NATIONAL BANKSHARES














































                                                       
                                                       1996 Annual Report

                                      -53-<PAGE>




























                              Contents
                              --------

                              In the Community                               2
                              ------------------------------------------------

                              To Our Stockholders                            6
                              ------------------------------------------------

                              Selected Consolidated Financial Data           7
                              ------------------------------------------------

                              Management's Discussion and Analysis           8
                              ------------------------------------------------

                              Statement of Management's Responsibility      20
                              ------------------------------------------------

                              Independent Auditors' Report                  21
                              ------------------------------------------------


                              Consolidated Financial Statements             22
                              ------------------------------------------------

                              Notes to Consolidated Financial Statements    28
                              ------------------------------------------------

                              Corporate Information                         52
                              ------------------------------------------------
                                      -54-<PAGE>


NBB
The National Bank

     "For a Future You Can Bank On...Bank on Us!"  It's not just a slogan, it's
The National  Bank's commitment to be there  for you and your  family.  It also
reflects our promise  to remain  true to  our hometown roots.   This  is not  a
commitment we take lightly.   It's one we've made  to generations of New  River
Valley  residents.   The National  Bank has  been  a local  fixture for  over a
century, through good times  and bad.  We intend  to work hard to  continue the
tradition  of offering our neighbors a full  range of financial services with a
personal touch.

PHOTOGRAPH OF MAIN OFFICE MANAGER SERVING REFRESHMENTS 
TO CUSTOMERS DURING 4TH OF JULY CELEBRATION.


PHOTOGRAPH OF NBB HOSTING 1996 ANNUAL COMMUNITY BREAKFAST.


     We understand  what makes a  community bank different.   We know  that our
customers deserve exceptional  service.  They expect a  personal greeting and a
friendly smile.  They want to develop long term relationships  with our banking
and trust professionals, and they look  for honest advice from bankers who will
be with them for the long haul.   Our customers want their bank to keep up with
the times and  to offer new and  more convenient ways for them  to manage their
finances.  They would also like The National Bank to take an active and visible
role in their hometown.

                                    PHOTOGRAPH OF "PENNIES FROM HEAVEN" HELD AT
                                 HETHWOOD BRANCH FOR KIPPS ELEMENTARY STUDENTS.




























                                      -55-<PAGE>



                                        PHOTOGRAPH OF CHRISTMAS WITH HEAD START


PHOTOGRAPH OF PEMBROKE HERITAGE FESTIVAL


     NBB is proud to  be a part of the  community.  The bank and  its employees
contribute   time,  talent  and  resources  to  a  large  number  of  important
activities.  Every year we consult with community leaders and seek their advice
on  how The  National Bank  can  most effectively  serve our  locality.   NBB's
bankers work with  school children,  and they volunteer  with senior  citizens.
They  generously   share  their   expertise  with  groups   promoting  economic
development at the regional and  local levels.  We like to participate, both as
a company and as individuals, in community festivals and celebrations.  The New
River Valley is our home, and we believe that it is important to give something
back to the citizens who have rewarded us with their support and confidence for
almost 106 years.

                                        PHOTOGRAPH OF WILDERNESS TRAIL FESTIVAL

PHOTOGRAPH OF RICH CREEK AUTUMN FEST

     The National Bank--For a Future You Can Bank On... Bank On Us!


































                                      -56-<PAGE>


Bank of Tazewell County

     We are  excited  about the  future  of Bank  of  Tazewell County  and  its
affiliation  with National Bankshares, Inc.  Since  this is the first year that
BTC  will appear  as a  part  of National  Bankshares' Annual  Report, a  brief
description of BTC might be fitting.

PHOTOGRAPH OF R.E. DODSON AND ALONZO CROUSE



PHOTOGRAPH OF MAIN STREET FESTIVAL


     BTC  began in 1889  as "The Clinch  Valley Bank", with  roots in Tazewell,
Virginia.  In 1893  the name was changed to  "Bank of Clinch Valley".   In 1929
Bank  of Clinch  Valley merged  with "Farmers  National Bank", also  located in
Tazewell,  to form the  "Farmers Bank of  Clinch Valley".   In 1964 the Farmers
Bank of Clinch  Valley merged  with the  Bank of  Graham, Bluefield,  Virginia,
establishing the  "Bank of Tazewell County".   Bank of Graham  was organized in
1890  and had  operated  continuously in  Bluefield,  Virginia in  the  eastern
section  of Tazewell  County since  that date.   On  May 31,  1996, in  what is
believed to  be the most significant  development in its history,  BTC became a
wholly owned subsidiary of National Bankshares, Inc.


PHOTOGRAPH OF DAYCARE AND PRESCHOOL STUDENTS AT BTC ON HALLOWEEN

     BTC has  always prided  itself on  its mission  of satisfying  the banking
needs of  its customers in  the areas where it  operates.  We  are particularly
gratified  that because of the affiliation with  Bankshares, we will be able to
enlarge the scope  of services offered.  We are  currently cooperating with the
highly  skilled  staff  of  Bankshares   in  working  out  the  details   of  a
Visa/MasterCard credit card,  secondary market mortgage  loans and home  equity
lines.   These are just  a few of the increased  services the merger will allow
BTC to provide.






















                                      -57-<PAGE>


PHOTOGRAPH OF KIDZOWN PLAYGROUND


     Our  history  has been  built  on a  philosophy  of safety  and soundness,
service  to our customers, and the goal of  being a good corporate citizen.  We
support  and  participate in  numerous activities  and  projects that  make the
communities in which we do  our banking very desirable  areas in which to  live
and rear our families.

                                      PHOTOGRAPH OF A GINGERBREAD HOUSE DISPLAY


PHOTOGRAPH OF 1996 CHRISTMAS PARADE

     Finally, we  would like to express  our appreciation to all  who have made
BTC what it is today.   The cornerstone of any business is the  strength of its
people, whether they  are shareholders, customers or  bank personnel.   We face
the future with  the optimism and confidence that  will enable us to  embrace a
vision of success equal to or greater than our previous accomplishments.

                                         PHOTOGRAPH OF THE TAZEWELL COUNTY FAIR


     Bank  of Tazewell County---We''ll  Be There To  Serve You All  The Days Of
Your Life.

































                                      -58-<PAGE>


                              National Bankshares


To Our Stockholders:

This past  year proved to be  momentous for National  Bankshares, Inc.   At the
same  time the holding company was celebrating   its tenth anniversary, we were
completing our first  major expansion, a merger  with Bank of Tazewell  County.
We learned  many things from this endeavor.   We found that it takes stacks  of
paper and numerous  regulatory approvals before banking firms  can combine.  We
now know  that mergers  require  a major  commitment  of time  from  directors,
employees and consultants.  Most significantly, we discovered the importance of
working with the right merger partner.  We were extremely fortunate to have the
Tazewell bank affiliate with us,  where we dealt with individuals of  integrity
and goodwill throughout the long and complex process.

In the several months since the  completion of the merger, directors,  officers
and employees  of National Bankshares, The  National Bank and Bank  of Tazewell
County have worked together and come to know each other better.  There are many
more similarities than differences among us.  Both banks have deep roots in the
localities they serve.   They are true community  banks, committed to providing
high quality,  personalized service  to  customers.   NBB and  BTC  each has  a
dedicated board  of directors and a  staff of experienced bankers.   Looking to
the  future,  we plan  to  build on  the strengths  which  both banks  bring to
National Bankshares.

It  is gratifying to report positive financial results to you at the end of the
first year of  combined operations.   When you review  this Annual Report,  you
will notice that 1996 net income  reached over $6.1 million, 10.71% higher than
the combined totals of Bankshares and BTC in 1995.  A solid 18.63%  increase in
net  loans, growth  of 13.06% in  noninterest income  and a  5.16% reduction in
noninterest  expense contributed  to increased  earnings.   National Bankshares
ended 1996 with total assets of $388.9 million.

As National Bankshares, Inc. embarks on its  first full year with more than one
subsidiary,  we  felt that  it  would be  a  fitting time  to  introduce  a new
corporate  logo.   We  hope  you will  agree  that this  design,  which depicts
"...energy and the  dynamic image of a rising sun..",  is an appropriate symbol
for a corporation  that has a positive  view of growth and change,  but also an
appreciation for the importance of enduring fundamentals.  This is  also a good
opportunity to thank you,  our stockholders, for your continued support  and to
restate  our  commitment to  build and  operate  an exceptional  community bank
holding company.



James G. Rakes
President and                           PICTURE OF
Chief Executive Officer                 JAMES G. RAKES









                                      -59-<PAGE>


National Bankshares, Inc. and Subsidiaries
Selected Consolidated Financial Data

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

                                     1996      1995     1994     1993     1992
                                     ----      ----     ----     ----     ----
 Selected  Interest income          $ 28,647   28,094   26,062   25,827   28,304
 Income    Interest expense           13,036   12,703   10,684   10,752   13,965
 Statement Net interest income        15,611   15,391   15,378   15,075   14,339
 Data:     Provision for loan
            losses                       331      282      553      953    1,208
           Noninterest income          2,693    2,382    2,047    2,399    1,360
           Noninterest expense         9,515   10,033    9,725    9,002    8,396
           Income taxes                2,341    1,933    1,844    1,903    1,376
           Net income                  6,117    5,525    5,303    5,644    4,719

 Per Share Net income               $   1.61     1.46     1.40     1.49     1.25
 Data:     Cash dividends declared      0.62     0.57     0.52     0.45     0.39
           Book value per share(1)     13.56    12.70    11.25    10.81     9.81
 Selected  Loans, net               $193,598  163,193  156,289  150,156  150,555
 Balance   Total securities          171,244  187,635  184,231  174,964  164,842
 Sheet     Total assets              388,850  380,915  373,132  357,773  352,977
 Data at   Total deposits            334,584  330,313  327,686  314,001  312,840
 End       Stockholders' equity       49,801   48,154   42,658   40,951   37,106
 of Year:

 Selected  Loans, net               $177,419  160,643  152,976  149,027  153,487
 Balance   Total securities          177,403  183,994  185,365  154,740  161,406
 Sheet     Total assets              388,045  378,406  369,962  349,747  353,673
 Daily     Total deposits            335,938  330,261  325,167  307,645  314,518
 Averages: Stockholders' equity(1)    49,459   45,726   42,402   39,435   35,552
 Selected  Return on average assets     1.58     1.46     1.43     1.61     1.33
 Ratios:   Return on average
            equity(1)                  12.37    12.08    12.51    14.31    13.27
           Dividend payout ratio       37.55    37.32    37.13    32.18    34.29
           Average equity to
            average assets(1)          12.75    12.08    11.46    11.28    10.05


           (1)  Includes amount related to common stock subject to ESOP put
                option.  The effect is immaterial.


                     Average Equity to Average Assets Graph
            1992         1993         1994         1995         1996
           -----        -----        -----        -----        -----

           10.05%       11.28%       11.46%       12.08%       12.75%

(Dollars)
                         Cash Dividends Per Share Graph

            1992         1993         1994         1995         1996
           -----        -----        -----        -----        -----
            0.39         0.45         0.52         0.57         0.62



                                      -60-<PAGE>


Management's Discussion and Analysis

($ In millions)

Net Income Graph

            1992         1993         1994         1995         1996
           -----        -----        -----        -----        -----
           $  4.7       5.6           5.3          5.5          6.1

Net Interest Income Graph


            1992         1993         1994         1995         1996
           -----        -----        -----        -----        -----
           $ 14.3        15.1         15.4         15.4         15.6


($ In thousands, except per share data.)

PERFORMANCE SUMMARY 1996 v. 1995   Net income in 1996 for  National Bankshares,
Inc.  (Bankshares) and  its  wholly owned  subsidiaries, The  National  Bank of
Blacksburg (NBB)  and Bank of Tazewell County  (BTC), (the Company) was $6,117,
an  increase of $592 or  10.71%.  This produced a  return on average assets and
average equity of 1.58% and 12.37%, respectively.
     Net  income for  1995 was  $5,525 which  resulted in  a return  on average
assets of 1.46% and a return on average equity of 12.08%.
     Earnings per  share for 1996  was $1.61, which  represents an  increase of
$.15 per share over 1995.

NET INTEREST INCOME   Net interest income for 1996 was  $15,611, an increase of
$220 or 1.43% when compared with  1995.  This increase was primarily due  to an
increase  in interest-earning assets  which rose by  $7,785 or 2.15%.   The net
yield  on  interest-earning assets  for  1996 was  4.59%,  a  four basis  point
decrease from 1995 caused by a  slight decline in the yield on interest-earning
assets.   The cost to fund interest-earning assets  was 3.57% in 1996 and 3.56%
in 1995.
     During  1996, management's  strategy  was to  fund increases  in  the loan
portfolio   through  liquidity  generated   principally  from   the  securities
portfolio.   While  the Company experienced  a good  degree of  success in this
endeavor, a  substantial portion of the  growth took place in  the highly rate-
competitive commercial loan area.   This limited the effect of the  loan growth
on the yield on interest-earning assets and net interest income.
     The  Company continues to  have excess liquidity  which will  permit it to
increase the loan portfolio through the use of existing funds.  

INTEREST RATE SENSITIVITY   The Company has systems and  procedures in place to
monitor  interest  rate  sensitivity  and  modifies  its  asset  and  liability
management strategies in response to changing economic conditions.  The Company
is  sensitive to rising interest rate  changes as liabilities generally reprice
or mature more quickly than interest-earning assets.
     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 would benefit to some extent from
this position as assets at higher rate levels  would generally reprice downward
at a slower rate than interest sensitive liabilities.


                                      -61-<PAGE>


     Beyond  one year,  the  Company's cumulative  interest sensitive  position
reflects a  slightly liability sensitive  position indicating that  the adverse
effect of rising rates or benefit from falling rates would dissipate in the one
to five year time period.
     The impact  of rising rates is dependent, however, upon the magnitude, the
length of the rising or falling rate  trend and the period of time rates remain
stable  at a  given level.   Management  typically adjusts  its asset/liability
strategies during times of rising and falling rates to minimize or maximize the
impact of changing rate scenarios.

PROVISION AND ALLOWANCE FOR LOAN LOSSES  The adequacy of the allowance for loan
losses  is  based  on  management's  judgement  and  analysis  of  current  and
historical  loss  experience,  risk  characteristics  of  the  loan  portfolio,
concentrations  of credit  and  asset quality,  as well  as other  internal and
external factors such as general economic conditions.
     An internal credit review department performs  pre-credit reviews of large
credits  and provides  management  with  an  early  warning  of  asset  quality
deterioration.    Changing  trends  in  the loan  mix  are  also  evaluated  in
determining the adequacy of the allowance for loan losses.  
     Loan  loss  and other  industry indicators  related  to asset  quality are
presented in the following table.

