National Bankshares
















































                                                             1999
                                                            Annual Report<PAGE>

                               1999 Annual Report


                              Financial Highlights



              $ In thousands, except per share data   1999      1998     1997
                                                      ----      ----     ----

              Net income                             $  7,088    6,798    6,560
              Basic net income per share                 1.96     1.79     1.73
              Cash dividends declared per share          0.80     0.74     0.68
              Book value per share                      14.99    16.00    14.73

              Loans, net                             $291,562  236,578  214,552
              Total securities                        137,492  166,754  149,974
              Total assets                            472,134  445,166  402,907
              Total deposits                          407,187  382,696  344,867
              Stockholders' equity                     52,723   58,503   54,029






                                                       Contents



                                        To Our Stockholders                  2

                                        Selected Consolidated
                                         Financial Data                      4

                                        Management's Discussion and
                                         Analysis                            5

                                        Independent Auditors' Report        12

                                        Consolidated Financial
                                         Statements                         13

                                        Notes to Consolidated
                                         Financial Statements               17

                                        Selected Quarterly Data             36

                                        Board of Directors                  38

                                        Corporate Information               40
                                        <PAGE>

To Our Stockholders

     We   are   pleased  to   report
another year of higher  earnings and
solid   asset   growth.     National
Bankshares, Inc. achieved net income
in  1999 of nearly $7.09 million, an
increase of  4.3% over 1998.   Based            National Bankshares
upon  a  weighted average  of shares
outstanding  during  1999  and  also
reflecting the effects of the common
stock   repurchase  plan   that  was
completed in the  second quarter  of
the year, basic net income per share
rose to $1.96 from $1.79 in 1998.
     The  total  assets of  National
Bankshares   increased  to   $472.13
million  at  December  31, 1999,  as
compared to $445.17 million  for the
same period in 1998.  A major factor
contributing to  asset growth during                Picture of
the year was a 23.2% increase in net        "New Hubbard Street Office"
loans, to $291.56  million at  year-
end.    Adding  sound  loans  to our
subsidiary banks' portfolios  serves
our  communities, our  customers and
our stockholders.  Funds  on deposit
at The National Bank and at Bank  of
Tazewell  County  are  used to  make
loans  in  our  local  region.   The
loans   in  turn   support  business
expansion  and  the construction  of
new  homes.    They  also  allow our
customers to purchase  new cars,  to
pay  for  medical  expenses  and  to
educate  their  children.   National                Picture of
Bankshares'   stockholders   benefit      "Newly renovated BTC Bluefield
from loan growth because making good               Branch Lobby"
loans is the most profitable  use of
the banks' capital and assets.
     As I mentioned above,  when you
review this year's Annual Report you
will  see that  net income  for 1999
totaled nearly $7.09 million, a 4.3%
increase  over last year.   You will
also   see   an   item   listed   as
"comprehensive  income",   which  is
less  than  the  net income  figure.
Since   this   difference   can   be
confusing, I want  to explain  about
comprehensive income,  an accounting
presentation  that  in  our case  is                Picture of
used    to   reflect    the   annual   "NBB Customer Service Representative
fluctuations in the market  value of       demonstrating Online Banking"
our "available  for sale" investment
portfolio.




                                       2<PAGE>

     In  1999, because  of increases                Picture of
in interest rates in the bond market             "James G. Rakes"
and the structure  of our  available
for   sale   investment   portfolio,
National  Bankshares experienced  an
unrealized    net   loss    in   the   work   by  employees,   neither  The
portfolio.          This      year's   National Bank nor  Bank of  Tazewell
comprehensive  income resulted  from   Country  experienced any  disruption
subtracting the  unrealized net loss   in work flow.  On the first business
figure  from  our net  income total.   day  of 2000,  it  was  business  as
This   unrealized    net   loss   is   usual   for   bank   customers   and
significant only if we actually sell   employees.
the  investments  and recognize  the        We believe that  the future  of
loss   into   net   income.     When   our   progressive  community   banks
investments are fundamentally sound,   depends   upon   offering   a   full
as  we believe ours are, there is no   spectrum   of   financial    service
need to recognize  any loss into net   options,  from  high  touch to  high
income  unless  the investments  are   tech.   As  the world  becomes  more
sold  before  maturity.   We  do not   impersonal,   trusted  relationships
plan  to  liquidate any  significant   become  more  valuable.   Because of
portion  of  our available  for sale   our  historic  community  ties,  The
investment      portfolio     before   National Bank and  Bank of  Tazewell
maturity, and we  do not foresee any   County  are  important  present  and
events in the near future that would   future sources  of quality financial
cause us to change these plans.        services  with a personal touch.  It
     This past  year was a  busy and   would be  impossible for us  to move
productive one for The National Bank   forward and carry out  our corporate
and for Bank of Tazewell County.  On   mission without the  support of  our
February   1,   NBB  introduced   an   stockholders,      directors     and
Internet  Banking  product that  has   employees.   I  thank you  for  your
proven  to be  quite popular.   With   contributions   to   the   continued
Internet Banking,  our customers can   success of National Bankshares.
access  account balances,  apply for
loans,  open  new  accounts and  pay
bills when it is most convenient for        James G. Rakes
them.  In August, The  National Bank        Chairman of the Board
opened the new Hubbard Street Office        President and
Building in Blacksburg.  In addition        Chief Executive Officer
to housing the  bank's tenth  branch
location,  Hubbard Street  serves as
the  corporate  headquarters and  as
the home to NBB's Trust,  Bank Card,
Marketing,  Human  Resources, Audit,
Compliance    and     Loan    Review
departments.  Also during 1999, Bank
of Tazewell  County completed needed
renovations   at    the   Bluefield,
Virginia  office.   BTC  highlighted
the   importance  of   tradition  by
incorporating   several   items   of
antique furniture  from its 110-year
past  into   the  office  renovation
plan.    The  year  ended  with  the
publicized   millennium  celebration
and  the   associated  Y2K  computer
century  date change.   Fortunately,
because   of    years   of   advance
preparation and a great deal of hard


                                       3<PAGE>

National Bankshares, Inc. and Subsidiaries
Selected Consolidated Financial Data

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

                                     1999     1998      1997    1996     1995
                                     ----     ----      ----    ----     ----
   Selected   Interest income      $ 33,603   31,828   29,797   28,647   28,094
   Income     Interest expense       14,203   13,928   13,106   13,036   12,703
   Statement  Net interest income    19,400   17,900   16,691   15,611   15,391
   Data:      Provision for loan
               losses                 1,400      624      435      331      282
              Noninterest income      3,512    3,174    2,834    2,693    2,382
              Noninterest expense    11,868   11,061   10,031    9,515   10,033
              Income taxes            2,556    2,591    2,499    2,341    1,933
              Net income              7,088    6,798    6,560    6,117    5,525

   Per Share  Basic net income     $   1.96     1.79     1.73     1.61     1.46
   Data:      Cash dividends
               declared                0.80     0.74     0.68     0.62     0.57
              Book value per
               share(1)               14.99    16.00    14.73    13.56    12.70

   Selected   Loans, net           $291,562  236,578  214,552  193,598  163,193
   Balance    Total securities      137,492  166,754  149,974  171,244  187,635
   Sheet      Total assets          472,134  445,166  402,907  388,850  380,915
   Data at    Total deposits        407,187  382,696  344,867  334,584  330,313
   End        Stockholders'
   of Year:    equity                52,723   58,503   54,029   49,801   48,154

   Selected   Loans, net           $266,431  225,613  204,540  177,419  160,643
   Balance    Total securities      151,424  152,432  157,179  177,403  183,994
   Sheet      Total assets          454,189  420,988  395,932  388,045  378,406
   Daily      Total deposits        391,583  359,970  339,439  335,938  330,261
   Averages:  Stockholders'
               equity(1)             56,196   58,282   53,712   49,459   45,726

   Selected   Return on average
   Ratios:     assets                  1.56     1.61     1.66     1.58     1.46
              Return on average
               equity(1)              12.61    11.66    12.21    12.37    12.08
              Dividend payout
               ratio                  39.70    41.29    39.31    37.55    37.32
              Average equity to
               average assets(1)      12.37    13.84    13.57    12.75    12.08

     (1)  Includes amount related to common stock subject to ESOP put option
          excluded from stockholders' equity on the Consolidated Balance Sheets
          in 1998, 1997 and 1996.

                        "Cash Dividends Per Share" Graph
(In Dollars)
              1999        1998        1997        1996        1995
              ----        ----        ----        ----        ----
              .80         .74         .68         .62         .57






                                       4<PAGE>

Management's Discussion and Analysis
($ In thousands, except per share data.)

PERFORMANCE SUMMARY
     Net  income in  1999 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 $7,088, an increase of  $290 or 4.27%
over the previous year.  This produced  a return on average assets and a return
on average equity of 1.56% and 12.61%, respectively.
     Net income for  the Company for 1998  was $6,798, an  increase of $238  or
3.63% over 1997.  The return on average assets and return on average equity for
1998 were 1.61% and 11.66%, respectively.
     The Company's  net income for 1997  was $6,560 which produced  a return on
average assets of 1.66% and a return on average equity of 12.21%.
     Basic net income per  share increased steadily over the  three-year period
rising from $1.73 per share in 1997 to $1.79 in 1998 and $1.96 in 1999.
     Net income for 1999  increased 4.27% as previously stated;  however, total
asset  growth increased at  a rate of  approximately 6%, resulting  in a slight
decline in the return on average assets.  The increase in the return on average
equity  for  1999  was the  result  of  increased  earnings  and a  decline  in
stockholders' equity.   This  decline  in stockholders'  equity  was due  to  a
combination of a stock repurchase that occurred in the second  quarter of 1999,
cash dividends  and a substantial  decline in  accumulated other  comprehensive
income.   The  dividend payout  ratio for  1999 was  39.70%, which  compares to
41.29% in 1998 and 39.31% in 1997.


                               "Net Income" Graph

(In Millions)

              1999        1998        1997        1996        1995
              ----        ----        ----        ----        ----
              7.1         6.8         6.6         6.1         5.5

NET INTEREST INCOME
     Net interest income for 1999 was $19,400, an increase of  $1,500 or  8.38%
over 1998.  In 1998,  net interest income was $17,900, up $1,209  or 7.24% from
1997 net interest income of $16,691.
     The net yield on earning assets for 1999 was 4.82%.  In 1998 and 1997, the
net yield on earning assets was 4.77% and 4.75%, respectively.
     During  1999, the Company continued to experience substantial loan growth,
which in turn contributed significantly to the increase in net interest income.
The improvement in the net interest margin of 5 basis points  was the result of
a  14 basis point  decline in the  yield on earning  assets combined with  a 19
basis point decline in the  cost to fund earning assets.  In the fourth quarter
of 1999, the Company changed  its method of accounting for loan  late fees from
cash  to  accrual basis.   As  a  result of  this change,  net  interest income
increased by $266.  This change was not deemed to be material.
     The Company experienced a higher level  of deposit growth in 1998 relative
to the preceding year.  This allowed loan growth to be funded by deposits.  The
investment portfolio grew as well.
     In 1997, management's strategy was to fund increases in the loan portfolio
through liquidity  generated  principally from  the securities  portfolio.   In
1997,  overall loan  growth was  strong, particularly  in commercial  loans and
loans to individuals.




