Annual Report to
                    Stockholders (such Report,
                    except to the extent
                    incorporated herein by
                    reference, is being furnished
                    for the information of the
                    Commission only and is not
                    deemed to be filed as part of
                    this Report on Form 10-K)
           21(i)    Subsidiaries of National
                    Bankshares, Inc.
            27      Financial Data Schedule

            99      Independent Auditor's Report of
                    Cook & Associates, LLP on
                    financial statements of Bank of
                    Tazewell County as of and for
                    the years ended December 31,
                    1995 and 1994

* Indicates a  management contract  or compensatory  plan required  to be  filed
  herein.



























                                      -40-<PAGE>