                                Loan Loss Data

     ($ In thousands)                              1996         1995
                                                  ------       ------
     Provision for loan losses                    $   331          282   
     Net charge-offs to average net loans            0.21%        0.13%  
     Allowance for loan losses to loans,                                 
      net of unearned income and deferred fees       1.31%        1.58%  
     Allowance for loan losses to                           
      nonperforming loans                          418.02%      365.60%  

     Allowance for loan losses to
      nonperforming assets                         236.24%      177.37%  
     Nonperforming assets to loans,
      net of unearned income, plus                          
      other real estate owned                        0.55%        0.89%  
     Nonaccrual loans                             $   616          718   
     Restructured loans                               ---          ---   
     Other real estate owned, net                     474          762   
                                                  -------      -------   
        Total nonperforming assets                $ 1,090        1,480   
                                                  -------      -------   
     Accruing loans past due 90 days
      or more                                     $   458          574   
                                                  -------      -------   

     Nonperforming   loans   include   nonaccrual   and   restructured   loans.
Nonperforming loans  do not include  accruing loans past  due 90 days  or more.
Nonperforming assets  shown in the above table have decreased by $390 or 26.35%
from 1995 and represent the continuation of a declining trend.
     Net charge-offs for  1996 were .21% up slightly from  1995 when that ratio
was .13%.   While the Company did  experience a small  increase in net  charge-
offs, overall the trend  of improving assets quality continues.   The provision
for loan losses, which was up $49 or 17.38%, was made to not only cover current
year net  charge-offs, but to prevent  excessive deterioration of the  ratio of
the allowance for loan losses to loans, net of unearned income.



                                      -62-<PAGE>


Management's Discussion and Analysis

     While  continual  efforts  are  made  to  improve overall  asset  quality,
management is  unable  to estimate  when  and under  what  exact terms  problem
credits  will be  resolved.  With  the information available  to it, management
does  not anticipate any significant deterioration in asset quality and expects
the positive trend  to continue.   However, changing  economic conditions,  the
timing  and extent  of such  and  the ultimate  impact on  the Company's  asset
quality  is  not within  management's  ability to  predict  with any  degree of
precision.
     At December  31, 1996,  the recorded investment  in loans which  have been
identified as impaired, in accordance with SFAS No. 114, totaled $725.  Of this
amount, $354 related to loans with no valuation allowance, and  $371 related to
loans with  a corresponding valuation  allowance of $290.   For the  year ended
December  31, 1996,  the  average recorded  investment  in impaired  loans  was
approximately  $800, and the total interest income recognized on impaired loans
was $33, of which $23 was recognized on a cash basis.

NONINTEREST INCOME   Noninterest income for  1996 was $2,693 up  $311 or 13.06%
from 1995.
     Service  charges on  deposit  accounts were  up  $190 or  19.13%  from the
previous year.   The level of these charges is driven by demand deposit volume,
service charge rates in effect, waiver policy, types of accounts opened and the
willingness of account holders to bear penalty  charges such as overdraft fees.
While  management can exert direct influence  over some of the above variables,
it  can do  so only in  varying degrees with  others.  Increases  for 1996 were
largely attributable to volume.
     Other service  charges and  fees are  composed of  safe deposit box  rent,
charges associated with letters of credit and other miscellaneous items.  These
charges were up $41 or 17.98% over 1995.
     Trust income in 1996 rose by $123 or 25.63%  over 1995.  Factors affecting
this increase include an increase in estate settlement income and the retention
of managed  assets after  the closing of  estates.  Due  to its  nature, estate
business volume  and the related income  is not within management's  ability to
predict.  Management  accordingly cannot  determine if such  income levels  are
sustainable.
     Credit card  income is  composed of numerous  types of  fees and  charges,
including overlimit charges, annual  fees, and merchant discount.   Credit card
income  for 1996  was  $511 up  $61  or 13.56%  over  1995.   Given  the highly
competitive market which limits the amount of charges set, volume increases are
the principal means used by the Company to enhance revenues.
     Net gains from  securities activities were  down $85 or 46.70%  from 1995.
Gains and  losses can  occur as  a  result of  portfolio restructuring,  called
securities and certain market adjustments.   The majority of the gains for 1996
consisted  of market  adjustments to  an allowance  set up  to cover  potential
losses on certain bonds held by BTC.  The  amount of these bonds not covered by
reserves is  not material to  the Company's consolidated  financial statements,
hence is not expected to have a material effect on future operating results.

NONINTEREST  EXPENSE   Noninterest expenses  for 1996  were $9,515  compared to
$10,033 in 1995, which represents a $518 or 5.16% decrease.
     Salaries and fringe benefits expense for 1996 increased $244 or 4.85% over
1995.  This  increase was largely due  to a  $177 increase in net pension cost,
routine  merit adjustments,  promotions and  other normal  compensation related
items.
     Occupancy and furniture and fixtures expense experienced a slight decrease
in 1996 of 3.91%, however,  expenses in this area  are expected to increase  in


                                      -63-<PAGE>


National Bankshares, Inc. and Subsidiaries

1997  due to  the scheduled  opening  of a  new branch  facility in  the second
quarter.
     The cost of Federal  Deposit Insurance continued to decline  significantly
in 1996  by $375 or 98.94%  from 1995.   With the Bank Insurance  Fund reaching
mandated  levels, banks  in  general became  eligible in  1995  for refunds  on
premiums previously  paid  and for  reduced premiums  in future  periods.   The
Company expects  future premiums to be nominal  in amount, based on information
currently available.
     Net costs of  other real estate owned decreased sharply  by $190 or 97.44%
from 1995  due primarily to  a $119 reduction  in the  provision for losses  on
other real  estate owned in 1996.   Efforts to market  the remaining properties
continue,  however, the  exact  timing, terms  and conditions  of sale  of such
properties remains unknown.
     The other  operating expense category decreased by $251 or 9.65% from 1995
and  was due  primarily to  a $111  reduction in  expenses associated  with the
merger, from  $268  in 1995  to $157  in 1996,  and a  reduction in  charitable
contributions of $70.  Other operating expenses in 1995 included a contribution
to a community development corporation which was not incurred in 1996.

INCOME TAXES   Higher taxable income  in 1996  resulted in a  $408 increase  in
income tax expense when compared to 1995.  Tax exempt interest income continues
to be the  primary difference between  the "expected"  and reported income  tax
expense.  The  Company's effective tax rate  for 1996 and  1995 was 27.68%  and
25.92%, respectively.  The increase in the effective tax rate  for 1996 was due
primarily to the level of tax exempt interest income being comparable to 1995.
     The  Company has  determined  that a  valuation  allowance for  the  gross
deferred tax assets  is not necessary due to  the fact that realization  of the
entire amount of gross  deferred tax assets can  be supported by the amount  of
taxes paid during the carryback period under current tax laws.

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

BALANCE SHEET  Total assets at  year-end 1996 were $388,850 which represents an
increase  of  $7,935 or  2.08%  over the  previous  year.   Excluding corporate
acquisitions, deposits are  the Company's primary  method of achieving  growth.
In  both 1996  and 1995,  the Company  experienced excess  liquidity, therefore
management's strategy has  been to stress the absorption of  those funds before
pursuing  external sources.  Accordingly,  rates paid to  attract deposits have
moderated which in  turn produces a  lower level of  deposit growth.  In  1996,
deposits grew by a nominal $4,271 or 1.29%.  

Total Assets Graph

(Millions)
            1992         1993         1994         1995         1996
           -----        -----        -----        -----        -----
           $353.0       357.8        373.1        380.9        388.9




                                      -64-<PAGE>

Management's Discussion and Analysis

LOANS   Loans, net  of unearned income  and deferred  fees grew  by $30,355  or
18.31% in 1996.  Commercial loans which grew by $27,910 or 46.82% accounted for
the largest portion of increase.
     Loans  to individuals increased by $4,071 and represented a 7.15% increase
over 1995.
     The  Company routinely  engages in  the origination  and sale  of mortgage
loans in  the secondary market.  During 1996, the Company originated $17,907 in
mortgage loans and sold $18,271, respectively.  
     Management, as a part of its  strategic plan, will continue to pursue loan
growth  as long  as the  market can  provide such  growth without  compromising
underwriting standards.

SECURITIES   Overall bank owned securities  declined by $16,391 or  8.74%.  The
largest portion of the decrease took place in the available  for sale portfolio
which  declined by $13,336  or 17.58%.   Funds were  in turn used  to fund loan
growth.
     The  Company's  investment  policy  stresses  safety  with  a  program  of
purchasing  high quality securities such  as U.S. Treasury  and U.S. Government
agency issues, state, county, and  municipal bonds, corporate bonds,  mortgage-
backed  securities and  other  bank qualified  investments.   The  Company  has
classified  all of  its investment  securities as  either held  to maturity  or
available  for  sale, as  the Company  does not  engage in  trading activities.
Investment  strategies  are  adjusted  in  response to  market  conditions  and
available investment vehicles.
     At December  31, 1996, the Company had no investment concentrations in any
single issue (excluding U.S. Government) that exceeded ten percent of capital.

DEPOSITS  Total deposits at year-end 1996 were $334,584 which represents only a
nominal increase  from 1995.  Noninterest-bearing demand  deposits grew $4,280,
an increase of  10.75%.  Savings  deposits declined by  $2,384 or 4.72%.   This
decline was offset  by increases  in interest-bearing demand  deposits and  the
majority of  the funds shifted  to the  higher earning time  deposits category.
Limited  growth  in the  deposit  area  is expected  to  continue  until excess
liquidity  in the  securities  portfolio is  absorbed and  a need  for external
funding arises.

LIQUIDITY   Liquidity is  the ability to  provide sufficient cash  flow to meet
financial  commitments and  to fund  additional loan  demands or  withdrawal of
existing deposits.  Sources  of liquidity include deposits, loan  principal and
interest repayments, sales,  calls and maturities of  securities and short-term
borrowings.  The Company maintained an adequate liquidity level during 1996 and
1995.  Management is not aware  of any trends, commitments or events  that will
result in or  that are reasonably  likely to result  in a material  increase or
decrease in liquidity.
     Net cash from operating activities of $7,968 in 1996 increased $1,604 from
1995  and was  primarily attributable  to the  increase in  net income  and the
change in the mortgage loans held for sale category which fluctuates based upon
loan demand and the timing of loan sales in the secondary market.
     Cash flows from investing  activities continue to reflect the  shifting of
securities to the loan portfolio  and securities held to maturity to  available
for sale.  Net cash flows provided by operating activities, federal funds sold,
securities and financing  activities for  1996 of $7,968,  $5,815, $15,541  and
$1,930, respectively, were used principally to  fund the net increase in  loans
of $31,633.



                                      -65-<PAGE>


National Bankshares, Inc. and Subsidiaries

CAPITAL RESOURCES   Total stockholders'  equity increased $1,647  from 1995  to
1996,  with net  income, less  cash dividends  on common  stock of  $2,297, and
common   stock  subject  to  ESOP   put  option  of   $1,643  recorded  outside
stockholders'  equity  at  December  31, 1996,  accounting  primarily  for  the
increase.  Net unrealized gains (losses)  on securities available for sale, net
of income taxes,  were ($248) at  December 31, 1996,  and $282 at December  31,
1995.   These  unrealized net  gains  and losses  are  recorded as  a  separate
component of stockholders' equity and will continue to be subject  to change in
future years due to  fluctuations in fair values, sales,  purchases, maturities
and calls of securities classified as available for sale.  


Stockholders' Equity Graph
(Millions)
            1992         1993         1994         1995         1996
           -----        -----        -----        -----        -----
           $ 37.1        41.0         42.7         48.2         49.8

Book Value Graph
(Dollars)

            1992         1993         1994         1995         1996
           -----        -----        -----        -----        -----
           $ 9.81       10.81        11.25        12.70        13.56

     In November 1996, the Company entered into contracts for  the construction
of  a  new branch  facility  totaling $342.    Construction is  expected  to be
completed in  Spring 1997.  Total remaining  commitments under the construction
and related equipment purchases contracts as of December 31, 1996, approximated
$178.   There are no other material  commitments for capital expenditures as of
December 31, 1996.  In  addition, there are no expected material changes in the
mix or relative cost of capital resources.
     The Company has operated from a consistently strong capital position.  The
ratio of total stockholders' equity to total assets was 12.81% at year-end 1996
compared to 12.64% at year-end  1995.  Banks are required to  apply percentages
to  various  assets,  including  off-balance  sheet  assets,  to  reflect their
perceived risk.  Regulatory defined capital is divided by  risk-weighted assets
in determining the bank's risk-based capital ratio.  No  regulatory authorities
have advised National Bankshares, Inc., The National Bank of Blacksburg or Bank
of Tazewell County of any specific leverage ratios applicable to them. National
Bankshares, Inc., The National Bank of Blacksburg and Bank of Tazewell County's
capital  adequacy  ratios  exceed  regulatory requirements  and  provide  added
flexibility  to take advantage  of business opportunities  as they arise.   See
note  11  of the  Notes  to Consolidated  Financial  Statements  for additional
information.  

FUTURE  ACCOUNTING  CONSIDERATIONS   In  June  1996, the  Financial  Accounting
Standards Board issued SFAS No. 125, "Accounting for Transfers and Servicing of
Financial  Assets  and  Extinguishments  of  Liabilities".    SFAS  No.  125 is
effective for transfers  and servicing of financial assets  and extinguishments
of  liabilities  occurring after  December  31,  1996,  and  is to  be  applied
prospectively.  This Statement provides  accounting and reporting standards for


                                      -66-<PAGE>


Management's Discussion and Analysis

transfers and servicing of financial assets and  extinguishments of liabilities
based on consistent application of a financial-components approach that focuses
on control.  It distinguishes transfers of financial assets that are sales from
transfers that  are secured  borrowings.   Management of  the Company does  not
expect  that adoption  of SFAS  No.  125 will  have  a material  impact on  the
Company's financial position, results of operations or liquidity.

MERGER  On June 1, 1996, Bankshares issued 1,888,209 shares of its common stock
in  a one-for-one  exchange for  all the  outstanding common  stock of  Bank of
Tazewell  County,  Tazewell,  Virginia.   This  business  combination  has been
accounted  for as  a  pooling-of-interests and,  accordingly, the  consolidated
financial  statements  for  the periods  prior  to  the  combination have  been
restated to  include the accounts and results of operations of Bank of Tazewell
County.  There were no adjustments of a material amount resulting from  Bank of
Tazewell County's adoption of Bankshares' accounting policies. 
     In  May, 1996,  Bankshares  declared a  stock split  of  .11129 per  share
effected  in the form of  a stock dividend to the  holders of Bankshares common
stock just prior  to the merger  effective date to  facilitate the  one-for-one
common  stock exchange ratio.  All stockholders' equity accounts, share and per
share data  have been adjusted retroactively  to reflect the stock  split.  The
Bank of Tazewell  County is well capitalized with excess  liquidity, and should
provide the Company with an expanded market place.