                                       5<PAGE>

Management's Discussion and Analysis

INTEREST RATE SENSITIVITY
     The Company considers interest  rate risk to be a  significant market risk
and has  systems in place  to measure the exposure  of net interest  income and
fair  market values  to  adverse movement  in interest  rates.   Interest  rate
sensitivity analyses indicate repricing  opportunities, and interest rate shock
simulations  indicate  potential economic  loss  due  to future  interest  rate
changes.  Management realizes certain risks are inherent and minimizes these by
adjusting asset/liability management responses to changing economic conditions.
     The Company reduces the  volatility of its net interest income by managing
the relationship  of interest-rate sensitive assets  to interest-rate sensitive
liabilities.  In prior years, the Company has used its securities available for
sale as a  primary means to counter movements  in interest rates.   At December
31,  1999, this  portfolio  contained  a  substantial  amount  of  longer  term
securities with call  features.  Due  to an overall  increase in interest  rate
levels these  securities have not been  called as originally anticipated.   The
rising interest rate  levels also  resulted in  a substantial  increase in  net
unrealized losses making the sale of these securities impractical.   At present
and for an indeterminate amount of time in the future, the Company will  not be
able to  use the securities available for sale portfolio to respond to interest
rate movements  to the  extent possible  in  recent years.   This  risk can  be
mitigated, however,  by funds management,  specifically through  use of  credit
instruments offered by the Federal Home Loan Bank.   Accordingly, the Company's
vulnerability to upward movements of interest rates has increased.

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





















                                       6<PAGE>

National Bankshares, Inc. and Subsidiaries

                                 Loan Loss Data

   ($ In thousands)                           1999       1998        1997
                                              ----       ----        ----
   Provision for loan losses               $   1,400         624        435
   Net charge-offs to average
    net loans                                   0.31%       0.17%      0.28%
   Allowance for loan losses to
    loans, net of unearned
    income and deferred fees                    1.10%       1.12%      1.12%
   Allowance for loan losses to
    nonperforming loans                     1,691.62%   9,567.86%  2,802.30%
   Allowance for loan losses to
    nonperforming assets                      506.43%     408.38%    479.92%
   Nonperforming assets to loans,
    net of unearned income
    and deferred fees, plus
    other real estate owned                     0.22%       0.27%      0.23%

   Nonaccrual loans                        $     151          28         87
   Restructured loans                             40         ---        ---
   Other real estate owned, net                  447         628        421
                                           ---------   ---------  ---------
    Total nonperforming assets             $     638         656        508
                                           =========   =========  =========
   Accruing loans past due 90 days or more $   1,077         550        672
                                           =========   =========  =========

     Nonperforming  loans include nonaccrual loans  and restructured loans, but
do not include accruing loans  past due 90 days or more.   Nonperforming assets
for 1999 have decreased $18 or 2.74%  from 1998.  Nonperforming assets for 1998
increased by $148 or 29.13% from the 1997 total of $508.
     Net charge-offs to average net loans for 1999 were 0.31%, up from 0.17% in
1998.  In 1999, overall asset  quality continued to be satisfactory and general
economic conditions favorable.  The  provision for loan loss increased by  $776
or 124.36%.  This increased level of bad debt expense was primarily in response
to the growth  in the loan portfolio, but also  provided for additional losses.
Charge-offs in  the commercial loan  category increased by $153,  while charge-
offs on loans to individuals increased by $234.   A majority of the charge-offs
in the commercial loan  area was due to a  single credit, while charge-offs  on
loans to individuals consisted of numerous smaller credits.
     Net charge-offs to average net loans  for 1998 were 0.17%, down from  1997
when that ratio was 0.28%.  The provision for loan losses, which increased $189
in 1998 or 43.45% over 1997's provision  of $435, was increased to cover 1998's
net charge-offs and loan growth.  See note 5 of Notes to Consolidated Financial
Statements for  additional information relating  to nonperforming  assets, past
due loans, impaired loans and allowance for loan losses.
     While past efforts  directed at improving asset quality  have been largely
successful, management is  unable to estimate when  and under what  exact terms
problem assets will be resolved.   Changing economic conditions, the timing and
extent of changes and the ultimate impact on the Company's asset quality is not
within management's ability to predict with any degree of precision.
     In  addition, precise  loss  predictions  may  be difficult  to  determine
because of the complex circumstances that surround troubled debts.

NONINTEREST INCOME
     Noninterest income  for 1999 was $3,512, an increase of $338 or     10.65%
over 1998.   Noninterest  income for 1998  was $3,174,  up $340 or  12.00% from
1997.

                                       7<PAGE>

Management's Discussion and Analysis

     Service charges  on deposits for 1999 totaled  $1,395, an increase of $230
or 19.74%  from 1998.  This increase  was due in  part to  volume and  improved
collection efforts.  Service charges on deposit accounts in 1998 were up $34 or
3.01% from the  previous year.  The level of these  charges is driven by demand
deposit volume, types of  accounts opened, service charge rates in  effect, the
level of charges such as overdraft  fees and the waiver policy concerning these
fees.  The increase for  1998 was largely attributable to the  overall increase
in demand  deposit volume.  The  decrease for 1997 was  largely attributable to
fluctuations in overdraft volumes.
     Other service  charges and  fees are  composed of  safe deposit  box rent,
charges  associated with letters  of credit and other  miscellaneous items.  In
1999, these  charges were $279,  an increase of $48  or 20.78% from  1998.  For
1998, these charges totaled $231, a decrease of $19 or 7.60% from 1997.
     Trust income for  1999 was $927  which represents an  increase of $153  or
19.77% over 1998.  In 1998, trust income was $774, an increase of $36  or 4.88%
over 1997.  Factors affecting the growth in trust income include an increase in
the  number  of accounts  managed,  an increase  in  the average  value  of the
accounts  managed and  an increase  in  both the  number and  value of  estates
settled. Due  to its nature, estate  business volume and the  related income is
not within management's ability to predict.
     Credit  card income  is composed  of several  types of  fees and  charges,
including transaction or interchange fees, merchant discount fees and overlimit
charges.   In 1999, credit  card income  totaled $802, an  increase of  $149 or
22.82%  over 1998.   The  increase  in 1999  was attributable  to increases  in
merchant income  and debit card processing  fees.  Credit card  income for 1998
was  $653, up  $47 or  7.76% over  1997. Credit  card income increased  in 1998
largely because of a higher volume of interchange transactions, created in part
by the  Company's debit card  product.   The Company's debit  card product  was
introduced  late in the first quarter of  1997.  Accordingly, 1998 reflects the
first  full  year of  income  derived  from this  product.    Given the  highly
competitive  market which limits the  amount of set  charges, revenue increases
result from growth  in the number of merchant accounts  processed and increases
in the number of customer credit and debit card accounts that result in  higher
transaction volume.
     Net  realized securities gains were $24 in  1999, down $164 or 87.23% from
1998.   In 1998, net securities  gains were $188, up 408.11%  from 1997.  Gains
and losses can occur as a  result of portfolio restructuring, securities called
before maturity and certain market adjustments.

NONINTEREST EXPENSE
     Noninterest expense in 1999 totaled  $11,868, up $807 or 7.30%  from 1998.
In 1998, noninterest expense was $11,061,  an increase of $1,030 or 10.27% from
1997.
     Salaries and benefits in 1999 increased $224 or 3.85% from 1998.
     In 1998, salaries  and benefits expense  totaled $5,824, up $426  or 7.89%
from 1997.  The  increase in salaries was due in part to the acquisition of the
Galax office by NBB at the beginning of the second  quarter, salary adjustments
and from increases in other normal compensation related items.
     In early 2000, the Company's NBB subsidiary purchased a tract of land with
the  intent to establish a new branch facility.  The exact timing of the branch
application and construction processes has not been precisely determined.  When
completed, it is  expected that  this planned addition  will increase  salaries
expense as well as certain other noninterest expenses.
     Occupancy  and furniture and fixtures expense increased $154 or 15.43% for
1999 when compared to  1998.  This increase was due  to higher costs associated
with the Galax office acquired by NBB in the second quarter of 1998 and also to
regular planned  maintenance of  facilities.  Management  anticipates occupancy

                                       8<PAGE>

National Bankshares, Inc. and Subsidiaries

and  furniture  and fixtures  expense  will continue  to  increase  due to  the
addition of its Hubbard Street office placed in service in the third quarter of
1999 and the  previously mentioned planned new facility.  The expected increase
in occupancy  and furniture and fixtures  expense will be somewhat  offset by a
future reduction in expenses  for leased premises. Occupancy and  furniture and
fixtures expense experienced an increase in 1998 of 4.18% over 1997.
     Data processing and ATM expense  was $889 for 1999, an increase  over 1998
of  $118 or 15.30%.  This increase was due to costs associated with the upgrade
of information system hardware  and software and costs  related to an  expanded
microcomputer network.  In 1998,  data processing and ATM expense was  $771, an
increase of $193 or 33.39% over 1997.
     The cost of Federal Deposit Insurance was $47 in 1999, an increase  of $10
from 1998.  While  the banks' base premiums  remain at the minimum required  by
law, legislation enacted  in late 1996  levied an assessment  on banks for  the
purpose  of financing  certain  costs associated  with  the resolution  of  the
savings and loan crisis.  This additional  levy is expected to remain in effect
until 2018-2019.   In 1998, the Company's  affiliates paid a premium  of $37, a
decrease of $6 over 1997.
     Credit card processing expense for  1999 was $712, an increase of  $113 or
18.86%  over  1998.   In  1998, credit  card  processing expense  was  $599, an
increase  of 8.71%.    This increase  reflects additional  expense  due to  the
introduction of a debit card  product, higher merchant processing costs and  an
overall increase in business activity.
     Net costs of other real estate owned for 1999  were $26, a decrease of $11
or 29.73% from 1998.  In 1998, net  costs of other real estate owned were  $37,
increasing $29 from 1997.
     Other operating expenses were $2,956 in  1999, up $197 or 7.14% from 1998,
which  was  primarily  the result  of  increases  in  stationery and  supplies,
telephone and state franchise tax expense at BTC.  The  other operating expense
category in 1998 was $2,759, increasing 11.93% from 1997.

INCOME TAXES
     Despite higher  pre-tax  income in  1999,  a $35  decrease in  income  tax
expense resulted  when compared to 1998.   Tax exempt interest income continues
to be  the primary difference  between the "expected"  and reported income  tax
expense.   The  Company's effective  tax  rates for  1999, 1998  and 1997  were
26.50%, 27.60% and 27.59%, respectively.
     See note 10 of  Notes to Consolidated Financial Statements  for additional
information relating to income taxes.

EFFECTS OF INFLATION
     The Company's  consolidated statements of income  and comprehensive 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.

                              "Total Assets" Graph
($ In Millions)
              1999        1998        1997        1996        1995
              ----        ----        ----        ----        ----
             $472.1      445.2       402.9       388.9       380.9




                                       9<PAGE>

Management's Discussion and Analysis

                    "Net Loans" Graph

($ In Millions)

    1999        1998        1997        1996        1995
    ----        ----        ----        ----        ----
   $291.6       236.6       214.6       193.6       163.2

BALANCE SHEET
     Total assets at year-end  1999 were $472,134 which represents  an increase
of $26,968 or 6.06%  over the previous year.  The  Company's primary methods of
achieving growth are to seek increases in deposits at its bank subsidiaries and
to grow through corporate acquisitions and mergers.
     While deposit growth was strong in 1999, it was not sufficient to fund all
of  the Company's  investing  and financing  activities.   Deposit  growth  was
supplemented  in the fourth quarter by borrowing approximately $10,000 from the
Federal Home Loan Bank.  See the Liquidity section for further comments.
     In 1998, deposit growth was sufficient to fund loan growth as well as some
expansion  of the  securities portfolio.   Profitable growth continues  to be a
management objective.  In 1999 and 1998, total average deposits grew by $31,613
and  $20,531, respectively, which represents  growth rates of  8.78% and 6.05%,
respectively.

LOANS
     Loans,  net of  unearned income  and  deferred fees,  grew  by $55,536  or
23.21%  in 1999.   Commercial  loans grew  by $38,877  or 35.18% with  loans to
individuals increasing by $4,332 or  6.23%.  Loan growth  for the year 2000  is
not expected to reach 1999 levels.
     In 1998, loans, net of unearned income and deferred fees,  grew by $22,267
or 10.26%.  Commercial loans, which grew by $9,130 or 9.01%,  accounted for the
largest portion of the increase.
     The  Company engages in the origination and  sale of mortgage loans in the
secondary market.    In 1999  and  1998,  the Company  originated  $31,538  and
$41,472,  respectively,  and  sold  $33,489  and  $39,697  in  1999  and  1998,
respectively, of mortgage loans.

SECURITIES
     In  1999,  total  bank-owned securities  decreased  by  $29,262 or  17.55%
compared to 1998.  Securities available for sale declined by $22,233 or 16.34%,
while securities  held to maturity declined by $7,029 or 22.91%.  (See comments
in the Interest Rate Sensitivity section.)
     In 1998, total bank-owned  securities increased by $16,780 or  11.19% from
1997.
     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.
     At  December  31,   1999  and   1998,  the  Company   had  no   investment
concentrations in any  single issues (excluding U.S.  Government) that exceeded
ten percent of capital.

DEPOSITS
     At  year-end 1999, total deposits were $407,187 which represents a $24,491
or  6.4%  increase over  1998.    At December  31,  1998,  total deposits  were
$382,696, an increase of 10.97%  over 1997.  In the third quarter  of 1999, the

                                       10<PAGE>

National Bankshares, Inc. and Subsidiaries

Office  of  the Comptroller  of  Currency announced  the  closure of  a banking
institution in Keystone, West Virginia.  As a result of the closure, depositors
in that area  were forced to seek banking relationships with other institutions
in the  general area.  The  Company's BTC affiliate benefitted  from the event,
acquiring  new deposits  in excess of  $20,000.   This event  accounted for the
majority of the Company's deposit growth for 1999.
     Average noninterest-bearing deposits were $55,700 in 1999,  an increase of
$6,148  or 12.41%  over 1998.   In 1998, average  noninterest- bearing deposits
increased by $5,359 or 12.13% over 1997.
     Average interest-bearing  deposits were $335,883  in 1999, an  increase of
$25,465  over 1998.   In  1998, average  interest-bearing deposits  of $310,418
increased $15,172 from 1997.

DERIVATIVES AND MARKET RISK EXPOSURES
     The Company is  not a party to derivative financial  instruments with off-
balance sheet  risks such as futures, forwards, swaps and options.  The Company
is  a party  to  financial instruments  with  off-balance sheet  risks such  as
commitments  to   extend  credit,  standby  letters  of  credit,  and  recourse
obligations in the normal course of business to meet the financing needs of its
customers.   See  note 14  of Notes  to Consolidated  Financial  Statements for
additional information relating to financial instruments with off-balance sheet
risk.   Management does not plan any future involvement in high risk derivative
products.     The  Company  has  investments   in  mortgage-backed  securities,
principally  GNMA's, with a fair value of approximately $13,547, which includes
$2,142  of structured  notes.   In  addition, the  Company  has investments  in
nonmortgage-backed structured notes with a fair value of approximately  $4,297.
See  note  3  of Notes  to  Consolidated  Financial  Statements for  additional
information relating to securities.
     The Company's securities and loans are subject to credit and interest rate
risk and its deposits are subject  to interest rate risk.  Management considers
its credit risk when a loan  is granted and monitors its credit risk  after the
loan is granted.  The Company maintains an  allowance for loan losses to absorb
losses in  the collection of  its loans.  See  note 5 of  Notes to Consolidated
Financial Statements for information relating to nonperforming assets, past due
loans,  impaired loans and allowance for loan losses.   See note 15 of Notes to
Consolidated Financial Statements for information relating to concentrations of
credit risk.  The Company has an asset/liability program to manage its interest
rate risk.   This program provides management  with information related to  the
rate  sensitivity of certain assets and  liabilities and the effect of changing
rates on profitability and  capital accounts.   While this planning process  is
designed  to protect the Company  over the long term, it  does not provide near
term  protection from interest rate  shocks, as interest  rate sensitive assets
and  liabilities do not, by their nature, move up or down in tandem in response
to changes in the overall rate environment.  The Company's profitability in the
near term  may be temporarily affected either  positively by a falling interest
rate scenario or negatively  by a period of rising rates.  See note 16 of Notes
to  Consolidated Financial Statements for information relating to fair value of
financial instruments and comments concerning interest rate sensitivity.

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 1999 and
1998.   In  1999, the Company's  liquidity was  materially affected  by several
events.  As previously  discussed, the Company's available for  sale securities

                                       11<PAGE>

Management's Discussion and Analysis

portfolio experienced a significant level of net unrealized losses through much
of 1999 and at December 31, 1999, which limited, in the near term, its use as a
source of liquidity.  Deposit growth, however, during 1999 was strong, reducing
the effect  of the lack of liquidity  found in the securities  portfolio.  (See
comments  in the deposit section related to  the Keystone matter.)  Loan growth
and other  cash needs  did however  remain strong and  resulted in  the Company
borrowing $10,000 from the Federal Home Loan Bank on a short  term basis at its
NBB subsidiary.   Liquidity was also  affected by a stock  repurchase that used
cash  totaling $7,762  and  the  building  of  a  new  corporate  headquarters.
Management does not anticipate that 1999 loan growth levels will be repeated in
2000 and accordingly, believes that liquidity needs can be met by extensions of
credit  by the  Federal Home  Loan Bank,  as well  as federal  funds purchased.
Other needs  for cash  include the  planned building  of a  new  branch by  the
Company's NBB subsidiary.   The Company had approximately $43,000  in available
credit at the Federal Home  Loan Bank at December 31, 1999.   Overall, based on
available information, management does  not expect demands for cash in  2000 to
reach 1999 levels.
     Management  is not  aware of  any  other commitments  or events  that will
result in or are reasonably likely to result in a material and adverse decrease
in liquidity.
     Net cash from operating activities of  $11,448 in 1999 increased by $6,201
from  1998 primarily due to the  increase in the provision  for loan losses and
the  decrease in  mortgage loans  held for  sale.  Net  cash flows  provided by
operating  activities and financing activities for 1999 of $11,448 and $24,161,
respectively, were used primarily to fund loan growth.
     Net cash from operating activities of $5,247 in 1998 decreased $2,326 from
1997 due primarily to the  increase in mortgage loans  held for sale offset  by
the increase  in net income.   Net cash flows provided  by operating activities
and financing activities  for 1998  of $5,247 and  $34,751, respectively,  were
used to fund the net increases in federal funds sold, securities, loans made to
customers  and purchases of loan  participations of $790,  $15,429, $18,675 and
$4,635, respectively.

CAPITAL RESOURCES
     Total  stockholders'  equity  decreased  $7,986  from  1998  to  1999  and
increased $4,474 from 1997 to  1998.  Cash dividends on common stock  of $2,814
and the repurchase of common stock of $7,762, offset by net income, contributed
to  the  decrease in  1999.   In  addition,  net unrealized  gains  (losses) on
securities  available for sale, net of  deferred income taxes, were ($3,453) at
December 31, 1999, $1,019 at December  31, 1998 and $194 at December  31, 1997.
These  unrealized  net  gains and  losses  are  recorded  as accumulated  other
comprehensive income (loss), 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.
     In  the second  quarter of  1999, the Company  repurchased 275,856  of its
common  shares at  $28.00 per  share.   This  reduced  stockholders' equity  by
$7,762.
     The Company has operated from a consistently strong capital position.  The
ratio of total stockholders' equity to total assets was 11.17% at year end 1999
compared  to 13.14% at year  end 1998 and  13.41% at year end  1997.  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 banks'  risk-based capital ratios.
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

                                       12<PAGE>

National Bankshares, Inc. and Subsidiaries

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 Notes  to Consolidated Financial
Statements for additional information.

RECENT ACCOUNTING PRONOUNCEMENTS
     See  notes 1  and 19  of  Notes to  Consolidated Financial  Statements for
information relating to recent accounting pronouncements.

BUSINESS COMBINATIONS
     On December  26,  1997, NBB  entered  into an  agreement to  purchase  the
assets, including real estate  and improvements, and assume the  liabilities of
the  Galax,  Virginia branch  office of  First  American Federal  Savings Bank.
Settlement of this  purchase agreement occurred  on April 3,  1998 and did  not
have a material impact on the Company's results of operations or liquidity.

YEAR 2000
     The Company was  cognizant of the risks  posed by the Year 2000  issue for
Bank operations  and borrowers.  Subsequent  to December 31,  1999, the Company
was not aware of any information that indicates a significant vendor or service
provider may be unable to sell goods or provide services to the Company because
of Year 2000 issues.   Further, the Company has not received  any notifications
from borrowers or regulatory agencies  to which it is subject, nor is  it aware
of any  such information which  indicates that (1)  a borrower has  experienced
significant issues  which may impact its  ability to service its  loan or which
may  impact its  borrowing  agreement terms  or  covenants or  (2)  significant
regulatory action is being or may be  taken against the Company, as a result of
Year 2000 issues.
     The Company has not  experienced any significant disruptions  to financial
or operating  activities caused by  failure in  computerized systems  resulting
from Year 2000 issues.  Management  does not expect Year 2000 issues to  have a
material adverse effect  on the  Company's operations or  financial results  in
2000.
     The  Company was  prepared  for the  millennium  change and  continues  to
successfully  operate and  handle the transactions  of customers  subsequent to
December 31, 1999.

COMMON STOCK INFORMATION AND DIVIDENDS
     Effective December 1, 1999, National Bankshares, Inc.'s common stock began
trading  on  the Nasdaq  SmallCap Market  under the  symbol  "NKSH".   Prior to
December 1,  1999, National  Bankshares, Inc.'s  common stock was  traded on  a
limited basis in the over-the-counter market and was not listed on any exchange
or quoted on Nasdaq.  As of December 31, 1999, there were 1,109 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 1999 and  1998.  Prices prior to  December 1, 1999 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.