COMMON  STOCK INFORMATION  AND  DIVIDENDS   National Bankshares,  Inc.'s common
stock is  traded on a limited  basis in the over-the-counter market  and is not
listed on any exchange or quoted on NASDAQ.  Local brokerage firms are familiar
with and active in trading in the common stock of National Bankshares, Inc.  As
of December 31, 1996, there were 1,184 stockholders of Bankshares common stock.
The following is a summary of the market price  per share and cash dividend per
share  of the  common stock  of National  Bankshares, Inc.  for 1996  and 1995.
Prices do  not necessarily  reflect the prices  which would have  prevailed had
there been  an active trading  market, nor  do they reflect  unreported trades,
which may have been at lower or higher prices.

                           Common Stock Market Prices
       -----------------------------------------------------------------
                                                             Dividend
                               1996            1995         Per Share
                           High    Low     High    Low     1996    1995
                          ------  ------  ------  ------  ------  ------
       First Quarter     $26.50   24.00   23.50   21.50     --      --  
       Second Quarter     26.25   24.50   25.00   22.00    .30     .27  
       Third Quarter      27.00   24.50   25.00   23.00     --      --  
       Fourth Quarter     26.50   25.00   25.50   24.00    .32     .30  


     Bankshares' primary source  of funds  for dividend  payments is  dividends
from its  subsidiaries, The National  Bank of Blacksburg  and Bank of  Tazewell
County.     Bank  regulatory   agencies  restrict  dividend   payments  of  the
subsidiaries as  more fully disclosed in  note 11 of the  Notes to Consolidated
Financial Statements.






                                      -67-<PAGE>


National Bankshares, Inc. and Subsidiaries

PERFORMANCE  SUMMARY   1995 v.  1994   The  Company's net  income for  1995 was
$5,525, an increase of $222 or 4.19%.  This produced a return on average assets
and equity of 1.46% and 12.08%,  respectively.  Net income for 1994  was $5,303
which resulted in a  return on average assets of 1.43% and  a return on average
equity of 12.51%.
     While these results reflect a slight improvement in  the return on average
assets, the return  on average equity declined.  That decline was caused by the
continued high level of  profitability coupled with a dividend  payout ratio of
37.32%.
     Earnings per share for 1995 was $1.46, up $.06 per share from 1994.

NET  INTEREST INCOME   Net  interest income  for 1995  was $15,391  compared to
$15,378 in  1994, a nominal increase.  The net yield on interest-earning assets
for 1995 was 4.63%, slightly lower than in 1994 at which time the net yield was
4.71%.
     In April 1994, the Company acquired the deposits of the Pembroke Office of
the  First Union  National  Bank  of  Virginia  which  increased  its  deposits
approximately  $14,514.   This  addition produced  excess  liquidity which  was
initially  absorbed by  the securities  portfolio.   With the  excess liquidity
position,  the  Company was  allowed  to  take  a  less  aggressive  stance  in
attracting external funds.  The full  absorption of excess liquidity created by
the acquisition of the  Pembroke Office deposits and nominal deposit  growth is
expected to continue.
     This  acquisition,  in  combination  with  the  rising  rate  environment,
produced the slight decline in the net yield on interest-earning assets.

PROVISION  AND  ALLOWANCE  FOR  LOAN  LOSSES   Loan  loss  and  other  industry
indicators related to asset quality are presented in the following table.

                                Loan Loss Data

     ($ In thousands)                              1995         1994
                                                  ------       ------
     Provision for loan losses                    $   282          553   
     Net charge-offs to average net loans            0.13%        0.38%  
     Allowance for loan losses to loans,                    
      net of unearned income and deferred fees       1.58%        1.61%  
     Allowance for loan losses to
      nonperforming loans                          365.60%      393.07%  
     Allowance for loan losses to
      nonperforming assets                         177.37%      141.80%  
     Nonperforming assets to loans,
      net of unearned income, plus
      other real estate owned                        0.89%        1.12%  
     Nonaccrual loans                             $   718          420   
     Restructured loans                               ---          229   
     Other real estate owned, net                     762        1,150   
                                                  -------       ------   
        Total nonperforming assets                $ 1,480        1,799   
                                                  -------       ------   
     Accruing loans past due 90 days or more      $   574          490   
                                                  -------       ------   





                                      -68-<PAGE>


Management's Discussion and Analysis

     Nonperforming   loans   include   nonaccrual   and   restructured   loans.
Nonperforming loans and nonperforming assets do not include accruing loans past
due 90 days or more.  Nonperforming assets totaled  $1,480 at December 31, 1995
which  represents a $319 or  17.73% decrease from December 31,  1994.  In 1994,
other real estate owned increased by $884 as nonaccrual real estate loans moved
into foreclosure.  Nonaccrual loans, which totaled $420 in 1994, increased $298
in 1995.  The  majority of this  increase related to one  impaired loan at  the
Company's BTC subsidiary.
     While  continual  efforts  are  made to  improve  overall  asset  quality,
management is unable to estimate when and under what exact terms problem assets
will be resolved.
     Effective January  1, 1995, Bankshares adopted the provisions of Statement
of  Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan", as amended by SFAS No. 118, "Accounting by Creditors for
Impairment of  a Loan - Income  Recognition and Disclosures."   At December 31,
1995, the recorded  investment in loans which have been  identified as impaired
loans, in accordance  with SFAS No.  114, totaled $837.   Of this  amount, $133
related to loans with no valuation allowance,  and $704 related to loans with a
corresponding valuation  allowance of $419.   For the  year ended December  31,
1995, the average recorded  investment in the impaired loans  was approximately
$906 and  the total interest  income recognized on  impaired loans was  $47, of
which  $5 was recognized  on a cash  basis.   The balance of  impaired loans at
January 1, 1995, totaled approximately $812.  The initial adoption  of SFAS No.
114 did  not require an  increase to the  Company's allowance for  loan losses.
The impact of SFAS No. 114, as amended  by SFAS No. 118, was immaterial to  the
Company's  consolidated financial  statements  as of  and  for the  year  ended
December 31, 1995.

NONINTEREST  INCOME  Noninterest income for 1995  was $2,382, up $335 or 16.37%
from 1994.
     Income  from service  charges on  deposits is  largely dictated  by demand
deposit  volume, service  charge rates,  waiver policy  and the  willingness of
account  holders to  bear penalty  charges such  as overdraft  and insufficient
funds  fees.  While  management can exert  direct influence over  some of these
variables, it can do so only in varying degrees  with others.  All of the above
factors contributed to the increase in this category of $82 or 9.00%.
     Other service charges and  fees is composed of  fees associated with  safe
deposit box  rent, letters  of credit  and other  services.   The miscellaneous
nature  of this  category  makes it  subject  to fluctuations.    In 1995  this
category declined by $18 or 7.32%.
     Trust  income for 1995 was down  from 1994 by $35 or  6.80%.  Trust income
may  fluctuate depending on the volume of business, particularly estate account
settlements.  A  continued financial  relationship with heirs  after an  estate
closing can build business  volume, but is unpredictable.  Market  factors also
affect the level of income earned.
     Credit card income  continues to show improvement.   For 1995, credit card
income  was  up $95  or 26.76%  over  the previous  year.   Credit  card income
includes various fees and charges, primarily annual fees and merchant discount.
Because of  the highly  competitive nature  of this  product, the  Company must
offer  fees  at market  levels  in order  to  retain cardholders.    Given this
inability to  adjust fees, the Company generally  relies on increased volume to
generate additional revenues.
     Net securities gains for  1995 were $182, as opposed to a  net loss of $14
in 1994.  The increase in net gains was due principally to calls of securities.



                                      -69-<PAGE>


National Bankshares, Inc. and Subsidiaries

NONINTEREST  EXPENSE   Noninterest  expense for  1995  was $10,033  compared to
$9,725 in 1994.  This represents a $308 increase or 3.17%.
     Salaries and employee benefits increased $117 or 2.38%.  This increase was
due  to routine  merit adjustments,  promotions and  other normal  compensation
related items, offset by a decrease of $75 in net pension cost.
     The cost of Federal Deposit  Insurance declined sharply by $334 or  46.84%
from  1994.  With  the Bank Insurance  Fund reaching mandated  levels, banks in
general became eligible in 1995 for refunds on premiums previously paid and for
reduced premiums in future periods.
     Net costs  related to  the liquidation  and holding  of other  real estate
owned rose $158 in  1995 due primarily to a $124 increase  in the provision for
losses on  other real estate  owned in  1995 to reduce  the carrying  amount of
certain properties to their net realizable values.
     The other operating expense category increased by $302 or 13.13% from 1994
and  was due primarily to expenses associated  with the merger in the amount of
$268   incurred  in  1995,  and  a  contribution  to  a  community  development
corporation  expensed  in  1995.    A  substantial  portion  of  the  Company's
involvement in the community development  corporation will be recovered through
future tax deductions and tax credits over a ten year period.

INCOME TAXES  Higher taxable income in 1995 resulted in a $89 or 4.83% increase
in  income  tax expense  when compared  to 1994.    Tax exempt  interest income
continues to  be the primary  difference between   the "expected"  and reported
income tax  expense.  The  Company's effective tax  rate for 1995 and  1994 was
25.92% and 25.80%, respectively.
     The  Company has  determined  that a  valuation  allowance for  the  gross
deferred tax assets  is not necessary due to  the fact that realization  of the
entire amount of gross  deferred tax assets can  be supported by the amount  of
taxes paid during the carryback period under current tax laws.

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

BALANCE SHEET   Total assets at year-end 1995 totaled  $380,915, an increase of
$7,783 or  2.09%  over 1994.    Average assets  for  1995 totaled  $378,406  an
increase of $8,444 or 2.28% over 1994.  Loans, net outstanding at year-end 1995
were $163,193, an increase of 4.42% from the same point in time in 1994.   This
growth was  funded by a  shift from  securities to loans,  increased internally
generated capital and a nominal growth in deposits.
     The  use of  excess  internal liquidity  to fund  loan growth  allowed the
Company to  place less emphasis  on the  procurement of external  funds in  the
market place and avoid the associated cost of such activities.

LOANS  Loans, net of  unearned interest and deferred fees, at December 31, 1995
were $165,818.  This represents an increase  of $6,978 or 4.39% over 1994  year
end.  Management continues in its efforts to add to the loan portfolio  as long
as such growth can be accomplished without compromising underwriting standards.





                                      -70-<PAGE>


Management's Discussion and Analysis

SECURITIES   In  late 1995,  the Financial  Accounting Standards  Board granted
financial  institutions a one time opportunity to transfer securities from held
to maturity to  available for sale.  Conditions of  this transfer provided that
institutions  opting  to make  this shift  could  do so  without  bringing into
question their ability and positive intent  to hold to maturity their remaining
held to maturity securities.  The Company utilized this one time opportunity to
shift approximately $30,156 in securities held to maturity to the available for
sale category on December 1, 1995.
     The year-end balances for  securities available for sale were  $75,870 and
$36,219  in  1995  and  1994,  respectively,  and  the  year-end  balances  for
securities  held  to maturity  were  $111,765 and  $148,012 in  1995  and 1994,
respectively.    Year-end  1995 balances  reflect  more  clearly  the shift  of
investments  associated with the one  time transfer of  $30,156 described above
and  the  general decline  in  securities held  to  maturity due  to  calls and
maturities.
     The  Company's  investment  policy  stresses  safety  with  a  program  of
purchasing  high quality securities such  as U.S. Treasury  and U.S. Government
agency issues, state,  county, and municipal bonds,  corporate bonds, mortgage-
backed  securities and  other  bank qualified  investments.   The  Company  has
classified all  of its  investment securities  as either  held  to maturity  or
available  for sale,  as the  Company does  not engage  in trading  activities.
Investment  strategies  are  adjusted  in response  to  market  conditions  and
available investment vehicles.
     At December 31, 1995, the Company had no investment concentrations in  any
single issue (excluding U.S. Government) that exceeded ten percent of capital.

DEPOSITS    Average  total deposits  at  December  31,  1995, totaled  $330,261
compared to  $325,167 in 1994, an increase of $5,094  or 1.57%.  The low growth
rate was in part due to the Company's excess liquidity position and its ability
to meet  funding needs.

LIQUIDITY  Liquidity  is the ability  to provide sufficient  cash flow to  meet
financial  commitments  and to  fund additional  loan  demand or  withdrawal of
existing deposits.  Sources  of liquidity include deposits, loan  principal and
interest  repayments, sales, calls and  maturities of securities and short-term
borrowings.  The Company maintained an adequate liquidity level during 1995 and
1994.  Management is not aware of  any trends, commitments or events that  will
result in or that  are reasonably likely  to result in  a material increase  or
decrease in liquidity.
     Net cash from operating activities of $6,364 in 1995 decreased $1,357 from
1994 and  was primarily attributable to  the change in the  mortgage loans held
for sale  category which fluctuates  based upon loan  demand and the  timing of
loan sales in the secondary market.

CAPITAL RESOURCES   Total stockholders'  equity increased $5,496  from 1994  to
1995,  with  net  income,  less  cash  dividends  on  common  stock  of $2,062,
accounting  primarily for  the  increase.   Net  unrealized gains  (losses)  on
securities available for  sale, net of income taxes, were  $282 at December 31,
1995 and ($1,751) at December  31, 1994.  These unrealized net gains and losses
are recorded as a separate component of stockholders'  equity and will continue
to be subject to  change in future  years due to  fluctuations in fair  values,
sales,  purchases, maturities and  calls of securities  classified as available
for sale.  




                                      -71-<PAGE>


National Bankshares, Inc. and Subsidiaries

     The Company has operated from a consistently strong capital position.  The
ratio of  total stockholders'  equity to total  assets was  12.64% at  year-end
1995.   Banks  are required to  apply percentages to  various assets, including
off-balance  sheet assets, to reflect their perceived risk.  Regulatory defined
capital is divided by risk-weighted assets in determining the bank's risk-based
capital ratio.   No regulatory  authorities have  advised National  Bankshares,
Inc. or its subsidiaries, The  National Bank of Blacksburg or Bank  of Tazewell
County,  of any specific leverage  ratios applicable to  them.  Bankshares' and
its subsidiaries'  capital adequacy  ratios exceed regulatory  requirements and
provide added flexibility to  take advantage of business opportunities  as they
arise.   See  note 11  of the  Notes to  Consolidated Financial  Statements for
additional information.













































                                      -72-<PAGE>


Statement of Management's Responsibility

     Management  is responsible for  the preparation, content  and integrity of
the consolidated financial statements, related notes and all other  information
included  in this  annual report.    The financial  data has  been prepared  in
accordance  with  generally  accepted  accounting  principles  and,  management
believes, fairly  and consistently presents Bankshares'  financial position and
results of operations.