                                       13<PAGE>

                           Common Stock Market Prices

                                                          Dividends
                               1999           1998        Per Share
                            High    Low    High    Low    1999    1998
                            ----    ---    ----    ---    ----    ----
          First Quarter    $26.00  22.00  $27.75  24.75    ---    ---
          Second Quarter    27.50  24.00   28.00  26.50   0.39   0.36
          Third Quarter     25.00  22.00   27.50  23.25    ---    ---
          Fourth Quarter    23.50  19.75   24.25  21.25   0.41   0.38

     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  Notes to  Consolidated
Financial Statements.












































                                       14<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, 1999 and  1998, and the
related consolidated statements of income and comprehensive income, changes  in
stockholders' equity,  and cash flows for  each of the years  in the three-year
period  ended December 31, 1999.   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  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  provide a reasonable basis
for our opinion.

In our opinion, 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,  1999 and 1998,  and the
results  of their operations and their cash flows  for each of the years in the
three-year period ended December 31, 1999 in conformity with generally accepted
accounting principles.

As discussed in note 1(S) to the consolidated financial statements, the Company
adopted  the provisions of Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and  Hedging Activities," as of  October
1, 1998.


                                                  /S/KPMG LLP




Roanoke, Virginia
February 11, 2000














                                       15<PAGE>
<TABLE>
National Bankshares, Inc. and Subsidiaries
Consolidated Balance Sheets

<CAPTION>
$ In thousands, except share and per share data.
 December 31, 1999 and 1998                                        1999      1998
                                                                   ----      ----
<S>          <C>                                                 <C>        <C>
Assets       Cash and due from banks (notes 2 and 16)            $ 13,311    14,421
             Interest-bearing deposits (note 16)                    9,219     7,027
             Federal funds sold (note 16)                           2,800     5,090
             Securities available for sale (notes 3 and 16)       113,845   136,078
             Securities held to maturity (fair value $23,496
              in 1999 and $31,151 in 1998) (notes 3 and 16)        23,647    30,676
             Mortgage loans held for sale (notes 14, 15 and 16)       229     2,180
             Loans (notes 4, 5, 15 and 16):
                  Real estate construction loans                   14,669    12,827
                  Real estate mortgage loans                       58,829    48,724
                  Commercial and industrial loans                 149,386   110,509
                  Loans to individuals                             73,825    69,493
                                                                 --------   -------
                       Total loans                                296,709   241,553

                  Less unearned income and deferred fees           (1,916)   (2,296)
                                                                 --------   -------
                       Loans, net of unearned income and
                        deferred fees                             294,793   239,257

                  Less allowance for loan losses (note 5)          (3,231)   (2,679)
                                                                 --------   -------
                       Loans, net                                 291,562   236,578
                                                                 --------   -------

             Bank premises and equipment, net (note 6)              8,506     6,657
             Accrued interest receivable                            4,014     3,777
             Other real estate owned, net (note 5)                    447       628
             Other assets (note 10)                                 4,554     2,054
                                                                 --------   -------

                       Total assets                              $472,134   445,166
                                                                 ========   =======

Liabilities  Noninterest-bearing demand deposits                 $ 54,748    55,479
and          Interest-bearing demand deposits                      88,385    84,319
Stockholders'Savings deposits                                      44,834    46,387
Equity       Time deposits (note 7)                               219,220   196,511
                                                                 --------   -------

                       Total deposits (note 16)                   407,187   382,696
                                                                 --------   -------

             Other borrowed funds (notes 3 and 16)                 10,460       214
             Accrued interest payable                                 651       647
             Other liabilities (note 8)                             1,113       926
                                                                 --------   -------

                       Total liabilities                          419,411   384,483
                                                                 --------   -------



                                          16<PAGE>

             Common stock subject to ESOP put option (note 8)         ---     2,180
                                                                 --------   -------

             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
                   3,516,977 shares in 1999 and 3,792,833 in
                   1998                                             8,792     9,482
                  Retained earnings                                47,384    50,182
                  Accumulated other comprehensive income (loss)    (3,453)    1,019
                  Common stock subject to ESOP put option
                   (77,301 shares at $28.20 per share in
                    1998)(note 8)                                     ---    (2,180)
                                                                 --------   -------

                       Total stockholders' equity                  52,723    58,503

             Commitments and contingent liabilities (notes 6, 8,
              and 14)
                                                                 --------   -------
                       Total liabilities and stockholders'
                        equity                                   $472,134   445,166
                                                                 ========   =======































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

                                          17<PAGE>

National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Income and Comprehensive Income

$ In thousands, except per share data. Years ended
December 31, 1999, 1998 and 1997                        1999      1998      1997
                                                        ----      ----      ----
Interest    Interest and fees on loans                $ 24,105    21,691  19,553
Income      Interest on federal funds sold                 170       345     451
            Interest on interest-bearing deposits          269       696     230
            Interest on securities - taxable             6,820     7,201   7,776
            Interest on securities - nontaxable          2,239     1,895   1,787
                                                      --------  -------- -------

                 Total interest income                  33,603    31,828  29,797
                                                      --------  -------- -------

Interest    Interest on time deposits of $100,000 or
Expense      more                                        2,487     2,457   2,335
            Interest on other deposits                  11,484    11,460  10,754
            Interest on borrowed funds                     232        11      17
                                                      --------  -------- -------

                 Total interest expense                 14,203    13,928  13,106
                                                      --------  -------- -------

                 Net interest income                    19,400    17,900  16,691

            Provision for loan losses (note 5)           1,400       624     435
                                                      --------  -------- -------
                 Net interest income after
                  provision for loan losses             18,000    17,276  16,256
                                                      --------  -------- -------

Noninterest Service charges on deposit accounts          1,395     1,165   1,131
Income      Other service charges and fees                 279       231     250
            Credit card fees                               802       653     606
            Trust income                                   927       774     738
            Other income                                    85       163      72
            Realized securities gains, net (note 3)         24       188      37
                                                      --------  -------- -------

                 Total noninterest income                3,512     3,174   2,834
                                                      --------  -------- -------

Noninterest Salaries and employee benefits (note 8)      6,048     5,824   5,398
Expense     Occupancy and furniture and fixtures         1,152       998     958
            Data processing and ATM                        889       771     578
            FDIC assessment                                 47        37      43
            Credit card processing                         712       599     551
            Goodwill amortization                           38        36      30
            Net costs of other real estate owned            26        37       8
            Other operating expenses                     2,956     2,759   2,465
                                                      --------  -------- -------

                 Total noninterest expense              11,868    11,061  10,031
                                                      --------  -------- -------




                                          18<PAGE>

            Income before income tax expense             9,644     9,389   9,059
            Income tax expense (note 10)                 2,556     2,591   2,499
                                                      --------  -------- -------

                 Net income                              7,088     6,798   6,560
                                                      --------  -------- -------
            Other comprehensive income (loss), net of
              income taxes:
              Net unrealized gains (losses) on
               securities available for sale (notes
               1(R), 1(S) and 18):
                Arising during the year                 (4,472)      356     442
                Cumulative accounting change               ---       469     ---
                                                      --------  -------- -------

                 Total other comprehensive income
                  (loss)                                (4,472)      825     442
                                                      --------  -------- -------

                 Comprehensive income                 $  2,616     7,623   7,002
                                                      ========  ======== =======

                 Basic net income per share (note
                  1(N))                               $   1.96      1.79    1.73
                                                      ========  ======== =======
































See accompanying notes to consolidated financial statements.


                                          19<PAGE>

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

<CAPTION>

                                                                           Common
                                                                           Stock
                                                            Accumulated   Subject
$ In thousands, except per share                               Other      to ESOP
data.  Years ended December 31, 1999,   Common   Retained  Comprehensive    Put
1998 and 1997.                          Stock    Earnings  Income (Loss)   Option    Total
                                        ------   --------  -------------  -------    -----
<S>                                     <C>      <C>       <C>            <C>        <C>
Balances, December 31, 1996             $ 9,482   42,210         (248)     (1,643)   49,801
Net income                                  ---    6,560          ---         ---     6,560
Cash dividends ($0.68 per share)            ---   (2,579)         ---         ---    (2,579)
Change in net unrealized gains
 (losses) on securities available for
 sale, net of income tax expense of
 $228                                       ---      ---          442         ---       442
Change in common stock subject to
 ESOP put option                            ---      ---          ---        (195)     (195)
                                        -------   ------       ------      ------    ------

Balances, December 31, 1997               9,482   46,191          194      (1,838)   54,029
Net income                                  ---    6,798          ---         ---     6,798
Cash dividends ($0.74 per share)            ---   (2,807)         ---         ---    (2,807)
Change in net unrealized gains
 (losses) on securities available
 for sale, net of income tax expense
 of $425:
  Arising during the year, net of
   income tax expense of $183               ---      ---          356         ---       356
  Cumulative accounting change, net
   of income tax expense of $242
   (note 1(S))                              ---      ---          469         ---       469
                                        -------   ------       ------      ------    ------
      Total                                 ---      ---          825         ---       825
                                        -------   ------       ------      ------    ------
Change in common stock subject to
 ESOP put option                            ---      ---          ---        (342)     (342)
                                        -------   ------       ------      ------    ------

Balances December 31, 1998                9,482   50,182        1,019      (2,180)   58,503
Net income                                  ---    7,088          ---         ---     7,088
Cash dividends ($0.80 per share)            ---   (2,814)         ---         ---    (2,814)
Change in net unrealized gains
 (losses) on securities available
 for sale, net of income tax benefit
 of $2,304                                  ---      ---       (4,472)        ---    (4,472)
Common stock repurchase                    (690)  (7,072)         ---         ---    (7,762)
Change in common stock subject to
 ESOP put option (note 8)                   ---      ---          ---       2,180     2,180
                                        -------   ------       ------      ------    ------
Balances, December 31, 1999             $ 8,792   47,384       (3,453)        ---    52,723
                                        =======   ======       ======      ======    ======


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

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

<CAPTION>
$ In thousands. Years ended December 31, 1999, 1998 and
1997                                                           1999      1998       1997
                                                               ----      ----       ----
<S>                                                            <C>       <C>        <C>
Cash Flows  Net income                                       $  7,088     6,798     6,560
from        Adjustments to reconcile net income to net cash
Operating    provided by operating activities:
Activities       Provision for loan losses                      1,400       624       435
(Note 13)        Recovery of bond losses                          ---       ---       (10)
                 Provision for deferred income taxes             (214)     (135)      300
                 Depreciation of bank premises and
                  equipment                                       903       811       586
                 Amortization of intangibles                      152       144       121
                 Amortization of premiums and accretion of
                  discounts, net                                  350        87        11
                 Gains on sales and calls of
                  securities available for sale, net              (20)     (145)       (5)
                 Gains on calls of securities held to
                  maturity, net                                    (4)      ---       ---
                 Other                                             22      (135)      (18)
                 (Increase) decrease in:
                      Mortgage loans held for sale              1,951    (1,775)      111
                      Accrued interest receivable                (237)     (332)       65
                      Other assets                               (134)     (580)      (76)
                 Increase (decrease) in:
                      Accrued interest payable                      4       (75)       22
                      Other liabilities                           187       (40)     (529)
                                                             --------  --------   -------
                           Net cash provided by operating
                            activities                         11,448     5,247     7,573
                                                             --------  --------   -------

Cash Flows  Net (increase) decrease in federal funds sold       2,290      (790)   (2,390)
from        Net (increase) decrease in interest-bearing
Investing    deposits                                          (2,192)    2,701    (9,637)
Activities  Proceeds from repayments of mortgage-backed
(Note 13)    securities available for sale                      4,558     1,065       396
            Proceeds from sales of other securities
             available for sale                                 1,300     2,999       ---
            Proceeds from calls and maturities of other
             securities available for sale                     21,495    35,180     9,443
            Proceeds from calls and maturities of
             securities held to maturity                        6,997    34,187    35,673
            Purchases of mortgage-backed securities
             available for sale                                   ---   (14,175)      ---
            Purchases of other securities available for
             sale                                             (12,190)  (73,685)  (12,201)
            Purchases of securities held to maturity              ---    (1,000)  (11,345)
            Purchases of loan participations                   (5,643)   (4,635)   (6,189)
            Collections of loan participations                  3,408     4,074     1,934
            Loans purchased, including premium                    ---    (4,051)      ---
            Net increase in loans made to customers           (54,456)  (18,675)  (17,400)
            Proceeds from disposal of other real estate
             owned                                                336       194       216





                                          21<PAGE>

            Recoveries on loans charged off                       130       255       107
            Bank premises and equipment expenditures           (2,757)   (1,770)   (1,304)
            Proceeds from sale of bank premises and
             equipment                                              5       114         8
                                                             --------  --------   -------
                           Net cash used in investing
                            activities                        (36,719)  (38,012)  (12,689)
                                                             --------  --------   -------

Cash Flows  Deposits acquired, net of premium                     ---     7,016       ---
from        Net increase in time deposits                      22,709    14,357     6,618
Financing   Net increase in other deposits                      1,782    16,456     3,665
Activities  Net increase (decrease) in other borrowed funds    10,246      (271)     (142)
(Note 13)   Cash dividends paid                                (2,814)   (2,807)   (2,579)
            Common stock repurchase                            (7,762)      ---       ---
                                                             --------  --------   -------
                           Net cash provided by
                            financing activities               24,161    34,751     7,562
                                                             --------  --------   -------
            Net increase (decrease) in cash and due from
             banks                                             (1,110)    1,986     2,446
            Cash and due from banks at beginning of year       14,421    12,435     9,989
                                                             --------  --------   -------
            Cash and due from banks at end of year           $ 13,311    14,421    12,435
                                                             ========  ========   =======





























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

                                          22<PAGE>

National Bankshares, Inc. and Subsidiaries

$ In thousands, except share and per share data.
December 31, 1999, 1998 and 1997

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.
     The following is a summary of the more significant accounting policies.

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

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

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

     (D)  Loans
          Loans are stated at the amount of funds disbursed plus the applicable
     amount,  if  any,  of unearned  income  and  deferred  fees less  payments
     received.   Income  on installment  loans, including  impaired installment
     loans that  have not been  placed in nonaccrual  status, is  recognized on
     methods which approximate  the level yield method.   Interest on all other
     loans,  including  impaired  other loans  that  have  not  been placed  in
     nonaccrual status, is accrued  based on the balance outstanding  times the
     applicable interest rate.
          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.   All
     interest accrued but not collected for loans that are placed on nonaccrual
     status or charged-off is  reversed against interest income.   The interest
     on  these loans is  accounted for on  the cash basis  until qualifying for
     return  to accrual.   Loans are  returned to  accrual status  when all the
     principal and interest  amounts contractually due are  brought current and
     future payments are reasonably assured.
          Impaired loans are presented in the consolidated 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.   This  requirement

                                       23<PAGE>

Notes to Consolidated Financial Statements

     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.
          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.
          Mortgage loans held for sale are carried at the lower of cost or fair
     value on an individual loan basis.

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

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

     (G)  Other Real Estate Owned
          Other  real estate, acquired through  foreclosure or deed  in lieu of
     foreclosure,  is carried  at the lower  of the recorded  investment or its
     fair value, less estimated costs to sell (net realizable value).  When the
     property is acquired,  any excess of the loan balance  over net realizable
     value is charged to the  allowance for loan losses.  Subsequent  decreases
     in the  net realizable value of  such properties are 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 $592 and $706  at
     December 31, 1999 and 1998, respectively, and goodwill of $382 and $420 at
     December 31, 1999 and  1998, 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)  Stock Option Plan
          Effective  March   10,  1999,   the  Company  adopted   the  National
     Bankshares,  Inc. 1999  Stock  Option  Plan.    The  Company  applies  the
     intrinsic  value-based  method  of  accounting  prescribed  by  Accounting
     Principles Board (APB)  Opinion No.  25, "Accounting for  Stock Issued  to
     Employees," and related interpretations, in  accounting for its fixed plan
     stock  options.   As such, compensation  expense would be  recorded on the
     date of grant  only if the  current market price  of the underlying  stock
     exceeded the  exercise price.  Statement of Financial Accounting Standards
     No. 123, "Accounting for Stock-Based Compensation," established accounting
     and disclosure requirements using a fair  value-based method of accounting
     for stock-based employee compensation plans.  As allowed by Statement 123,

                                       24<PAGE>

National Bankshares, Inc. and Subsidiaries

     the Company has  elected to  continue to apply  the intrinsic  value-based
     method  of  accounting described  above,  and has  adopted  the disclosure
     requirements of Statement 123.

     (J)  Impairment of Long-Lived  Assets and Long-Lived Assets to Be Disposed
          Of
          Long-lived assets and  certain identifiable intangibles  are 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  undiscounted 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.

     (K)  Pension Plans
          On  January  1, 1998,  the  Company  adopted Statement  of  Financial
     Accounting  Standards No.  132, "Employers'  Disclosure about  Pension and
     Other  Post-retirement Benefits."    Statement 132  revises the  Company's
     disclosure  about  pension   and  other  post-retirement  benefit   plans.
     Statement 132 does not change the method of accounting for such plans.
          The Company sponsors two separate defined benefit pension plans which
     cover  substantially all full-time  officers and employees.   The benefits
     are  based upon  length  of service  and a  percentage  of the  employee's
     compensation  during the  final years  of employment.   Pension  costs are
     computed  based  upon  the  provisions  of  Statement  87.    The  Company
     contributes to the pension plans amounts deductible for federal income tax
     purposes.

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

     (M)  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.

     (N)  Net Income Per Share
          Basic net income per share is based upon the weighted average  number
     of common shares outstanding  (3,607,669 shares in 1999, and  3,792,833 in
     1998 and 1997).   Stock  options that could  potentially dilute basic  net
     income per share  in the future that were not  included in the computation
     of  diluted  net  income  per  share because  to  do  so  would  have been
     antidilutive totaled 5,500 at December 31, 1999 (see note 9).


                                       25<PAGE>

Notes to Consolidated Financial Statements

          In  February 1997,  the Financial  Accounting Standards  Board issued
     Statement of Financial Accounting Standards No. 128, "Earnings per Share."
     Statement  128  established new  standards  for  computing and  presenting
     earnings per share (EPS) and applies to entities with publicly-held common
     stock or potential common stock.
          Basic  EPS  excludes dilution  and  is  computed by  dividing  income
     available to common stockholders by the weighted-average  number of common
     shares outstanding for  the period.   Diluted EPS  reflects the  potential
     dilution that could occur if securities or other contracts to issue common
     stock were  exercised or converted  into common  stock or resulted  in the
     issuance of common stock that then shared in the earnings of the entity.
          Statement 128 was adopted by the Company at December 31, 1997.

     (O)  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.

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

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

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

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






                                       26<PAGE>

National Bankshares, Inc. and Subsidiaries

               Fair  value  for significant  nonperforming  loans  is based  on
          estimated cash flows which  are discounted using a  rate commensurate
          with  the risk associated with the estimated cash flows.  Assumptions
          regarding credit risk, cash flows and discount rates are judgmentally
          determined using  available market information  and specific borrower
          information.

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

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

          (6)  Commitments to Extend Credit and Standby Letters of Credit
               The  only amounts  recorded  for commitments  to extend  credit,
          standby letters of  credit and financial  guarantees written are  the
          deferred fees arising from these unrecognized  financial instruments.
          These deferred fees are  not deemed significant at December  31, 1999
          and  1998,  and as  such,  the  related  fair  values have  not  been
          estimated.

     (Q)  Transfers and  Servicing of  Financial Assets and  Extinguishments of
          Liabilities
          The  Company adopted the provisions of Statement No. 125, "Accounting
     for Transfers  and Servicing  of Financial  Assets and Extinguishments  of
     Liabilities,"  on January 1, 1997.  This Statement provides accounting and
     reporting  standards for transfers  and servicing of  financial assets and
     extinguishments  of  liabilities  based  on consistent  application  of  a
     financial-components  approach  that  focuses  on  control.    Under  that
     approach, after a transfer  of financial assets, an entity  recognizes the
     financial  and servicing  assets it  controls and  the liabilities  it has
     incurred, derecognizes financial assets when control has been surrendered,
     and derecognizes  liabilities when extinguished.   This Statement provides
     consistent standards for distinguishing transfers of financial assets that
     are sales from transfers that are secured borrowings.  This Statement also
     provides implementation guidance  for assessing  isolation of  transferred
     assets and for accounting for transfers of partial interests, servicing of
     financial assets,  securitizations,  transfers of  sales-type  and  direct
     financing  lease receivables, securities  lending transactions, repurchase
     agreements including  "dollar rolls," "wash sales,"  loan syndications and
     participations,  risk participations  in  banker's acceptances,  factoring
     arrangements,  transfers of receivables with recourse, and extinguishments
     of liabilities.   Statement No.  127, "Deferral of  the Effective  Date of
     Certain Provisions  of Statement 125,"  issued in December  1996, deferred
     until January  1, 1998 the effective date (a) of paragraph 15 of Statement
     125 and (b) for repurchase agreement, dollar-roll, securities lending, and
     similar transactions,  of paragraphs  9-12 and  237(b)  of Statement  125.
     Statement 125  was required to be  adopted on a prospective  basis and its
     adoption  did  not  have a  material  impact  on  the Company's  financial
     position, results of operations or liquidity.

                                       27<PAGE>

Notes to Consolidated Financial Statements

     (R)  Comprehensive Income
          On  January  1,  1998, the  Company  adopted  Statement of  Financial
     Accounting Standards No. 130, "Reporting Comprehensive Income."  Statement
     130 establishes standards for  reporting and presentation of comprehensive
     income  and  its components  in a  full set  of general  purpose financial
     statements.    Statement  130 was  issued  to  address  concerns over  the
     practice of reporting elements of comprehensive income directly in equity.
          The  Company is  required to classify  items of  "Other Comprehensive
     Income" [such as net unrealized gains (losses) on securities available for
     sale] by their nature in a financial statement and present the accumulated
     balance of  other comprehensive  income separately from  retained earnings
     and additional paid-in-capital  in the  equity section of  a statement  of
     financial   position.    It  does   not  require  per   share  amounts  of
     comprehensive income to be disclosed.
          In accordance with the  provisions of the Statement, the  Company has
     included Consolidated Statements of Income and Comprehensive Income in the
     accompanying  consolidated financial  statements.    Comprehensive  income
     consists of net  income and  net unrealized gains  (losses) on  securities
     available for sale.   Also, accumulated other  comprehensive income (loss)
     is included as a separate disclosure within the Consolidated Statements of
     Changes in Stockholders' Equity in the accompanying consolidated financial
     statements.  The adoption of Statement 130 did not have  any effect on the
     Company's  consolidated   financial  position,  results  of  operation  or
     liquidity.