     Bankshares  maintains  a  system   of  internal  controls  which  provides
reasonable assurances that assets are protected and that accounting records are
reliable for the preparation of consolidated financial statements.

     The Audit  Committee of the  Board of Directors  is comprised  entirely of
outside directors.  Bankshares' internal auditor reports to the committee.   On
a  periodic basis, the committee  meets with the  internal auditor, independent
auditors and management to  discuss matters relating to the quality of internal
control, financial  reporting and audit scope.   Both the internal  auditor and
independent auditors  have access  to the  Audit Committee, without  management
present if desired, to freely discuss their evaluation of Bankshares' system of
internal controls and any other matters.









          James G. Rakes                Joan C. Nelson
          President and                 Treasurer
          Chief Executive Officer


























                                      -73-<PAGE>


Independent Auditors' Report


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

     We have audited the  accompanying consolidated balance sheets  of National
Bankshares, Inc.  and subsidiaries as  of December 31,  1996 and 1995,  and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for each  of the years in  the three-year period ended  December 31,
1996.   These consolidated financial  statements are the  responsibility of the
Company's management.   Our responsibility  is to  express an opinion  on these
consolidated financial  statements based on our  audits.  We did  not audit the
financial statements of  Bank of  Tazewell County, a  wholly owned  subsidiary,
which  statements  reflect total  assets  constituting  46.6 percent  and  46.5
percent and total interest income constituting 42.8 percent and 44.1 percent in
1995  and  1994,  respectively, of  the  related  consolidated  totals.   Those
statements were  audited by other auditors  whose report has been  furnished to
us, and our  opinion, insofar as it relates to the amounts included for Bank of
Tazewell County for 1995  and 1994, is based solely on the  report of the other
auditors.

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

     In our opinion, based on our audits  and the report of the other auditors,
the  consolidated financial statements referred to above present fairly, in all
material  respects, the  financial  position of  National Bankshares,  Inc. and
subsidiaries as  of  December 31,  1996  and 1995,  and  the results  of  their
operations and their cash flows for each of the years in the three-year  period
ended  December  31, 1996  in  conformity  with generally  accepted  accounting
principles.

     As discussed in notes 1(D) and 5 to the consolidated financial statements,
the  Company  adopted  the  provisions of  Statement  of  Financial  Accounting
Standards No.  114, "Accounting  by Creditors  for  Impairment of  a Loan",  as
amended  by Statement of Financial Accounting Standards No. 118, "Accounting by
Creditors for Impairment of  a Loan-Income Recognition and Disclosures",  as of
January  1, 1995.    As discussed  in  notes  1(C) and  3  to the  consolidated
financial  statements,  the Company  adopted  the  provisions of  Statement  of
Financial Accounting Standards No. 115, "Accounting for  Certain Investments in
Debt and Equity Securities", as of January 1, 1994.


                                   KPMG Peat Marwick LLP

Roanoke, Virginia
February 17, 1997




                                      -74-<PAGE>


National Bankshares, Inc. and Subsidiaries 
Consolidated Balance Sheets

 $ In thousands except share and per share data,             1996      1995
 December 31, 1996 and 1995                                 ------    ------
 Assets        Cash and due from banks (notes 2 and 16)    $ 10,080    10,055 
               Federal funds sold (note 16)                   1,910     7,725 
               Securities available for sale 
                (notes 3 and 16)                             62,534    75,870 
               Securities held to maturity (fair value
                $108,755 in 1996 and $112,778 in 1995)      108,710   111,765 
               Mortgage loans held for sale (notes 14, 
                15 and 16)                                      516       880 
               Loans (notes 4, 5, 15 and 16):
                 Real estate construction loans               6,295     6,007 
                 Real estate mortgage loans                  43,917    45,589 
                 Commercial and industrial loans             87,519    59,609 
                 Loans to individuals                        60,991    56,920 
                                                           --------  -------- 
                    Total loans                             198,722   168,125 

                 Less unearned income and deferred fees      (2,549)   (2,307)
                                                           --------  -------- 
                    Loans, net of unearned income and
                     deferred fees                          196,173   165,818 
                 Less allowance for loan losses (note 5)     (2,575)   (2,625)
                                                           --------  -------- 
                    Loans, net                              193,598   163,193 
                                                           --------  -------- 
               Bank premises and equipment, net (note 6)      5,037     4,679 
               Accrued interest receivable                    3,510     3,621 
               Other real estate owned, net (note 5)            474       762 
               Other assets (note 9)                          2,481     2,365 
                                                           --------  -------- 
                    Total assets                           $388,850   380,915 
                                                           ========  ======== 

 Liabilities   Noninterest-bearing demand deposits         $ 44,096    39,816 
 and           Interest-bearing demand deposits              73,804    73,101 
 Stockholders' Savings deposits                              48,164    50,548 
 Equity        Time deposits (note 7)                       168,520   166,848 
                                                           --------  -------- 
                    Total deposits (note 16)                334,584   330,313 
                                                           --------  -------- 
               Other borrowed funds (note 16)                   627       161 
               Accrued interest payable                         700       744 
               Other liabilities (note 8)                     1,495     1,543 
                                                           --------  -------- 

                    Total liabilities                       337,406   332,761 
                                                           --------  -------- 
               Common stock subject to ESOP put option
                (note 8)                                      1,643       --- 







                                      -75-<PAGE>


               Stockholders' equity (notes 9, 10, 11                
                and 17):
                 Preferred stock of no par value.
                  Authorized 5,000,000 shares;
                  none issued and outstanding                   ---       --- 
                 Common stock of $2.50 par value.
                  Authorized 5,000,000 shares; issued and
                  outstanding 3,792,833 shares                9,482     9,482 
                 Retained earnings                           42,210    38,390 
                 Net unrealized gains (losses) on                             
                  securities available for sale                (248)      282 
                 Common stock subject to ESOP put option
                  (64,796 shares at $25.35 per share)
                  (note 8)                                   (1,643)      --- 
                                                           --------  -------- 
                    Total stockholders' equity               49,801    48,154 

               Commitments and contingent liabilities
                (notes 6, 8 and 14)
                                                           --------  -------- 
                    Total liabilities and stockholders'
                     equity                                $388,850   380,915 
                                                           ========  ======== 


































                  See accompanying notes to consolidated financial statements.


                                      -76-<PAGE>



National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Income

$ In thousands, except per share data. Years ended
December 31, 1996, 1995 and 1994                      1996     1995     1994
                                                     ------   ------   ------
Interest    Interest and fees on loans               $ 17,232   15,761  13,764 
Income      Interest on federal funds sold                567      704     450 
            Interest on securities - taxable            8,877    9,723   9,966 
            Interest on securities - nontaxable         1,971    1,906   1,882 
                                                     --------  ------- ------- 
               Total interest income                   28,647   28,094  26,062 
                                                     --------  ------- ------- 
Interest    Interest on time deposits of                                       
Expense      $100,000 or more (note 7)                  2,070    1,898   1,364 
            Interest on other deposits                 10,939   10,770   9,284 
            Interest on borrowed funds                     27       35      36 
                                                     --------  ------- ------- 
               Total interest expense                  13,036   12,703  10,684 
                                                     --------  ------- ------- 
               Net interest income                     15,611   15,391  15,378 

            Provision for loan losses (note 5)            331      282     553 
                                                     --------  ------- ------- 
               Net interest income after                              
                provision for loan losses              15,280   15,109  14,825 
                                                     --------  ------- ------- 

Noninterest Service charges on deposit accounts         1,183      993     911 
Income      Other service charges and fees                269      228     246 
            Credit card fees                              511      450     355 
            Trust income                                  603      480     515 
            Other income                                   30       49      34 
            Realized securities gains (losses),
             net (note 3)                                  97      182     (14)
                                                     --------  ------- ------- 
               Total noninterest income                 2,693    2,382   2,047 
                                                     --------  ------- ------- 

Noninterest Salaries and employee benefits (note 8)     5,278    5,034   4,917 
Expense     Occupancy and furniture and fixtures          884      920     936 
            Data processing and ATM                       497      462     462 
            FDIC assessment                                 4      379     713 
            Credit card processing                        466      411     340 
            Goodwill amortization                          30       30      20 
            Net costs of other real estate owned            5      195      37 
            Other operating expense                     2,351    2,602   2,300 
                                                     --------  ------- ------- 
               Total noninterest expense                9,515   10,033   9,725 
                                                     --------  ------- ------- 
            Income before income tax expense            8,458    7,458   7,147 
            Income tax expense (note 9)                 2,341    1,933   1,844 
                                                     --------  ------- ------- 
               Net income                            $  6,117    5,525   5,303 
                                                     ========  ======= ======= 
               Net income per share                  $   1.61     1.46    1.40 
                                                     ========  ======= ======= 

                   See accompanying notes to consolidated financial statements.

                                      -77-<PAGE>
<TABLE>
National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity

<CAPTION>
                                                                               Net Unrealized    Common
                                                                                Gains (Losses)    Stock
                                                                                 on Securities  Subject to
 $ in thousands except share and per share data.    Common            Retained     Available     ESOP Put
 Years ended December 31, 1996, 1995 and 1994.       Stock   Surplus  Earnings     For Sale       Option     Total
                                                   --------  -------  --------  --------------  ----------  -------
 <S>                                               <C>       <C>      <C>       <C>             <C>         <C>   
 Balances, December 31, 1993 as previously
  reported                                          $ 4,274   1,112    12,868          ---          ---     18,254 
 .11129 for one stock split 190,472 additional                        
  shares issued                                         476    (476)      ---          ---          ---        --- 
 Adjustment in connection with pooling-of-
  interests                                           4,721    (711)   18,725          (38)         ---     22,697 
                                                    -------  ------   -------       ------       ------     ------ 
 Balances, December 31, 1993 as restated              9,471     (75)   31,593          (38)         ---     40,951 
 Cumulative effect of change in accounting for
  securities available for sale at January 1,                                              
  1994, net of income taxes of $141                     ---     ---       ---          273          ---        273 
 Net Income                                             ---     ---     5,303          ---          ---      5,303 
 Net proceeds from issuance of common stock                                                          
  (4,480 shares) (note 10)                               11      75       ---          ---          ---         86 
 Cash dividends ($.52 per share)                        ---     ---      (993)         ---          ---       (993)
 Cash dividends of BTC declared prior to merger         ---     ---      (976)         ---          ---       (976)
  
 Change in net unrealized gains (losses)
  on securities available for sale, net of
  income tax benefit of $1,023                          ---     ---       ---       (1,986)         ---     (1,986)
                                                    -------  ------   -------       ------       ------     ------ 
 Balances, December 31, 1994 as restated              9,482     ---    34,927       (1,751)         ---     42,658 
 Net income                                             ---     ---     5,525          ---          ---      5,525 
 Cash dividends ($.57 per share)                        ---     ---    (1,080)         ---          ---     (1,080)
 Cash dividends of BTC declared prior to merger         ---     ---      (982)         ---          ---       (982)
 Change in net unrealized gains (losses) on
  securities available for sale, net of income
  taxes of $1,047                                       ---     ---       ---        2,033          ---      2,033 
                                                    -------  ------   -------       ------       ------     ------ 
 Balances, December 31, 1995 as restated              9,482     ---    38,390          282          ---     48,154 
 Net income                                             ---     ---     6,117          ---          ---      6,117 
 Cash dividends ($.62 per share)                        ---     ---    (1,787)         ---          ---     (1,787)
 Cash dividends of BTC declared prior to merger         ---     ---      (510)         ---          ---       (510)
 Change in net unrealized gains (losses) on
  securities available for sale, net of income
  tax benefit of $273                                   ---     ---       ---         (530)         ---       (530)
 Common stock subject to ESOP put option                ---     ---       ---          ---       (1,643)    (1,643)
                                                    -------  ------   -------       ------       ------     ------ 
 Balances, December 31, 1996                        $ 9,482     ---    42,210         (248)      (1,643)    49,801 
                                                    =======  ======   =======       ======       ======     ====== 

                                                 See accompanying notes to consolidated financial statements.
</TABLE>
                                                     -78-<PAGE>


National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows

$ In thousands. Years ended December 31, 1996, 1995     1996     1995    1994
 and 1994                                              ------   ------  ------

Cash Flows Net income                                 $ 6,117    5,525    5,303 
from       Adjustments to reconcile net income to net
Operating   cash provided by operating activities: 
Activities    Provision for loan losses                   331      282      553 
(Note 13)     Recovery of bond losses                     (89)     ---      --- 
              Provision for deferred income taxes          (4)    (120)     (32)
              Depreciation of bank premises and
               equipment                                  517      535      544 
              Amortization of intangibles                 121      145      123 
              Amortization of premiums and accretion
               of discounts, net                           52      (32)      69 
              (Gains) losses on bank premises and
               equipment disposals                          7       (9)     --- 
              (Gains) losses on sales and calls of
               securities available for sale, net          (3)      (2)      27 
              Gains on calls of securities held to
               maturity, net                               (5)    (180)     (13)
              Net (increase) decrease in mortgage
               loans held for sale                        364     (488)   1,360 
              (Gains) losses and write-downs on other
               real estate owned                           (9)     168        8 
              (Increase) decrease in:
                Accrued interest receivable               111       88     (242)
                Other assets                               40      129     (343)
              Increase (decrease) in:
                Accrued interest payable                  (44)     170       40 
                Other liabilities                         462      153      324 
                                                      -------  -------  ------- 
                Net cash provided by operating
                 activities                             7,968    6,364    7,721 
                                                      -------  -------  ------- 
Cash Flows Net (increase) decrease in federal funds
from        sold                                        5,815     (100)   6,270 
Investing  Proceeds from sales of securities
Activities  available for sale                          1,000    1,867      --- 
(Notes 3   Proceeds from calls and maturities of
and 13)     securities available for sale              21,938    8,134    9,964 
           Proceeds from calls and maturities of
            securities held to maturity                35,569   28,592   30,865 
           Purchases of securities available for sale (10,397) (16,432) (16,068)
           Purchases of securities held to maturity   (32,477) (22,271) (36,707)
           Purchases of loan participations            (1,704)     ---   (1,000)
           Collections of loan participations           2,448    1,928      510 
           Net increase in loans made to customers    (31,633)  (9,197)  (7,213)
           Proceeds from disposal of other real
            estate owned                                  325      220       91 
           Recoveries on loans charged off                125       83       54 
           Bank premises and equipment expenditures
           Proceeds from sale of bank premises and       (882)    (492)  (1,112)
            equipment                                     ---        9        1 
                                                      -------  -------  ------- 
                Net cash used in investing activities  (9,873)  (7,659) (14,345)
                                                      -------  -------  ------- 

                                      -79-<PAGE>


Cash Flows Deposits assumed, net of premium paid          ---      ---   13,159 
from       Net increase in time deposits                1,672   18,179    8,471 
Financing  Net increase (decrease) in other deposits    2,599  (15,552)  (9,300)
Activities Net proceeds from issuance of common stock     ---      ---       86 
(Note 13)  Net increase (decrease) in other borrowed
            funds                                         466     (630)    (397)
           Cash dividends paid                         (2,807)  (2,056)  (1,969)
                                                      -------  -------  ------- 
                Net cash provided by (used in)
                 financing activities                   1,930      (59)  10,050 
                                                      -------  -------  ------- 
           Net increase (decrease) in cash and due
            from banks                                     25   (1,354)   3,426 
           Cash and due from banks at beginning of
            year                                       10,055   11,409    7,983 
                                                      -------  -------  ------- 
           Cash and due from banks at end of year     $10,080   10,055   11,409 
                                                      =======  =======  ======= 







































                    See accompanying notes to consolidated financial statements.