     (S)  Derivatives
          In  June  1998,  the  Financial  Accounting  Standards  Board  issued
     Statement  of  Financial Accounting  Standards  No.  133, "Accounting  for
     Derivative  Instruments  and Hedging  Activities."    The Company  adopted
     Statement  133 as of October 1, 1998.   In connection with the adoption of
     Statement 133, the Company transferred securities with a carrying value of
     approximately $20,516 from  held to maturity to available for  sale.  This
     transfer  of securities  resulted in  an increase  in unrealized  gains on
     securities  available for  sale, comprehensive  income, accumulated  other
     comprehensive income  and stockholders' equity of  approximately $469, net
     of income taxes  of $242, as of  October 1, 1998,  which is reported as  a
     cumulative effect of an accounting change.  Except as discussed above, the
     adoption  of  Statement  133  did  not  have  a  material  effect  on  the
     consolidated financial position, results of operations or liquidity of the
     Company.

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







                                       28<PAGE>

National Bankshares, Inc. and Subsidiaries

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 $5,285  and $4,813 for the weeks including  December 31, 1999
and 1998, respectively.

Note 3: Securities
     The amortized  costs, gross unrealized gains, gross  unrealized losses and
fair values  for securities  available for  sale by major  security type  as of
December 31, 1999 and 1998 are as follows:

                                         December 31, 1999

                                           Gross     Gross
                              Amortized Unrealized Unrealized   Fair
($ In thousands)                Costs      Gains     Losses    Values
                              --------- ---------- ----------  ------
Available for sale:
 U.S. Treasury                $  6,244        7         87       6,164
 U.S. Government agencies
  and corporations              50,373        7      2,882      47,498
 States and political
  subdivisions                  32,903      112      1,398      31,617
 Mortgage-backed securities     13,464        8        296      13,176
 Corporate debt securities      14,349      ---        703      13,646
 Federal Home Loan Bank
  stock                          1,329      ---        ---       1,329
 Federal Reserve Bank stock        247      ---        ---         247
 Other securities                  168      ---        ---         168
                              --------   ------      -----     -------
     Total securities
      available for sale      $119,077      134      5,366     113,845
                              ========   ======      =====     =======


                                         December 31, 1998

                                           Gross     Gross
                              Amortized Unrealized Unrealized   Fair
($ In thousands)                Costs      Gains     Losses    Values
                              --------- ---------- ----------  ------
Available for sale:
 U.S. Treasury                $  9,253      418        ---       9,671
 U.S. Government agencies
  and corporations              59,365      369       (139)     59,595
 States and political
  subdivisions                  32,183      786       (104)     32,865
 Mortgage-backed securities     17,282       12        (94)     17,200
 Corporate debt securities      14,528      331        (35)     14,824
 Federal Home Loan Bank
  stock                          1,214      ---        ---       1,214
 Federal Reserve Bank stock        247      ---        ---         247
 Other securities                  462      ---        ---         462
                              --------   ------      -----     -------
     Total securities
      available for sale      $134,534    1,916       (372)    136,078
                              ========   ======      =====     =======

                                       29<PAGE>

Notes to Consolidated Financial Statements

     The  amortized  costs  and  fair  values  of  single  maturity  securities
available for  sale at December  31, 1999, 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, 1999.


                                               December 31, 1999

                                               Amortized   Fair
      ($ In thousands)                           Costs    Values
                                               ---------  ------
      Due in one year or less                  $  4,170     4,168
      Due after one year through five years      21,629    21,423
      Due after five years through ten years     40,667    38,984
      Due after ten years                        51,037    47,695
      No maturity                                 1,574     1,575
                                               --------   -------

                                               $119,077   113,845
                                               ========   =======

     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, 1999 and 1998 are as follows:

                                                  December 31, 1999

                                                    Gross      Gross
                                       Amortized Unrealized Unrealized   Fair
         ($ In thousands)                Costs      Gains     Losses    Values
                                       --------- ---------- ----------  ------
         Held to maturity:
          U.S. Treasury                 $   500        ---      ---         500
          U.S. Government agencies
           and corporations               5,500        ---      230       5,270
          States and political
           subdivisions                  17,283        117       45      17,355
          Mortgage-backed securities        364          7      ---         371
                                        -------    -------    -----     -------
              Total securities held
               to maturity              $23,647        124      275      23,496
                                        =======    =======    =====     =======













                                       30<PAGE>

National Bankshares, Inc. and Subsidiaries

                                                  December 31, 1998

                                                    Gross      Gross
                                       Amortized Unrealized Unrealized   Fair
         ($ In thousands)                Costs      Gains     Losses    Values
                                       --------- ---------- ----------  ------
         Held to maturity:
          U.S. Treasury                 $ 1,006          3      ---       1,009
          U.S. Government agencies
           and corporations               7,497         55     (121)      7,431
          States and political
           subdivisions                  21,160        537      (18)     21,679
          Mortgage-backed securities        513         17      ---         530
          Corporate debt securities         500          2      ---         502
                                        -------    -------    -----     -------
              Total securities held
               to maturity              $30,676        614     (139)     31,151
                                        =======    =======    =====     =======

     The  amortized costs and fair values of single maturity securities held to
maturity  at  December 31,  1999,  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, 1999.

                                                    December 31, 1999

                                                    Amortized    Fair
            ($ In thousands)                          Costs     Values
                                                    ---------   ------
            Due in one year or less                  $ 2,602     2,606
            Due after one year through five years     15,868    15,817
            Due after five years through ten years     3,877     3,779
            Due after ten years                        1,300     1,294
                                                     -------   -------

                                                     $23,647    23,496
                                                     =======   =======

     There were no sales  of securities held to  maturity during 1999, 1998  or
1997.
     The  carrying  value of  securities  pledged to  secure  public  and trust
deposits, and for other purposes  as required or permitted by law,  was $46,937
at December 31, 1999 and $21,629 at December 31, 1998.
     As members of the Federal Reserve and the Federal Home Loan Bank (FHLB) of
Atlanta, NBB and BTC  are required to  maintain certain minimum investments  in
the common stock of  those entities.  Required  levels of investment are  based
upon NBB and BTC's capital and a percentage of qualifying assets.  In addition,
NBB and BTC are eligible to borrow from the FHLB with borrowings collateralized
by qualifying  assets, primarily residential mortgage loans,  and NBB and BTC's
capital stock investment  in the  FHLB.  At  December 31,  1999, the  available
borrowing  limit  was  approximately  $53,000,  of  which  NBB  had  $10,000 in
borrowings outstanding  at December 31, 1999.  The note is due in February 2000
and bears interest at a fixed rate of 5.93 percent.


                                       31<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,
1999 and 1998, there were  direct loans to executive officers and  directors of
$1,566 and $1,782,  respectively.  In  addition, there were  loans of $357  and
$1,844 at  December 31, 1999  and 1998,  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)                            1999
                                                    ------------
           Aggregate balance, beginning of year       $ 3,626
           Additions                                    2,601
           Collections                                 (4,304)
                                                      -------

           Aggregate balance, end of year             $ 1,923
                                                      =======


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

     Nonperforming assets consist of the following:

                                                         December 31,
           ($ In thousands)                       1999       1998       1997
                                                  ----       ----       ----
           Nonaccrual loans                      $   151         28        87
           Restructured loans                         40        ---       ---
           Other real estate owned, net              447        628       421
                                                 -------    -------    ------

                Total nonperforming assets       $   638        656       508
                                                 =======    =======    ======
           Accruing loans past due 90 days or
            more                                 $ 1,077        550       672
                                                 =======    =======    ======


     There were no material  commitments to lend additional funds  to customers
whose loans were classified as nonperforming at December 31, 1999.
     The following  table shows  the interest  that would  have been  earned on
nonaccrual  loans if they  had been current  in accordance  with their original
terms and the recorded interest that was earned and included in income on these
loans:





                                       32<PAGE>

National Bankshares, Inc. and Subsidiaries


                                                    Years ended December 31,
           ($ In thousands)                         1999      1998      1997
                                                    ----      ----      ----

           Scheduled interest:
            Nonaccrual loans                       $    13         4        8
                                                   =======    ======   ======
           Recorded interest:
            Nonaccrual loans                       $   ---       ---        1
                                                   =======    ======   ======

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

                                                    Years ended December 31,
           ($ In thousands)                         1999      1998      1997
                                                    ----      ----      ----

           Balances, beginning of year             $    93        68       96
           Provision for other real estate owned         8        25      ---
           Write-offs                                  ---       ---      (28
                                                   -------   -------    -----

           Balances, end of year                   $   101        93       68
                                                   =======   =======    =====

     At December  31, 1999, the  recorded investment  in loans which  have been
identified as  impaired loans, totaled  $317.  Of  this amount, $95  related to
loans   with  no  valuation  allowance  and   $222  related  to  loans  with  a
corresponding valuation allowance of $154.  At December 31, 1998, the  recorded
investment in  loans which have been identified as impaired loans totaled $373.
Of  this amount, $228  related to  loans with  no valuation allowance  and $145
related to loans with a corresponding valuation allowance of $145.
     For the year ended December  31, 1999, the average recorded investment  in
impaired loans was approximately $292, and the total interest income recognized
on impaired  loans was $13 of which $0 was recognized on a cash basis.  For the
year ended December 31, 1998, the average recorded investment in impaired loans
was approximately  $387, and the  total interest income recognized  on impaired
loans was $32 of which $0  was recognized on a cash basis.  For  the year ended
December  31, 1997,  the  average  recorded investment  in  impaired loans  was
approximately $458, and the total  interest income recognized on impaired loans
was $23 of which $12 was recognized on a cash basis.
     Changes in the allowance for loan losses are as follows:

                                                   Years ended December 31,
           ($ In thousands)                       1999       1998       1997
                                                  ----       ----       ----
           Balances, beginning of year           $ 2,679      2,438     2,575
           Provision for loan losses               1,400        624       435
           Recoveries                                130        255       107
           Loans charged off                        (978)      (638)     (679)
                                                 -------    -------    ------

           Balances, end of year                 $ 3,231      2,679     2,438
                                                 =======    =======    ======

                                       33<PAGE>

Notes to Consolidated Financial Statements

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

                                                           December 31,
         ($ In thousands)                               1999          1998
                                                        ----          ----
         Premises                                      $  8,818         6,321
         Furniture and equipment                          6,140         5,343
         Construction-in-progress                            21           632
                                                       --------      --------
                                                         14,979        12,296
         Less accumulated depreciation                   (6,473)       (5,639)
                                                       --------      --------

              Bank premises and equipment, net         $  8,506         6,657
                                                       ========      ========

     The Company leases a branch facility as well as certain other office space
under noncancellable  operating leases  that expire over  the next  five years.
The future minimum lease payments under these leases (with initial or remaining
lease terms in excess of one year) as of December 31, 1999 are as follows:  $51
in 2000, $50 in 2001, $43 in 2002 and $33 in 2003.

Note 7: Time Deposits
     Included  in time  deposits are  certificates  of deposit  and other  time
deposits of  $100 or more in  the aggregate amounts of $46,172  at December 31,
1999 and  $46,257 at December  31, 1998.  At  December 31, 1999,  the scheduled
maturities  of time deposits are as follows: $152,147 in 2000, $43,490 in 2001,
$9,692 in 2002, $8,297 in 2003 and $5,594 in 2004.

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, 1999, 1998 and 1997,
NBB contributed $102, $91 and $87, respectively, to the plan.
     Bankshares has a  nonleveraged Employee Stock Ownership  Plan (ESOP) which
enables employees of the sole participating employer, NBB, who have one year of
service  and who have attained the age of  21 prior to the plan's January 1 and
July 1 enrollment dates to own  Bankshares common stock.  Contributions to  the
ESOP are determined annually by  the Board of Directors.  Contribution  expense
amounted to $162, $0 and $219  for the years ended December 31, 1999,  1998 and
1997, respectively.  Dividends on ESOP shares are charged to retained earnings.
As  of December 31, 1999, the  number of allocated shares  held by the ESOP was
76,680 and the number of unallocated shares was 1,951.  All shares held by  the
ESOP are treated as outstanding in computing the Company's basic 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

                                       34<PAGE>

National Bankshares, Inc. and Subsidiaries

not readily tradeable on an established market at the time of its distribution.
Since the shares were not readily tradeable at December 31, 1998, 77,301 shares
of stock held by the  ESOP, at their estimated  fair value, which was based  on
the most  recent  available  independent  valuation,  is  recorded  outside  of
stockholders' equity as  of December  31, 1998.   Effective  December 1,  1999,
Bankshares' common  stock began trading  on the Nasdaq  SmallCap Market.   As a
result of being listed on an established national exchange, presentation of the
fair  value of  the  shares  of  common  stock held  by  the  ESOP  outside  of
stockholders' equity is no longer required at December 31, 1999.
     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 (30%), mutual  funds (32%),
corporate bonds (5%) and equity securities (33%).   BTC's pension plan's assets
are invested principally in  BTC certificates of deposit (4%),  U.S. Government
agency obligations (81%) and equity securities (15%).

                                                             Pension Benefits
                                                             ----------------
                                                               December 31,
                                                               ------------

           ($ In thousands)                                   1999      1998
                                                              ----      ----
           Change in benefit obligation
           Benefit obligation at beginning of year          $  5,995     4,967
           Service cost                                          398       331
           Interest cost                                         415       367
           Actuarial gain                                       (749)      491
           Benefits paid                                        (365)     (161)
                                                            --------  --------

                Benefit obligation at end of year              5,694     5,995
                                                            --------  --------
           Change in plan assets
           Fair value of plan assets at beginning of year      4,971     4,337
           Actual return on plan assets                           85       430
           Employer contribution                                 186       365
           Benefits paid                                        (365)     (161)
                                                            --------  --------

                Fair value of plan assets at end of year       4,877     4,971
                                                            --------  --------
           Funded status                                        (817)   (1,024)
           Unrecognized net actuarial loss                       522       917
           Unrecognized prior service cost                       201       216
           Unrecognized transition asset                        (160)     (183)
                                                            --------  --------
                Net accrued pension cost (includes accrued
                 pension cost of $414 in 1999 and $363 in
                 1998 included in other liabilities, and
                 prepaid pension cost of $160 in 1999 and
                 $289 in 1998 included in other assets)     $   (254)      (74)
                                                            ========  ========

                                       35<PAGE>

Notes to Consolidated Financial Statements

                                               Pension Benefits
                               ------------------------------------------------
                                        NBB                       BTC
          ($ In thousands)      1999    1998    1997      1999   1998    1997
                                ----    ----    ----      ----   ----    ----
          Weighted average
           assumptions as of
           December 31
          Weighted average
           discount rate         7.50%  7.00%   7.50%     7.50%   7.00%   7.50%
          Expected return on
           plan assets           9.00%  9.00%   9.00%     9.00%   9.00%   9.00%
          Rate of compensation
           increase              5.00%  5.00%   5.00%     5.00%   5.00%   5.00%



                                                    Pension Benefits
                                                    ----------------
                                                Years Ended December 31,
          ($ In thousands)                   1999         1998         1997
                                             ----         ----         ----
          Components of net periodic
           benefit cost
          Service cost                     $  398         331           281
          Interest cost                       415         367           367
          Expected return on plan assets     (457)       (400)         (364)
          Amortization of prior service
           cost                                15          15            15
          Recognized net actuarial loss        18           3             8
          Amortization of transition
           asset                              (23)        (22)          (23)
                                           ------       -----         -----

               Net periodic benefit cost   $  366         294           284
                                           ======       =====         =====


Note 9: Stock Option Plan
     Effective March  10, 1999,  the Company  adopted the  National Bankshares,
Inc.  1999  Stock Option  Plan  to give  key  employees of  Bankshares  and its
subsidiaries  an opportunity  to  acquire shares  of National  Bankshares, Inc.
common  stock.   The purpose of  the 1999 Stock  Option Plan is  to promote the
success of  Bankshares and its  subsidiaries by  providing an incentive  to key
employees  that enhances the identification of their personal interest with the
long  term financial  success  of the  Company and  with growth  in stockholder
value.  Under the 1999  Stock Option Plan, up  to 250,000 shares of  Bankshares
common stock may be granted.  The 1999 Stock Option Plan is administered by the
Stock Option Committee, which  is made up of  all of the non-employee,  outside
directors  of National  Bankshares,  Inc.    The  Stock  Option  Committee  may
determine whether  options are incentive  stock options  or nonqualified  stock
options and may determine the other terms of  grants, such as number of shares,
term, a vesting schedule  and the exercise price.   The 1999 Stock Option  Plan
limits the maximum term of any option granted to ten years, states that options
may be granted at not less than fair market value on the date of  the grant and
contains  certain other  limitations on the  exercisability of  incentive stock
options.  The options vest 25% after  one year, 50% after two years, 75%  after

                                       36<PAGE>

National Bankshares, Inc. and Subsidiaries

three years and 100% after  four years.  At the discretion of  the Stock Option
Committee, options  may  be  awarded  with  the  provision  that  they  may  be
accelerated   upon  a  change  of  control,   merger,  consolidation,  sale  or
dissolution of National Bankshares, Inc.
     At December 31, 1999,  there were 244,500 additional shares  available for
grant under the  Plan.  The per share weighted-average  estimated fair value of
stock options granted  during 1999  was $2.38 on  the date  of grant using  the
Black  Scholes  option-pricing   model  with  the  following   weighted-average
assumptions:   1999 - expected cash dividend  yield of 3.41% percent, risk-free
interest rate  of 6.38% percent, expected  volatility of 18.60% percent  and an
expected life of ten years.
     The Company  applies APB Opinion  No. 25 in  accounting for its  Plan and,
accordingly,  no compensation cost has been recognized for its stock options in
the consolidated  financial statements.  Proforma  compensation cost determined
in  accordance with Statement  123 was  not material and  had no  impact on net
income per share presented.
     Stock option activity during the periods indicated is as follows:

                                                           Weighted
                                          Number of        Average
                                            Shares      Exercise Price
                                          ---------     --------------
         Granted in 1999                     5,500          $22.00
         Exercised                             ---             ---
         Forfeited                             ---             ---
         Expired                               ---             ---
                                            ------          ------

         Balance at December 31, 1999        5,500          $22.00
                                            ======          ======


     At December 31, 1999, the exercise price and remaining contractual life of
outstanding options was $22.00 and 9.83 years.

Note 10: Income Taxes
     Total income taxes were allocated as follows:


                                                    Years ended December 31,
           ($ In thousands)                         1999      1998      1997
                                                    ----      ----      ----
           Income                                  $ 2,556     2,591    2,499
           Stockholders' equity, for net
            unrealized gains (losses) on
            securities available for sale
            recognized for financial reporting
            purposes                                (2,304)      425      228
                                                   -------   -------   ------

                Total income taxes                 $   252     3,016    2,727
                                                   =======   =======   ======






                                       37<PAGE>

Notes to Consolidated Financial Statements

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

                                                    Years ended December 31,
           ($ In thousands)                         1999      1998      1997
                                                    ----      ----      ----
           Current                                 $ 2,770     2,726    2,199
           Deferred                                   (214)     (135)     300
                                                   -------   -------   ------

                Total income tax expense           $ 2,556     2,591    2,499
                                                   =======   =======   ======

     Taxes resulting from securities transactions amounted to a  tax expense of
$8  for the year ended December  31, 1999, $64 for  the year ended December 31,
1998 and $13 for the year ended December 31, 1997.
     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)                         1999      1998      1997
                                                    ----      ----      ----
           Expected income tax expense (34%)       $ 3,279     3,192    3,080
           Tax-exempt interest income                 (866)     (742)    (700)
           Nondeductible interest expense              109        97       90
           Other, net                                   34        44       29
                                                   -------   -------   ------

                Reported income tax expense        $ 2,556     2,591    2,499
                                                   =======   =======   ======

     The tax  effects of  temporary differences that  give rise  to significant
portions of the deferred  tax assets and deferred  tax liabilities at  December
31, 1999 and 1998 are presented below:






















                                       38<PAGE>

National Bankshares, Inc. and Subsidiaries

                                                               December 31,

           ($ In thousands)                                    1999     1998
                                                               ----     ----
           Deferred tax assets:
             Loans, principally due to allowance for loan
              losses and unearned fee income                 $   786       545
             Other real estate owned, principally due to
              valuation allowance                                 32        32
             Deferred compensation and other liabilities,
              due to accrual for financial reporting
              purposes                                           124        96
             Deposit intangibles and goodwill                     59        51
             Community development corporation related tax
              credit                                              19        22
             Other                                                36       ---
             Net unrealized losses on securities available
              for sale                                         1,779       ---
                                                             -------   -------

                Total gross deferred tax assets                2,835       746

                Less valuation allowance                         ---       ---
                                                             -------   -------

                Net deferred tax assets                        2,835       746

           Deferred tax liabilities:
             Bank premises and equipment, principally due
              to differences in depreciation                    (121)     (102)
             Securities, due to differences in discount
              accretion                                          (58)      (52)
             Accrued late fee income                             (72)      ---
             Other assets                                        (62)      (63)
             Net unrealized gains on securities available
              for sale                                           ---      (525)
                                                             -------   -------

                Total gross deferred tax liabilities            (313)     (742)
                                                             -------   -------
                Net deferred tax asset included in other
                 assets                                      $ 2,522         4
                                                             =======   =======



     The  Company has  determined  that  a valuation  allowance  for the  gross
deferred  tax assets is not necessary at December  31, 1999 and 1998 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.






                                       39<PAGE>

Notes to Consolidated Financial Statements

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, 1999,
1998  and 1997, dividends received  from subsidiary banks  were $10,538, $5,341
and $2,712, respectively.   Additional funds dividended  to the parent in  1999
were used primarily for a common stock repurchase.
     Substantially all  of  Bankshares'  retained  earnings  are  undistributed
earnings  of  its  banking  subsidiaries,  which  are  restricted  by   various
regulations administered by federal  and state bank regulatory agencies.   Bank
regulatory  agencies  restrict,  without  prior approval,  the  total  dividend
payments of a bank  in any calendar year to  the bank's retained net  income of
that  year to date,  as defined, combined  with its retained  net income of the
preceding two years, less any  required transfers to surplus.  At  December 31,
1999, retained net income which was free of such restriction at NBB amounted to
approximately $198.   There was no retained income free  of this restriction at
BTC at December 31, 1999.
     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,  1999, that  Bankshares  and its  subsidiaries  meet all  capital  adequacy
requirements to which they are subject.
     Bankshares' and  its subsidiaries'  actual regulatory capital  amounts and
ratios are also presented in the following tables.





