                                      -80-<PAGE>


Notes to Consolidated Financial Statements

$ In thousands, except share and per share data.December 31, 1996, 1995 and 1994

Note 1: Summary of Significant Accounting Policies  The accounting and reporting
policies  of  National  Bankshares,  Inc.  (Bankshares)  and  its  wholly  owned
subsidiaries, The National Bank of Blacksburg  (NBB) and Bank of Tazewell County
(BTC), conform to generally accepted accounting principles and general practices
within the banking industry (see note 17 for merger with BTC).  In preparing the
consolidated  financial  statements,  management  is required  to  make  certain
estimates,  assumptions  and  loan  evaluations  that  affect  its  consolidated
financial  statements for the period.   Actual results  could vary significantly
from those estimates.
   Changing economic  conditions, adverse  economic prospects for  borrowers, as
well as regulatory agency action as a  result of an examination, could cause NBB
and  BTC to recognize  additions to the  allowance for loan  losses and may also
affect the valuation of  real estate acquired in connection with foreclosures or
in satisfaction of loans.
   The following is a summary of the more significant accounting policies.
   (A) Consolidation  The consolidated financial statements include the accounts
   of National Bankshares, Inc. and its wholly owned subsidiaries (the Company).
   All significant intercompany balances and transactions have been eliminated.
   (B) Cash and Cash Equivalents  For purposes of reporting cash flows, cash and
   cash equivalents include cash on hand and due from banks.
   (C) Securities  Effective January 1, 1994, the Company adopted the provisions
   of  Statement of Financial Accounting  Standards (SFAS) No.  115, "Accounting
   for Certain Investments in Debt and Equity Securities," and accordingly,  has
   recorded  the  effect  of  this adoption  in  the  accompanying  consolidated
   financial statements for the year ended December 31, 1994.  
       Securities available for sale are reported at fair value, with unrealized
   gains and losses excluded from net income and reported,  net of income taxes,
   in a separate component of stockholders' equity.  Securities held to maturity
   are stated at  cost, adjusted for  amortization of premiums and  accretion of
   discounts on a basis which approximates the level yield  method.  The Company
   does not  engage in securities trading.   Gains and losses  on securities are
   accounted  for   on  the   completed  transaction  basis   by  the   specific
   identification method.
       A decline in the fair value of any available for sale or held to maturity
   security  below cost that is deemed other than temporary is charged to income
   resulting in the establishment of a new cost basis for the security.
   (D) Loans   Loans  are  stated at  the  amount  of funds  disbursed  plus the
   applicable  amount, if  any,  of  unearned interest  and other  charges  less
   payments  received.     Income  on  installment   loans,  including  impaired
   installment  loans  that have  not  been  placed  in  nonaccrual  status,  is
   recognized on methods which approximate  the level yield method.  Interest on
   all other loans, including impaired other loans that have  not been placed in
   nonaccrual  status, is  accrued based  on the  balance outstanding  times the
   applicable interest rate.
       Interest  is  recognized on  the  cash  basis for  all  loans carried  in
   nonaccrual status.   Loans generally are placed in nonaccrual status when the
   collection  of principal or interest is 90  days or more past due, unless the
   obligation is both well-secured and in the process of collection.
       Loan origination and  commitment fees and certain direct costs  are being
   deferred, and the net amount amortized as an adjustment to the related loan's
   yield.   These amounts are being  amortized over the contractual  life of the
   related loans.



                                      -81-<PAGE>


National Bankshares, Inc. and Subsidiaries

       Effective January 1, 1995, the Company adopted the provisions of SFAS No.
   114, "Accounting by Creditors for Impairment of  a Loan", as amended by  SFAS
   No.  118,  "Accounting  by Creditors  for  Impairment  of  a  Loan  -  Income
   Recognition and  Disclosures".   SFAS No. 114,  as amended by  SFAS No.  118,
   requires that impaired loans within  the scope of the statements be presented
   in  the financial statements  at the  present value  of expected  future cash
   flows or at  the fair value of  the loan's collateral  if the loan is  deemed
   "collateral dependent."  A valuation allowance is required to the extent that
   the measure of the impaired loans is less than the recorded investment.  SFAS
   No. 114  does not  apply to large  groups of small-balance  homogeneous loans
   such  as residential real estate mortgage,  consumer installment, home equity
   and bank card loans, which are  collectively evaluated for impairment.   SFAS
   No. 118 allows  a creditor to use  existing methods for recognizing  interest
   income on an impaired loan.
       Mortgage loans  held for sale  are carried at  the lower of cost  or fair
   value.
   (E) Allowance for Loan Losses  The allowance  for loan losses is a  valuation
   allowance consisting  of the  cumulative  effect of  the provision  for  loan
   losses, plus  any amounts recovered  on loans previously  charged off,  minus
   loans charged off.  The  provision for loan losses charged to expense  is the
   amount necessary in management's judgement to maintain the allowance for loan
   losses at a level it believes adequate to absorb losses in the  collection of
   its loans.
   (F) Bank Premises and  Equipment  Bank premises  and equipment are stated  at
   cost,  net of accumulated  depreciation.  Depreciation is  charged to expense
   over the  estimated useful lives  of the assets  on the straight-line  basis.
   Depreciable lives include 40 years  for premises and 3-10 years for furniture
   and equipment.   Costs of maintenance  and repairs are charged  to expense as
   incurred and improvements are capitalized.
   (G) Other Real Estate Owned  Other real estate, acquired through  foreclosure
   or deed  in lieu  of foreclosure,  is carried  at the  lower of  the recorded
   investment or  its fair value, less  estimated costs to  sell (net realizable
   value).  When the property  is acquired, any excess of the loan  balance over
   net  realizable value is charged to the allowance for loan losses.  Increases
   or decreases in the net realizable value  of such properties are credited  or
   charged  to income by adjusting the valuation allowance for other real estate
   owned.   Net costs  of  maintaining or  operating foreclosed  properties  are
   expensed as incurred.  
   (H) Intangible  Assets  Included  in other assets are  deposit intangibles of
   $666 and  $757 at December 31,  1996 and 1995, respectively,  and goodwill of
   $367  and  $397 at  December  31,  1996  and  1995,  respectively.    Deposit
   intangibles  are being  amortized on  a straight-line  basis over  a ten-year
   period  and goodwill  is  being amortized  on  a straight-line  basis  over a
   fifteen-year period.
   (I) Pension Plans  The Company sponsors two separate defined benefit  pension
   plans  which cover substantially  all full-time officers and  employees.  The
   benefits are based upon length of service and a  percentage of the employee's
   compensation  during  the  final  years of  employment.    Pension costs  are
   computed based upon the  provisions of SFAS No. 87.  The  Company contributes
   to the pension plans amounts deductible for federal income tax purposes.
   (J) Income  Taxes   Income  taxes  are  accounted  for under  the  asset  and
   liability method.  Deferred tax assets and liabilities are recognized for the
   future  tax consequences  attributable to  differences between  the financial
   statement  carrying amounts  of  existing assets  and  liabilities  and their
   respective  tax  bases  and  operating  loss  and  tax  credit carryforwards.
   Deferred  tax assets  and liabilities  are measured  using enacted  tax rates

                                      -82-<PAGE>


Notes to Consolidated Financial Statements

   expected  to apply to  taxable income  in the years in  which those temporary
   differences are expected to be recovered or settled.   The effect on deferred
   tax assets and liabilities of  a change in tax rates is  recognized in income
   in the period that includes the enactment date.
   (K) Trust Assets  and Income  Assets  (other than cash deposits)  held by the
   Trust  Departments in a  fiduciary or  agency capacity for  customers are not
   included  in the consolidated  financial statements since such  items are not
   assets of the Company.  Trust income is recognized on the accrual basis.
   (L) Net  Income Per Share   Net income per  share is based  upon the weighted
   average number  of common shares  outstanding (3,792,833 shares  in 1996  and
   1995 and 3,788,859 shares in 1994).
   (M) Off-Balance  Sheet  Financial  Instruments   In  the  ordinary  course of
   business,  the   Company  has   entered  into  off-balance   sheet  financial
   instruments consisting of commitments to extend credit and standby letters of
   credit. Such financial instruments are  recorded in the financial  statements
   when they become payable.
   (N) Fair  Value  of  Financial   Instruments    The  following  methods   and
   assumptions were used  to estimate the fair value  of each class of financial
   instrument for which it is practicable to estimate that value:
       (1) Cash and Due from Banks  The carrying amount is a reasonable estimate
       of fair value.
       (2) Federal Funds Sold   The carrying amount is a  reasonable estimate of
       fair value.
       (3) Securities   The fair  values of securities are  determined by quoted
       market prices  or dealer  quotes.  The  fair value of  certain state  and
       municipal  securities is  not  readily available  through  market sources
       other than dealer quotations, so fair value estimates are based on quoted
       market prices  of similar  instruments, adjusted for  differences between
       the quoted instruments and the instruments being valued.
       (4) Loans  Fair values are estimated for portfolios of loans with similar
       financial characteristics.  Loans are segregated by type such as mortgage
       loans held for sale, commercial,  real estate - commercial, real estate -
       construction, real  estate -  mortgage, credit  card and  other  consumer
       loans.  Each loan category is further segmented into fixed and adjustable
       rate interest terms and by performing and nonperforming categories.
           The  fair value  of  performing loans  is  calculated  by discounting
       scheduled  cash  flows through  the  estimated  maturity using  estimated
       market  discount rates  that reflect  the credit  and interest  rate risk
       inherent  in the loan,  as well  as estimates for  operating expenses and
       prepayments.    The estimate  of  maturity  is  based  on  the  Company's
       historical  experience  with  repayments  for  each loan  classification,
       modified, as required, by an  estimate of the effect of current  economic
       and lending conditions.
           Fair value  for significant nonperforming loans is based on estimated
       cash flows which are discounted using  a rate commensurate with the  risk
       associated with the estimated  cash flows.  Assumptions  regarding credit
       risk,  cash flows  and discount rates  are judgmentally  determined using
       available market information and specific borrower information.
       (5) Deposits  The fair value of demand and savings deposits is the amount
       payable on  demand.  The fair  value of fixed maturity  time deposits and
       certificates  of deposit is estimated  using the rates  currently offered
       for deposits with similar remaining maturities.
       (6) Other Borrowed Funds   Other  borrowed funds represents treasury  tax
       and loan deposits.  The  carrying amount is a reasonable estimate of fair
       value because the deposits are generally repaid within 1 to 120 days from
       the transaction date.

                                      -83-<PAGE>


National Bankshares, Inc. and Subsidiaries

       (7) Commitments to Extend Credit and Standby Letters of Credit    T  h  e
       only  amounts recorded for commitments to  extend credit, standby letters
       of credit and financial guarantees written are the deferred fees  arising
       from these  unrecognized financial instruments.   These deferred fees are
       not deemed  significant at December 31,  1996 and 1995, and  as such, the
       related fair values have not been estimated.
   (O) Impairment of Long-Lived  Assets and Long-Lived Assets to Be  Disposed Of
   The Company  adopted  the provisions  of SFAS  No. 121,  "Accounting for  the
   Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of",
   on  January 1,  1996.   This Statement  requires  that long-lived  assets and
   certain identifiable  intangibles be reviewed for  impairment whenever events
   or changes in circumstances indicate that the carrying amount of an asset may
   not be recoverable.  Recoverability of assets to be held and used is measured
   by a  comparison of the carrying amount of  an asset to future net cash flows
   expected to be generated by the  asset.  If such assets are  considered to be
   impaired,  the impairment to be recognized is measured by the amount by which
   the carrying  amount  of the  assets exceed  the fair  value  of the  assets.
   Assets to be disposed of are  reported at the lower of the carrying amount or
   fair value  less costs to sell.   Adoption of  this Statement did not  have a
   material impact on the Company's financial position, results of operations or
   liquidity.
   (P) Reclassifications   Certain  reclassifications  have been  made  to prior
   years' consolidated financial statements to place them on a basis  comparable
   with the 1996 consolidated financial statements.

Note 2:  Restrictions on Cash   To comply with Federal  Reserve regulations, the
Company is  required to maintain  certain average  reserve balances.   The daily
average  reserve requirements  were $2,914  and $2,530  for the  weeks including
December 31, 1996 and 1995, respectively.

Note 3: Securities   As discussed in  note 1(C), effective January  1, 1994, the
Company  adopted the  provisions  of  SFAS  No.  115,  "Accounting  for  Certain
Investments  in  Debt and  Equity Securities".   The  cumulative effect  of this
change in  accounting at January  1, 1994, was to  increase securities available
for  sale by  $414, decrease  the net deferred  tax asset  by $141  and increase
stockholders' equity by $273.
   The amortized costs, gross unrealized gains, gross unrealized losses and fair
values  for securities available for sale by  major security type as of December
31, 1996 and 1995 are as follows:

                                                   December 31, 1996

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

                                      -84-<PAGE>


Notes to Consolidated Financial Statements

                                                   December 31, 1995

                                                    Gross     Gross
                                       Amortized Unrealized Unrealized   Fair
   ($ In thousands)                      Costs     Gains      Losses    Values
                                       --------- ---------- ----------  ------
   Available for sale:
    U.S. Treasury                       $ 14,991      352        (21)    15,322 
    U.S. Government agencies and                                      
     corporations                         42,586      476       (253)    42,809 
    States and political subdivisions      7,613        3        (49)     7,567 
    Mortgage-backed securities             4,748        8       (111)     4,645 
    Other securities                       5,505       42        (20)     5,527 
                                        --------   ------     ------    ------- 
      Total securities available for
       sale                             $ 75,443      881       (454)    75,870 
                                        ========   ======     ======    ======= 

   The amortized costs  and fair values of single maturity  securities available
for sale  at  December  31, 1996,  by  contractual maturity,  are  shown  below.
Expected maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations  with or without call or prepayment
penalties.   Mortgage-backed securities included  in these totals  are allocated
based upon estimated cash flows at December 31, 1996.

                                               December 31, 1996  

                                               Amortized   Fair
   ($ In thousands)                              Costs    Values
                                               --------- --------
   Due in one year or less                     $  6,768     6,764 
   Due after one year through five years         22,325    22,276 
   Due after five years through ten years        27,872    27,654 
   Due after ten years                            5,144     5,032 
   No maturity                                      801       808 
                                               --------   ------- 
                                               $ 62,910    62,534 
                                               ========   ======= 

   The amortized costs, gross unrealized gains, gross unrealized losses and fair
values for securities held to maturity by major security type as of December 31,
1996 and 1995 are as follows:
                                                   December 31, 1996

                                                   Gross      Gross 
                                       Amortized Unrealized Unrealized   Fair
   ($ In thousands)                      Costs     Gains      Losses    Values
                                       --------- ---------- ----------  ------
   Held to maturity:
    U.S. Treasury                       $ 11,547       36       (148)    11,435 
    U.S. Government agencies and                                                
     corporations                         54,804      215       (604)    54,415 
    States and political subdivisions     34,144      530       (105)    34,569 
    Mortgage-backed securities               767       29         ---       796 
    Other securities                       7,448      103        (11)     7,540 
                                        --------   ------     ------    ------- 
      Total securities held to
       maturity                         $108,710      913       (868)   108,755 
                                        ========   ======     ======    ======= 

                                      -85-<PAGE>


National Bankshares, Inc. and Subsidiaries

                                                   December 31, 1995

                                                   Gross      Gross 
                                       Amortized Unrealized Unrealized   Fair
   ($ In thousands)                      Costs     Gains      Losses    Values
                                       --------- ---------- ----------  ------
   Held to maturity:
    U.S. Treasury                       $ 19,330      167        (32)    19,465 
    U.S. Government agencies and
     corporations                         49,938      188        (16)    50,110 
    States and political subdivisions     36,428      802       (202)    37,028 
    Mortgage-backed securities               961       31        ---        992 
    Other securities                       5,108       81         (6)     5,183 
                                        --------   ------     ------    ------- 
      Total securities held to
       maturity                         $111,765    1,269       (256)   112,778 
                                        ========   ======     ======    ======= 


   The amortized  costs and fair  values of  single maturity securities  held to
maturity  at  December  31,  1996, by  contractual  maturity,  are  shown below.
Expected maturities may differ from contractual maturities because borrowers may
have the right to call  or prepay obligations with or without call or prepayment
penalties.  Mortgage-backed  securities included in  these totals are  allocated
based upon estimated cash flows at December 31, 1996.

                                              December 31, 1996   

                                               Amortized   Fair
   ($ In thousands)                              Costs    Values
                                               ---------  ------

   Due in one year or less                     $ 18,781     18,820
   Due after one year through five years         55,493     55,480
   Due after five years through ten years        30,479     30,414
   Due after ten years                            3,957      4,041
                                               --------    -------
                                               $108,710    108,755
                                               ========    =======

   There were no sales of securities held to maturity during 1996, 1995 or 1994.
   The carrying value of securities pledged to secure public and trust deposits,
and  for other purposes as required or permitted by law, was $18,446 at December
31, 1996 and $16,262 at December 31, 1995.  
   On November  15,  1995, the  Financial Accounting  Standards  Board issued  a
Special Report, "A  Guide to Implementation of  Statement 115 on Accounting  for
Certain  Investments in  Debt  and  Equity  Securities."   This  Special  Report
contained a  unique provision  that  allowed entities  to, concurrent  with  the
initial adoption of the implementation  guidance but no later than  December 31,
1995, reassess the appropriateness of the classifications of all securities held
at  the time.    In  connection with  this  one-time  reassessment, the  Company
transferred securities classified  as held to  maturity with amortized  costs of
approximately $30,156 to available for sale securities, increased by the related
unrealized gain  in  the  amount of  approximately  $643 on  December  1,  1995.
Entities  opting  to make  such a  transfer could  do  so without  bringing into
question  their ability  and  positive  intent to  hold  the  remaining held  to
maturity portfolio until maturity.


                                      -86-<PAGE>


Notes to Consolidated Financial Statements

Note 4: Loans to Officers and Directors  In the normal course of business, loans
have  been  made  to executive  officers  and directors  of  Bankshares  and its
subsidiaries.   As of  December 31,  1996 and 1995,  there were direct  loans to
executive  officers  and  directors of  $2,567  and  $3,332,  respectively.   In
addition, there were loans  of $2,145 and $2,550 at December  31, 1996 and 1995,
respectively,  which were endorsed by directors and/or executive officers or had
been made  to companies  in  which directors  and/or executive  officers had  an
equity interest.
   The following schedule summarizes  amounts receivable from executive officers
and directors of Bankshares  and its subsidiaries, and their  immediate families
or associates:

                                                   Year ended
                                                  December 31,
   ($ In thousands)                                   1996 
                                                  ------------
   Aggregate balance, beginning of year             $ 5,882      
   Additions                                          3,449      
   Collections                                       (4,619)     
                                                    -------      
   Aggregate balance, end of year                   $ 4,712      
                                                    =======      


Note 5:  Nonperforming Assets, Past Due Loans,  Impaired Loans and Allowance for
Loan Losses  Nonperforming assets consist of the following:

                                                        December 31,

   ($ In thousands)                             1996        1995        1994
                                               ------      ------      ------
   Nonaccrual loans                            $   616        718         420  
   Restructured loans                              ---        ---         229  
                                               -------     ------      ------  

      Total nonperforming loans                    616        718         649  
   Other real estate owned, net                    474        762       1,150  
                                               -------     ------      ------  
      Total nonperforming assets               $ 1,090      1,480       1,799  
                                               -------     ------      ------  

   Accruing loans past due 90 days or more     $   458        574         490  
                                               =======     ======      ======  


   There  were no  material commitments  to lend  additional funds  to customers
whose loans were classified as nonperforming at December 31, 1996.










                                      -87-<PAGE>


National Bankshares, Inc. and Subsidiaries

   The  following  table shows  the  interest that  would  have  been earned  on
nonaccrual and restructured loans  if they had  been current in accordance  with
their original terms  and the recorded interest that was  earned and included in
income on these loans:

                                                  Years ended December 31,
   ($ In thousands)                             1996        1995        1994
                                               ------      ------      ------
   Scheduled interest:
    Nonaccrual loans                           $    68         59          38  
    Restructured loans                             ---        ---          19  
                                               -------     ------      ------  
      Total scheduled interest                 $    68         59          57  
                                               =======     ======      ======  

   Recorded interest:                                  
    Nonaccrual loans                           $    24          5           1  
    Restructured loans                             ---        ---           9  
                                               -------     ------      ------  
      Total recorded interest                  $    24          5          10  
                                               =======     ======      ======  


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

                                                  Years ended December 31,

   ($ In thousands)                             1996        1995        1994
                                               ------      ------      ------
   Balances, beginning of year                 $    91         49         409  
   Provision for other real estate owned             5        124         ---  
   Write-offs                                      ---        (82)       (360) 
                                               -------     ------      ------  

      Balances, end of year                    $    96         91          49  
                                               =======     ======      ======  


   As discussed in note 1(D), effective January 1, 1995, the Company adopted the
provisions of SFAS No. 114, as amended by  SFAS No. 118.  At December 31,  1996,
the recorded investment in loans  which have been identified as impaired  loans,
in accordance with SFAS No. 114, totaled $725.   Of this amount, $354 related to
loans with no valuation allowance and $371 related to loans with a corresponding
valuation  allowance of $290.  At December  31, 1995, the recorded investment in
loans  which have  been identified  as  impaired loans  totaled $837.   Of  this
amount, $133  related to loans with  no valuation allowance and  $704 related to
loans with a corresponding valuation allowance of $419.
   For the  year ended  December 31, 1996,  the average  recorded investment  in
impaired  loans was approximately $800, and the total interest income recognized
on impaired loans was $33 of which $23 was recognized on a cash basis.  For  the
year ended December 31, 1995, the  average recorded investment in impaired loans
was approximately $906,  and the  total interest income  recognized on  impaired
loans was $47  of which  $5 was  recognized on  a cash  basis.   The balance  of


                                      -88-<PAGE>


Notes to Consolidated Financial Statements

impaired  loans at  January  1, 1995  totaled approximately  $812.   The initial
adoption of SFAS No.  114 did not require an increase to the Company's allowance
for loan losses.   The impact of SFAS  No. 114, as amended by SFAS  No. 118, was
immaterial to the Company's  consolidated financial statements as of and for the
year ended December 31, 1995.
   Changes in the allowance for loan losses are as follows:

                                                  Years ended December 31,

   ($ In thousands)                             1996        1995        1994
                                               ------      ------      ------

   Balances, beginning of year                 $ 2,625      2,551       2,583  
   Provision for loan losses                       331        282         553  
   Recoveries                                      125         83          54  
   Loans charged off                              (506)      (291)       (639) 
                                               -------     ------      ------  

   Balances, end of year                       $ 2,575      2,625       2,551  
                                               =======     ======      ======  


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

                                                  December 31,

   ($ In thousands)                             1996        1995
                                               ------      ------

   Premises                                    $ 5,787      5,511  
   Furniture and equipment                       3,936      3,764  
   Construction-in-progress                        249         30  
                                               -------     ------  
                                                 9,972      9,305  
   Less accumulated depreciation                (4,935)    (4,626) 
                                               -------     ------  
      Total bank premises and equipment        $ 5,037      4,679  
                                               =======     ======  


   The Company  leases a branch facility  as well as certain  other office space
under  noncancellable operating leases  that expire  over the next  seven years.
The future minimum  lease payments under these leases (with initial or remaining
lease terms in excess of one year) as of December 31, 1996 are:


          Years ending December 31,            Amount
                                               ------

   1997                                         $ 83   
   1998                                           60   
   1999                                           36   
   2000                                           13   
   2001                                           13   
   Later years through 2003                       23   
                                                ----   
                                                $228   
                                                ====   


                                      -89-<PAGE>


National Bankshares, Inc. and Subsidiaries

Note 7: Time Deposits  Included in time deposits are certificates of deposit and
other  time deposits  of $100  or more  in the  aggregate amounts of  $37,414 at
December 31, 1996 and $35,127 at December  31, 1995.  At December 31, 1996,  the
scheduled maturities of time deposits are as follows:  $120,448 in 1997; $19,701
in 1998; $3,137 in 1999; $24,530 in 2000; $563 in 2001; and $141 thereafter.

Note  8:  Employee  Benefit  Plans    NBB  has  a  Retirement Accumulation  Plan
qualifying under IRS Code Section 401(k).  Eligible participants in the plan can
contribute up to  10% of their total annual compensation to  the plan.  Employee
contributions are  matched by NBB based  on a percentage of  an employee's total
annual  compensation contributed to the plan.   For the years ended December 31,
1996, 1995  and 1994,  NBB contributed  $83, $78 and  $76, respectively,  to the
plan.
   Bankshares has  a nonleveraged  Employee Stock  Ownership  Plan (ESOP)  which
enables employees with one year of service who have attained the age of 21 prior
to  the plan's January  1 and July  1 enrollment dates to  own Bankshares common
stock.   Contributions to  the  ESOP are  determined annually  by  the Board  of
Directors.  Contribution  expense amounted to $200, $163 and  $145 for the years
ended December  31, 1996, 1995 and 1994, respectively.  Dividends on ESOP shares
are  charged to  retained earnings.   As  of December  31,  1996, the  number of
allocated  shares held  by the  ESOP was  47,560 and  the number  of unallocated
shares was 17,236.  All  shares held by the  ESOP are treated as outstanding  in
computing  the Company's net income  per share.  Bankshares  or the ESOP has the
right of first refusal for any shares distributed to a  participant in the event
the participant elects to sell the shares.   Upon reaching age 55 with ten years
of plan  participation, a vested participant  has the right to  diversify 50% of
his or her allocated ESOP shares and Bankshares or the ESOP, with  the agreement
of the Trustee, would  be obligated to purchase those shares.  The ESOP contains
a put option which allows a withdrawing participant to require Bankshares or the
ESOP, if the plan administrator agrees,  to purchase his or her allocated shares
if the shares  are not readily tradeable on an established market at the time of
its distribution.   Accordingly, at  December 31,  1996, 64,796 shares  of stock
held by the  ESOP, at their  estimated fair value,  which is  based on the  most
recent  available independent  valuation, is  recorded outside  of stockholders'
equity.  Bankshares  does not anticipate any material  cash requirements in each
of the next five years relating to the ESOP.
   The  Company  also  sponsors  two  separate noncontributory  defined  benefit
pension plans which cover substantially all of its employees. The pension plans'
benefit  formulas generally base payments to retired employees upon their length
of service and a percentage of qualifying compensation during their  final years
of  employment.  The NBB pension plan's  assets are invested principally in U.S.
Government  agency obligations (53%), mutual funds  (22%), and equity securities
(18%).    The  BTC  pension  plan's  assets  are  invested  principally  in  BTC
certificates of deposit  (29%), U.S. Government  agency obligations (26%),  U.S.
Treasury securities (25%), and money market funds (18%).












                                      -90-<PAGE>


Notes to Consolidated Financial Statements


   The plans' funded status at December 31, 1996 and 1995 is as follows:
                                                              December 31,

   ($ In thousands)                                         1996        1995
                                                           ------      ------
   Actuarial present value of benefit obligations:
    Accumulated benefit obligation, including vested
     benefits of $3,148 in 1996 and $3,110 in 1995        $  3,252      3,210  
                                                          ========    =======  
   Projected benefit obligation for service rendered to
    date                                                    (5,160)    (5,094) 
   Plan assets at fair value                                 3,950      3,498  
                                                          --------    -------  
      Projected benefit obligation in excess of plan
       assets                                               (1,210)    (1,596) 

   Unrecognized net transition asset                          (228)      (251) 
   Unrecognized net loss from past experience different
    from that assumed                                          989      1,438  
   Prior service cost not yet recognized in net pension                        
    cost                                                       246        262  
                                                          --------    -------  
      Net accrued pension cost (includes accrued
       pension cost of $346 in 1996 and $276 in 1995
       included in other liabilities, and prepaid
       pension cost of $143 in 1996 and $129 in 1995
       included in other assets)                          $   (203)      (147) 
                                                          ========    =======  

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

                                                  Years ended December 31,

   ($ In thousands)                             1996        1995        1994
                                               ------      ------      ------
   Service cost-benefits earned during the
    year                                        $  327        223         273  
   Interest cost on projected benefit
    obligation                                     353        288         281  
   Actual return on plan assets                   (185)      (304)        (13) 
   Net amortization and deferral                   (92)        19        (240) 
                                               -------     ------      ------  
      Net pension cost                         $   403        226         301  
                                               =======     ======      ======  

   Assumptions used in accounting for the pension plans as of December 31, 1996,
1995 and 1994 are as follows:

                                               NBB                  BTC

                                        1996   1995   1994   1996   1995   1994
                                        ----   ----   ----   ----   ----   ----
   Weighted average discount rate      7.75%    7%    8.5%    7%      7%    8% 
   Expected long-term rate of return      9%    9%      9%    9%    7.5%    8% 
   Rate of increase in future                      
    compensation                          5%    5%      5%    5%      5%    5% 


                                      -91-<PAGE>


National Bankshares, Inc. and Subsidiaries

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

                                         Years ended December 31,

   ($ In thousands)                      1996      1995      1994
                                         ----      ----      ----

   Income                              $ 2,341     1,933     1,844 
   Stockholders' equity, for net
    unrealized gains (losses) on
    securities available for sale                                  
    recognized for financial
    reporting purposes                    (273)    1,047      (882)
                                       -------    ------    ------ 
      Total income taxes               $ 2,068     2,980       962 
                                       =======    ======    ====== 


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

                                         Years ended December 31,

   ($ In thousands)                      1996      1995      1994
                                         ----      ----      ----

   Current                             $ 2,345     2,053     1,876 
   Deferred                                 (4)     (120)      (32)
                                       -------    ------    ------ 

      Total income tax expense         $ 2,341     1,933     1,844 
                                       =======    ======    ====== 

   Taxes resulting from securities transactions amounted to a tax expense of $33
for the year  ended December 31, 1996, $62 for the year ended December 31, 1995,
and a tax benefit of $5 for the year ended December 31, 1994.
   The  following is  a  reconciliation of  the "expected"  income  tax expense,
computed  by applying the U.S.  Federal income tax rate  of 34% to income before
income tax expense, with the reported income tax expense:

                                         Years ended December 31,

   ($ In thousands)                      1996      1995      1994
                                         ----      ----      ----

   Expected income tax expense (34%)   $ 2,876     2,536     2,430 
   Tax-exempt interest income             (756)     (744)     (740)
   Nondeductible interest expense           99        88        75 
   Other, net                              122        53        79 
                                       -------    ------    ------ 

      Reported income tax expense      $ 2,341     1,933     1,844 
                                       =======    ======    ====== 








                                      -92-<PAGE>


Notes to Consolidated Financial Statements

   The  tax effects  of  temporary  differences that  give rise  to  significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1996 and 1995 are presented below:

                                                 December 31,
   ($ In thousands)                             1996      1995
                                                ----      ----
   Deferred tax assets:
     Loans, principally due to allowance for
      loan losses and unearned fee income      $  545      560  
     Other real estate owned, principally
      due to valuation allowance                   33       33  
     Deferred compensation and other                            
      liabilities, due to accrual for
      financial reporting purpose                 138      115  
     Deposit intangibles and goodwill              35       28  
     Nonaccrual interest on loans                  23       19  
     Community development corporation
      related tax credit                           30       34  
     Net unrealized losses on securities
      available for sale                          128      ---  
                                               ------   ------  

       Total gross deferred tax assets            932      789  
       Less valuation allowance                   ---      ---  
                                               ------   ------  
       Net deferred tax assets                    932      789  
                                               ------   ------  
   Deferred tax liabilities:
     Bank premises and equipment,
      principally due to differences in
      depreciation                                (12)     (20) 
     Securities, due to differences in
      discount accretion                          (43)     (30) 
     Other assets                                 (55)     (49) 
     Net unrealized gains on securities                         
      available for sale                          ---     (145) 
                                               ------   ------  
       Total gross deferred liabilities          (110)    (244) 
                                               ------   ------  
       Net deferred tax asset included in
        other assets                           $  822      545  
                                               ======   ======  



   The Company has determined that a valuation  allowance for the gross deferred
tax assets is not necessary at December 31, 1996 and 1995, due to  the fact that
the realization  of the entire gross deferred tax assets can be supported by the
amount of  taxes paid  during the carryback  period available under  current tax
laws.






                                      -93-<PAGE>


National Bankshares, Inc. and Subsidiaries

Note 10: Common Stock Transactions  During 1994, the ESOP purchased 4,480 shares
of the common stock of Bankshares at a price of $19.35 per share.  There was  no
stock purchased from  Bankshares by the ESOP in 1996 and 1995.  The net proceeds
from the stock issuance in 1994 have been credited to common stock and surplus.

Note  11:  Restrictions  on  Payments  of  Dividends  and  Capital  Requirements
Bankshares' principal  source  of  funds  for  dividend  payments  is  dividends
received from its subsidiary banks.  For the years ended December 31, 1996, 1995
and  1994,  dividends received  from subsidiary  banks  were $1,901,  $1,055 and
$1,133, respectively.
   Bank regulatory agencies restrict, without prior approval, the total dividend
payments of a  bank in any  calendar year to the  bank's retained net  income of
that year  to date,  as defined, combined  with its retained  net income  of the
preceding two  years, less any required  transfers to surplus.   At December 31,
1996,  retained  net  income which  was  free  of such  restriction  amounted to
approximately $7,572.
   Bankshares and  its subsidiaries  are subject  to various regulatory  capital
requirements  administered by  the bank  regulatory agencies.   Failure  to meet
minimum  capital  requirements  can  initiate certain  mandatory,  and  possibly
additional discretionary, actions by regulators that, if undertaken, could  have
a  direct material  effect on  the Company's consolidated  financial statements.
Under  capital  adequacy guidelines  and  the  regulatory framework  for  prompt
corrective action, Bankshares  and its subsidiaries  must meet specific  capital
guidelines  that involve quantitative measures of  their assets, liabilities and
certain  off-balance-sheet  items  as  calculated  under  regulatory  accounting
practices.  Bankshares' and its subsidiaries' capital amounts and classification
are also subject to  qualitative judgments by regulators about  components, risk
weightings and other factors.
   Quantitative measures  established by  regulation to ensure  capital adequacy
require Bankshares and its  subsidiaries to maintain minimum amounts  and ratios
(set forth in the  table below) of total and  Tier I capital (as defined  in the
regulations) to  risk-weighted assets (as  defined), and  of Tier I  capital (as
defined) to average  assets (as defined).   Management believes, as of  December
31,  1996,  that  Bankshares and  its  subsidiaries  meet  all capital  adequacy
requirements to which they are subject.
   As of December 31,  1996, the most recent notifications from  the appropriate
regulatory authorities categorized Bankshares and its subsidiaries as adequately
capitalized under the regulatory framework for  prompt corrective action.  To be
categorized  as adequately  capitalized,  Bankshares and  its subsidiaries  must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as  set forth  in the  table.   There are  no conditions  or events  since those
notifications  that  management  believes   have  changed  Bankshares'  and  its
subsidiaries' category.














                                      -94-<PAGE>


Notes to Consolidated Financial Statements

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

                                                                   To Be Well
                                               For Capital     Capitalized Under
                                 Actual     Adequacy Purposes  Prompt Corrective
                                                               Action Provisions

   ($ In thousands)          Amount  Ratio   Amount    Ratio    Amount     Ratio
                             ------  -----   ------    -----    ------     -----
   December 31, 1996:
   Total capital (to risk 
    weighted assets)
                                                                            
    Bankshares consolidated  $53,193 23.00%    18,497      8%     n/a        n/a
    NBB                       26,175 16.29%    12,855      8%   16,069       10%
    BTC                       27,007 38.30%     5,642      8%    7,052       10%

   Tier I capital (to risk
    weighted assets):
    Bankshares consolidated  $50,618 21.89%     9,249      4%     n/a        n/a

    NBB                       24,171 15.04%     6,428      4%    9,641        6%
    BTC                       26,436 37.49%     2,821      4%    4,231        6%
   Tier I capital (to
    average assets):
    Bankshares consolidated  $50,618 12.96%    15,620      4%     n/a        n/a

    NBB                       24,171 11.20%     8,636      4%   10,795        5%
    BTC                       26,436 15.14%     6,984      4%    8,730        5%

                                                                   To Be Well
                                               For Capital     Capitalized Under
                                 Actual     Adequacy Purposes  Prompt Corrective
                                                               Action Provisions

   ($ In thousands)          Amount  Ratio   Amount    Ratio    Amount     Ratio
                             ------  -----   ------    -----    ------     -----
   December 31, 1995:
   Total capital (to risk 
    weighted assets)
    Bankshares consolidated  $48,350 24.47%    15,799      8%     n/a        n/a
    NBB                       22,272 16.21%    10,991      8%   13,739       10%
    BTC                       25,991 43.24%     4,808      8%    6,011       10%

   Tier I capital (to risk
    weighted assets):
    Bankshares consolidated  $46,083 23.33%     7,900      4%     n/a        n/a
    NBB                       20,550 14.96%     5,496      4%    8,244        6%
    BTC                       25,446 42.33%     2,404      4%    3,607        6%

   Tier I capital (to
    average assets):
    Bankshares consolidated  $46,083 12.25%    15,051      4%     n/a        n/a
    NBB                       20,550 10.27%     8,007      4%   10,009        5%
    BTC                       25,446 14.45%     7,044      4%      881        5%




                                      -95-<PAGE>


National Bankshares, Inc. and Subsidiaries

Note 12: Parent Company Financial  Information  Condensed financial  information
of National Bankshares, Inc. (Parent) is presented below:

                    Condensed Balance Sheets                

                                                                December 31,

 ($ In thousands)                                              1996     1995
                                                               ----     ---- 
 Assets        Cash due from subsidiaries                    $    20         14
               Investment in subsidiaries, at equity          51,434     48,067
               Refundable income taxes due from               
                subsidiaries                                      25        113
                                                             -------    -------

                Total assets                                 $51,479     48,194
                                                             =======    =======

 Liabilities   Other liabilities                             $    35         40
 and                                                         -------    -------
 Stockholders' Common stock subject to ESOP put option
 Equity         (note 8)                                       1,643        ---
                                                             -------    -------
               Stockholders' equity (notes 9, 10, 11 and
                17):
               Preferred stock of no par value.  Authorized
                5,000,000 shares; none issued and
                outstanding                                      ---        ---
               Common stock of $2.50 par value.  Authorized
                5,000,000 shares; issued and outstanding
                3,792,833 shares                               9,482      9,482
               Retained earnings                              42,210     38,390
               Net unrealized gains (losses) on securities
                available for sale                              (248)       282
               Common stock subject to ESOP put option
                (64,796 shares at $25.35 per share)(note 8)   (1,643)       ---
                                                             -------    -------
                Total stockholders' equity                    49,801     48,154

               Commitments and contingent liabilities
                (notes 6, 8 and 14)
                                                             -------    -------
                Total liabilities and stockholders' equity   $51,479     48,194
                                                             =======    =======














                                      -96-<PAGE>


Notes to Consolidated Financial Statements

                         Condensed Statements of Income

                                                      Years ended December 31,

 ($ In thousands)                                       1996    1995     1994
                                                        ----    ----     ----

 Income        Dividends from subsidiaries (note 11)   $ 1,901   1,055    1,133
 Expenses      Other expenses                              232     285      127
                                                       ------- -------  -------
               Income before income tax benefit and
                equity in undistributed net income
                of subsidiaries                          1,669     770    1,006
               Applicable income tax benefit                41      97       43
                                                       ------- -------  -------
               Income before equity in undistributed
                net income of subsidiaries               1,710     867    1,049
               Equity in undistributed net income of
                subsidiaries                             4,407   4,658    4,254
                                                       ------- -------  -------
                Net income                             $ 6,117   5,525    5,303
                                                       ======= =======  =======

                       Condensed Statements of Cash Flows

                                                      Years ended December 31,

 ($ In thousands)                                      1996     1995     1994
                                                       ----     ----     ----

 Cash Flows    Net income                             $ 6,117   5,525     5,303
 from          Adjustments to reconcile net income 
 Operating      to net cash provided by operating
 Activities     activities:
                Equity in undistributed net income
                 of subsidiaries                       (4,407) (4,658)  (4,254)
                (Increase) decrease in other assets       ---       3       (2)
                (Increase) decrease in refundable
                 income taxes due from subsidiaries        88     162      (43)
                Increase (decrease) in other
                 liabilities                               (5)     (9)      20 
                                                      -------  ------   ------ 
                  Net cash provided by operating
                   activities                           1,793   1,023    1,024 
                                                      -------  ------   ------ 
 Cash Flows    Cash flows from financing activities:
 from             Purchase of common stock of                 
 Financing      subsidiaries                              ---     ---      (86)
 Activities       Net proceeds from issuance of               
                common stock                              ---     ---       86 
                  Dividends paid                       (1,787) (1,080)    (993)
                                                      -------  ------   ------ 
                  Net cash used in financing
                   activities                          (1,787) (1,080)    (993)
                                                      -------  ------   ------ 
               Net increase (decrease) in cash              6     (57)      31 
               Cash due from subsidiary at beginning
                of year                                    14      71       40 
                                                      -------  ------   ------ 
               Cash due from subsidiary at end of
                year                                  $    20      14       71 
                                                      =======  ======   ====== 

                                      -97-<PAGE>


National Bankshares, Inc. and Subsidiaries

Note  13: Supplemental Cash Flow Information   The Company paid $13,080, $12,533
and $10,644 for interest  and $1,839, $1,942 and $2,159 for income taxes, net of
refunds, in 1996,  1995 and  1994, respectively.   Noncash investing  activities
consisted of $506, $291 and $639 of loans charged against the allowance for loan
losses in 1996, 1995 and 1994,  respectively.  Noncash investing activities also
included $28 in 1996 and  $26 in 1994 of loans transferred to  other real estate
owned.  In  addition, for  the years ended  December 31, 1996  , 1995 and  1994,
noncash  investing activities included changes  in net unrealized gains (losses)
on securities available for  sale of ($803), $3,080 and  ($2,595), respectively,
changes in  deferred tax assets included  in other assets of  $273, ($1,047) and
$882, respectively, and changes  in net unrealized gains (losses)  on securities
available  for sale  included  in stockholders'  equity  of ($530),  $2,033  and
($1,713), respectively.  See note 3 for noncash transfers of securities.

Note 14:  Financial Instruments with  Off-Balance Sheet Risk   The Company  is a
party to financial instruments with off-balance  sheet risk in the normal course
of  business to  meet the  financing needs  of its  customers.   These financial
instruments  include commitments to extend credit and standby letters of credit.
Those instruments involve, to varying degrees, elements of credit risk in excess
of the  amount recognized  in the  consolidated balance  sheets.   The  contract
amounts of those  instruments reflect the extent of involvement  the Company has
in particular classes of financial instruments.
   The Company's exposure to credit loss, in the event  of nonperformance by the
other  party to the  financial instrument for  commitments to extend  credit and
standby  letters of  credit, is represented  by the contractual  amount of those
instruments.  The Company  uses the same credit  policies in making  commitments
and conditional obligations as it does for on-balance sheet instruments.
   The Company may require collateral or other security to support the following
financial instruments with credit risk:

                                                           December 31,

   ($ In thousands)                                      1996       1995
                                                         ----       ----

   Financial instruments whose contract amounts
    represent credit risk:
           Commitments to extend credit                $ 32,087     32,378 
                                                       ========     ====== 
           Standby letters of credit                   $  1,380      1,969 
                                                       ========     ====== 

   Commitments to extend credit  are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.  Commitments
generally  have fixed  expiration  dates or  other termination  clauses  and may
require  payment of a fee.  Since many of the commitments are expected to expire
without  being  drawn  upon, the  total  commitment amounts  do  not necessarily
represent  future cash  requirements.   The  Company  evaluates each  customer's
creditworthiness on a case-by-case basis.  The amount of collateral obtained, if
required  by the  Company upon  extension of  credit, is  based  on management's
credit  evaluation of  the customer.   Collateral  held varies  but may  include
accounts  receivable,  inventory,  property,  plant and  equipment  and  income-
producing  commercial properties.    Extensions  of  credit arising  from  these
commitments are predominantly variable  rate in nature; the principal  exception
being construction loans which are at fixed rates, but have terms generally less
than one year.


                                      -98-<PAGE>


Notes to Consolidated Financial Statements

   Standby letters of  credit are conditional commitments issued by  the Company
to guarantee the performance  of a customer to a  third party.  The  credit risk
involved in issuing  letters of credit is essentially the  same as that involved
in  extending  loans  to customers.    Collateral  held varies  but  may include
accounts  receivable,  inventory,  property,  plant and  equipment  and  income-
producing commercial properties.
   The Company originates mortgage loans for sale to secondary market  investors
subject  to contractually specified and  limited recourse provisions.   In 1996,
the  Company originated  $17,907  and sold  $18,271  to investors,  compared  to
$15,515 originated  and $15,027 sold in 1995.  Every contract with each investor
contains certain recourse language.  In general, the Company may  be required to
repurchase a previously sold mortgage loan if there is  major noncompliance with
defined loan origination or documentation standards, including fraud, negligence
or material misstatement in the loan documents.  Repurchase may also be required
if necessary governmental loan guarantees are canceled or never issued, or if an
investor is forced  to buy back a loan  after it has been resold as  a part of a
loan pool.  In addition, the Company may have an obligation to repurchase a loan
if the mortgagor has  defaulted early in the loan term.   This potential default
period is  approximately twelve months  after sale  of a loan  to the  investor.
Sold loans with potential recourse totaled approximately $18,271 at December 31,
1996.

Note  15: Concentrations  of Credit  Risk   The Company  does a  general banking
business, serving the commercial, agricultural and personal banking needs of its
customers. NBB's  trade territory, commonly referred to as the New River Valley,
consists of Montgomery  and Giles  Counties, Virginia and  portions of  adjacent
counties.   NBB's  operating results  are closely  correlated with  the economic
trends  within this  area which  are, in  turn, influenced  by the  area's three
largest   employers,  Virginia  Polytechnic   Institute  and  State  University,
Montgomery County Schools and Hoechst-Celanese.  Other industries include a wide
variety of manufacturing, retail and service  concerns.  Most of BTC's  business
originates  from the communities of Tazewell and Bluefield and other communities
in Tazewell County, Virginia and in Mercer County, West Virginia.  BTC's service
area  has  largely depended  on the  coal mining  industry  and farming  for its
economic base.  In recent years, coal companies have mechanized  and reduced the
number of persons engaged in the  production of coal.  There are still  a number
of support  industries for  the coal  mining business  that continue to  provide
employment  in the  area.    Additionally,  several  new  businesses  have  been
established in the  area and Bluefield, West  Virginia has begun to  emerge as a
regional medical center.  The ultimate collectibility of the loan portfolios and
the  recovery of the carrying amounts of repossessed property are susceptible to
changes in the market conditions of these areas.  
   At December  31, 1996  and 1995, approximately  $71 million and  $52 million,
respectively, of the loan portfolio were concentrated in commercial real estate.
This represents approximately 36% and 34%  of the loan portfolio at December 31,
1996 and 1995, respectively.  Included in commercial real estate at December 31,
1996   and 1995 was approximately $49  million and $25 million, respectively, in
loans for  college housing  and professional  office buildings.   Loans for  the
purpose  of acquiring residential real estate were approximately $60 million and
$56 million  at  December 31,  1996  and 1995,  respectively.   This  represents
approximately 31% and 34% of  the loan portfolio at December 31, 1996  and 1995,
respectively.   Loans primarily for  the purpose of  purchasing automobiles were
approximately  $29  million and  $25  million  at December  31,  1996 and  1995,
respectively.   This  represents  approximately 15%  of  the loan  portfolio  at
December 31, 1996 and 1995.  


                                      -99-<PAGE>


National Bankshares, Inc. and Subsidiaries

   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.

Note 16: Fair  Value of Financial Instruments  The estimated  fair values of the
Company's financial instruments at December 31, 1996 and 1995 are as follows:


                                                 December 31,
                                         1996                     1995

                               Carrying    Estimated    Carrying    Estimated
   ($ In thousands)             Amount     Fair Value    Amount     Fair Value
                               --------    ----------   --------    ----------

   Financial assets:
      Cash and due from banks  $ 10,080      10,080       10,055      10,055   
      Federal funds sold          1,910       1,910        7,725       7,725   
      Securities                171,244     171,289      187,635     188,648   
      Mortgage loans held for                         
       sale                         516         516          880         880   
      Loans, net                193,598     192,201      163,193     163,290   
                               --------     -------      -------     -------   
    Total financial assets     $377,348     375,996      369,488     370,598   
                               ========     =======      =======     =======   
   Financial liabilities:
      Deposits                 $334,584     331,758      330,313     334,066   
      Other borrowed funds          627         627          161         161   
                               --------     -------      -------     -------   
    Total financial
     liabilities               $335,211     332,385      330,474     334,227   
                               ========     =======      =======     =======   


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


                                      -100-<PAGE>


Notes to Consolidated Financial Statements

Note  17: Business Combination    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 results of operations previously reported by the separate enterprises and
the  combined amounts  presented  in the  accompanying financial  statements are
summarized below:

                                   Six months
                                 ended June 30,     Years ended December 31,
   ($ In thousands)                   1996            1995            1994
                                      ----            ----            ----

   Revenues:                                                                   
    National Bankshares, Inc.       $  9,286         17,848          16,169    
    Bank of Tazewell County            6,166         12,628          11,940    
                                    --------         ------          ------    

   Combined                         $ 15,452         30,476          28,109    
                                    ========         ======          ======    
   Net Income:                                 
    National Bankshares, Inc.       $  1,883          3,256           2,916    
    Bank of Tazewell County            1,106          2,269           2,387    
                                    --------         ------          ------    

   Combined                         $  2,989          5,525           5,303    
                                    ========         ======          ======    

Note  18:  Future  Accounting  Considerations    In  June  1996,  the  Financial
Accounting Standards  Board issued SFAS  No. 125, "Accounting for  Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities".  SFAS No. 125
is effective for transfers and servicing of financial assets and extinguishments
of  liabilities  occurring  after  December  31,  1996  and  is  to  be  applied
prospectively.  This Statement  provides accounting and reporting  standards for
transfers  and servicing of financial assets  and extinguishments of liabilities
based  on consistent application of a financial-components approach that focuses
on control.  It distinguishes transfers of financial assets that  are sales from
transfers  that  are secured  borrowings.   Management of  the Company  does not
expect  that adoption  of  SFAS No.  125  will have  a  material impact  on  the
Company's financial position, results of operations or liquidity.








                                      -101-<PAGE>


The National Bank of Blacksburg Board of Directors

                         Robert E. Christopher, Jr.
                         Chairman of the Board
 PICTURE OF ROBERT       Retired
E. CHRISTOPHER, JR.,
CHARLES L. BOATWRIGHT    Charles L. Boatwright
AND JAMES G. RAKES       Vice Chairman of the Board
                         Physician

                         James G. Rakes
                         National Bankshares, Inc.
                         The National Bank
                         President and 
                         Chief Executive Officer

                         James M. Shuler
                         Companion Animal Clinic, Inc.
                         President
                         Virginia House of Delegates        PICTURE OF
                         Delegate                           JAMES M. SHULER, L. 
                                                            ALLEN BOWMAN AND 
                         L. Allen Bowman                    PAUL A. DUNCAN
                         Litton Poly-Scientific
                         Retiring President

                         Paul A. Duncan
                         Holiday Motor Corp.
                         President

                         Jeffrey R. Stewart
                         Educational Consultant
 PICTURE OF
JEFFREY R. STEWART,      J. Lewis Webb, Jr.
J. LEWIS WEBB, JR. AND   Dentist
PAUL P. WISMAN
                         Paul P. Wisman
                         Grundy National Bank
                         Vice President of Investments
                         Nicewonder Investments
                         Manager of Assets



The National Bank of Blacksburg Advisory Boards

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

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








                                      -102-<PAGE>


Bank of Tazewell County Board of Directors

                         Alonzo A. Crouse
                         Bank of Tazewell County
 PICTURE OF              Executive Vice President,
ALONZO A. CROUSE, CARL   Secretary and Cashier
C. GILLESPIE AND R. E.
DODSON                   Carl C. Gillespie
                         Honorary Chairman of the Board
                         Attorney

                         R.E. Dodson
                         Bank of Tazewell County
                         President and
                         Chief Executive Officer

                         James A. Deskins
                         Deskins Super Market, Inc.
                         President                          PICTURE OF
                                                            JAMES A. DESKINS,
                         Ralph S. Bailey                    RALPH S. BAILEY AND
                         Retired                            JAMES S. GILLESPIE,
                                                            JR.
                         James S. Gillespie, Jr.
                         Jim Sam Gillespie Farm
                         President

                         E.P. Greever
                         Retired
 PICTURE OF
E.P. GREEVER, WILLIAM    William T. Peery
T. PEERY, CHARLES E.     Cargo Oil Co., Inc.
GREEN, III AND JACK H.   President
HARRY
                         Charles E. Green, III
                         Equitable Financial Services
                         District Manager

                         Jack H. Harry
                         Harry's Enterprises, Inc.
                         President

                         J.M. Pope                           
                         Retired
                                                            PICTURE OF
                         James G. Rakes                     J.M. POPE, JAMES G.
                         National Bankshares, Inc.          RAKES AND WILLIAM H.
                         The National Bank                  VANDYKE
                         President and
                         Chief Executive Officer

                         William H. VanDyke
                         Candlewax Smokeless Fuel Co.
                         Vice President

                         T.C. Bowen, Jr. 
                         Chairman of the Board
                         Attorney


                                      -103-<PAGE>


National Bankshares, Inc. Board of Directors


                         James G. Rakes
                         National Bankshares, Inc.
 PICTURE OF              The National Bank
JAMES G. RAKES, ROBERT   President and
E. CHRISTOPHER, JR. AND  Chief Executive Officer
R.E. DODSON
                         Robert E. Christopher, Jr.
                         Chairman of the Board
                         Retired

                         R.E. Dodson
                         Bank of Tazewell County
                         President and
                         Chief Executive Officer


                         Alonzo A. Crouse
                         Bank of Tazewell County
                         Executive Vice President,          PICTURE OF
                         Secretary and Cashier              ALONZO A. CROUSE,
                                                            T.C. BOWEN, JR. AND
                         T.C. Bowen, Jr.                    CHARLES L. 
                         Attorney                           BOATWRIGHT

                         Charles L. Boatwright
                         Vice Chairman of the Board
                         Physician


                         Paul A. Duncan
                         Holiday Motor Corp.
 PICTURE OF              President
PAUL A. DUNCAN, WILLIAM
T. PEERY AND JEFFREY R.  William T. Peery
STEWART                  Cargo Oil Co., Inc.
                         President

                         Jeffrey R. Stewart
                         Educational Consultant


















                                      -104-<PAGE>


Corporate Information

NATIONAL BANKSHARES, INC. OFFICERS    James G. Rakes
                                      President and Chief Executive Officer

                                      Marilyn B. Buhyoff
                                      Secretary and Counsel

                                      F. Brad Denardo
                                      Corporate Officer

                                      Shelby M. Evans
                                      Corporate Compliance Officer

                                      Joan C. Nelson
                                      Treasurer

                                      David K. Skeens
                                      Corporate Auditor

ANNUAL MEETING   The Annual  meeting of  stockholders will be  held on  Tuesday,
April  8, 1997 at  3:00 p.m. at  the Best Western  Red Lion Inn,  900 Plantation
Road, Blacksburg, Virginia.

REQUESTS FOR INFORMATION Analysts, investors and those seeking financial
                         information should contact:
                         James G. Rakes
                         President and Chief Executive Officer
                         540/552/2011 or
                         800/552/4123

                         Those  seeking  general stockholder  information should
                         contact:
                         Marilyn B. Buhyoff
                         Secretary
                         540/552/2011 or
                         800/552/4123

FORM 10-K  A form 10-K Report filed with the  Securities and Exchange Commission
is  available to  stockholders  without  charge  upon  written  request  to  the
Secretary of National Bankshares, Inc.,  100 South Main Street, P.O. Box  90002,
Blacksburg, VA 24062-9002

CORPORATE OFFICE                           REGISTERED AGENT
          National Bankshares, Inc.             James G. Rakes
          100 South Main Street                 100 South Main Street
          Blacksburg, VA 24060                  Blacksburg, VA 24060
          P.O. Box 90002                        P.O. Box 90002
          Blacksburg, VA 24062-9002             Blacksburg, VA 24062-9002










                                      -105-<PAGE>






























                                                      
                               National Bankshares

                      100 South Main Street/P.O. Box 90002
                           Blacksburg, Virginia  24062
                                      -106-<PAGE>