                                       40<PAGE>

National Bankshares, Inc. and Subsidiaries

                                                          To Be Well
                                                          Capitalized
                                                         Under Prompt
                                          For Capital     Corrective
                                           Adequacy         Action
                             Actual        Purposes       Provisions
                             ------       -----------    ------------
($ In thousands)          Amount  Ratio  Amount  Ratio  Amount   Ratio
                          ------  -----  ------  -----  ------   -----
December 31, 1999
 Total capital (to risk
  weighted assets)
 Bankshares consolidated  $58,433  18.3%  25,552   8.0%    N/A    N/A
 NBB                       29,320  14.1%  16,682   8.0%   20,853  10.0%
 BTC                       26,630  23.7%   8,998   8.0%   11,247  10.0%

 Tier I capital (to risk
  weighted assets)
 Bankshares consolidated  $55,202  17.3%  12,776   4.0%    N/A    N/A
 NBB                       27,222  13.1%   8,341   4.0%   12,512   6.0%
 BTC                       25,497  22.7%   4,499   4.0%    6,748   6.0%

 Tier I capital (to
  average assets)
 Bankshares consolidated  $55,202  11.7%  18,957   4.0%    N/A    N/A
 NBB                       27,222   9.8%  11,135   4.0%   13,919   5.0%
 BTC                       25,497  12.7%   8,019   4.0%   10,023   5.0%

                                                          To Be Well
                                                          Capitalized
                                                         Under Prompt
                                                          Corrective
                                          For Capital       Action
                                           Adequacy       Provisions
                             Actual        Purposes      ------------
                             ------       -----------
($ In thousands)          Amount  Ratio  Amount  Ratio  Amount   Ratio
                          ------  -----  ------  -----  ------   -----
December 31, 1998
 Total capital (to risk
  weighted assets)
 Bankshares consolidated  $61,216  22.4%  21,819   8.0%    N/A    N/A
 NBB                       30,411  16.5%  14,747   8.0%   18,433  10.0%
 BTC                       28,284  31.8%   7,112   8.0%    8,890  10.0%

 Tier I capital (to risk
  weighted assets)
 Bankshares consolidated  $58,537  21.5%  10,910   4.0%    N/A    N/A
 NBB                       28,511  15.5%   7,373   4.0%   11,060   6.0%
 BTC                       27,505  30.9%   3,536   4.0%    5,334   6.0%

 Tier I capital (to
  average assets)
 Bankshares consolidated  $58,537  13.4%  17,457   4.0%    N/A    N/A
 NBB                       28,511  11.1%  10,292   4.0%   12,865   5.0%
 BTC                       27,505  15.6%   7,068   4.0%    8,835   5.0%


                                       41<PAGE>

Notes to Consolidated Financial Statements

     As   of  December  31,  1999,  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.


















































                                       42<PAGE>

National Bankshares, Inc. and Subsidiaries

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

                            Condensed Balance Sheets
                                                         December 31,
($ In thousands, except share and
 per share data.)                                      1999        1998
                                                       ----        ----
Assets        Cash due from subsidiaries             $      5          28
              Securities available for sale
               (note 3)                                 2,292       2,521
              Investment in subsidiaries, at
               equity                                  50,302      58,139
              Refundable income taxes due
               from subsidiaries                           59          30
              Other assets                                 85          30
                                                     --------    --------

                   Total assets                      $ 52,743      60,748
                                                     ========    ========

Liabilities   Other liabilities                      $     20          65
and                                                  --------    --------
Stockholders' Common stock subject to ESOP
Equity         put option (note 8)                        ---       2,180
                                                     --------    --------
              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 3,516,977
                  shares in 1999 and 3,792,833
                  in 1998                              8,792        9,482
                 Retained earnings                    47,384       50,182
                 Accumulated other
                  comprehensive income (loss)         (3,453)       1,019
                 Common stock subject to ESOP
                  put option (77,301 shares at
                  $28.20 per share in 1998)
                  (note 8)                               ---       (2,180)
                                                     -------     --------

                   Total stockholders' equity         52,723       58,503

              Commitments and contingent
                  liabilities (notes 6, 8, and 14)
                                                     -------     --------
                   Total liabilities and
                    stockholders' equity             $52,743       60,748
                                                     =======     ========


                                       43<PAGE>

Notes to Consolidated Financial Statements

            Condensed Statements of Income and Comprehensive Income

                                                Years ended December 31,
($ In thousands)                               1999       1998       1997
                                               ----       ----       ----
Income   Dividends from subsidiaries
          (note 11)                          $10,538      5,341      2,712
         Interest on securities - taxable         17         29        ---
         Interest on securities -
          nontaxable                             118         24        ---
                                             -------     ------     ------

                                              10,673      5,394      2,712

Expenses Other expenses                          194        173        125
                                             -------     ------     ------
         Income before income tax benefit
          and equity in undistributed net
          income (distributions in excess
          of equity in net income) of
          subsidiaries                        10,479      5,221      2,587

         Applicable income tax benefit            59         47         42
                                             -------     ------     ------
         Income before equity in
          undistributed net income
          (distributions in excess of
          equity in net income) of
          subsidiaries                        10,538      5,268      2,629

         Equity in undistributed net
          income (distributions in
          excess of equity in net
          income) of subsidiaries             (3,450)     1,530      3,931
                                             -------     ------     ------

            Net income                         7,088      6,798      6,560
                                             -------     ------     ------
         Other comprehensive income
          (loss), net of income taxes:

            Net unrealized gains
             (losses) on securities
             available for sale
             (notes 1(R), 1(S) and 18):
             Arising during the year          (4,472)       356        442
             Cumulative accounting change        ---        469        ---
                                             -------     ------     ------
            Total other comprehensive
             income (loss)                    (4,472)       825        442
                                             =======     ------     ------

            Comprehensive income             $ 2,616      7,623      7,002
                                             =======     ======     ======




                                       44<PAGE>

National Bankshares, Inc. and Subsidiaries

                       Condensed Statements of Cash Flows

                                            Years ended December 31,
($ In thousands)                             1999       1998       1997
                                             ----       ----       ----
Cash Flows  Net income                     $  7,088      6,798    6,560
from        Adjustments to reconcile net
Operating    income to net cash provided
Activities   by operating activities:
             (Equity in undistributed
              net income) distributions
              in excess of equity in
              net income of subsidiaries      3,450     (1,530)  (3,931)
             Amortization of premiums
              and accretion of
              discounts, net                      7          4      ---
             (Increase) decrease in
              refundable income taxes
              due from subsidiaries             (29)        (8)       3
             Increase in other assets           (10)       (30)     ---
             Increase (decrease) in
              other liabilities                 (45)        22       (4)
                                            -------    -------   ------

                 Net cash provided by
                  operating activities       10,461      5,256    2,628
                                            -------    -------   ------

Cash Flows  Purchases of securities
from         available for sale                (207)    (4,534)     ---
Investing   Maturities of securities
Activities   available for sale                 299      2,044      ---
                                            -------    -------   ------

                 Net cash provided by
                  (used in) investing
                  activities                     92     (2,490)     ---
                                            -------    -------   ------

Cash Flows  Cash dividends paid              (2,814)    (2,807)  (2,579)
from        Common stock repurchase          (7,762)       ---      ---
Financing                                   -------    -------   ------
Activities
                 Net cash used in
                  financing activities      (10,576)    (2,807)  (2,579)
                                            -------    -------   ------
            Net increase (decrease) in
             cash                               (23)       (41)      49
            Cash due from subsidiary
             at beginning of year                28         69       20
                                            -------    -------   ------
            Cash due from subsidiary
             at end of year                 $     5         28       69
                                            =======    =======   ======



                                       45<PAGE>

Notes to Consolidated Financial Statements

Note 13: Supplemental Cash Flow Information
     The Company paid  $14,199, $14,003  and $13,084 for  interest and  $2,941,
$2,631 and  $2,719 for income  taxes, net of refunds,  in 1999, 1998  and 1997,
respectively.  Noncash investing activities consisted of $978, $638 and $679 of
loans charged against  the allowance for  loan losses in  1999, 1998 and  1997,
respectively.  Noncash investing activities also included $177 in 1999, $382 in
1998 and $159  in 1997 of  loans transferred to  other real  estate owned.   In
addition,  for the  years  ended  December 31,  1999,  1998 and  1997,  noncash
investing  activities included  changes  in net  unrealized  gains (losses)  on
securities  available for  sale  of ($6,776),  $1,250  and $670,  respectively,
changes  in deferred tax assets included in  other assets of $2,304, ($425) and
($228),  respectively,  and  changes  in  net  unrealized  gains   (losses)  on
securities available  for sale  included in stockholders'  equity of  ($4,472),
$825  and  $442, respectively.   Securities,  classified  as held  to maturity,
totaling approximately  $20,516, were  transferred to securities  available for
sale  in   1998.    This  was  in  accordance  with  the  reassessment  of  the
classification  of  securities allowed  by  Statement No.  133  "Accounting for
Derivative  Instruments  and  Hedging Activities,"  which  was  adopted  by the
Company on October 1, 1998.

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)                           1999         1998
                                                  ----         ----
       Financial instruments whose contract
        amounts represent credit risk:
         Commitments to extend credit           $52,932        53,498
                                                =======       =======

         Standby letters of credit              $ 5,109         3,320
                                                =======       =======
         Mortgage loans sold with potential
          recourse                              $33,489        39,697
                                                =======       =======

     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

                                       46<PAGE>

National Bankshares, Inc. and Subsidiaries

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 approximately equally divided between fixed and  variable
rate in  nature, except for  construction loans which  are at fixed  rates, but
have terms generally less than one year.
     Standby  letters  of  credit are  conditional  commitments  issued by  the
Company to  guarantee the  performance of a  customer to  a third  party.   The
credit risk  involved in issuing letters  of credit is essentially  the same as
that involved in extending loans to customers.  Collateral held  varies but may
include  accounts  receivable, inventory,  property,  plant  and equipment  and
income-producing commercial properties.
     The  Company  originates  mortgage  loans  for  sale  to  secondary market
investors subject  to contractually specified and  limited recourse provisions.
In 1999, the Company originated $31,538 and sold $33,489 to investors, compared
to  $41,472 originated  and $39,697  sold in  1998.   Every contract  with each
investor contains  certain recourse language.   In general, the Company  may be
required to  repurchase  a previously  sold  mortgage loan  if there  is  major
noncompliance  with   defined  loan  origination  or  documentation  standards,
including fraud,  negligence or  material misstatement  in the  loan documents.
Repurchase may also be  required if necessary governmental loan  guarantees are
canceled or never issued, or if an investor is  forced to buy back a loan after
it has been resold as a part of a loan pool.  In addition, the Company may have
an  obligation to repurchase a loan if the mortgagor has defaulted early in the
loan term.  This potential default period is approximately twelve months  after
sale of a loan to the investor.

Note 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 and the  City of Galax,  Virginia and portions  of adjacent
counties.  NBB's  operating results  are closely correlated  with the  economic
trends  within this  area which are,  in turn,  influenced by  the area's three
largest  employers,  Virginia  Polytechnic   Institute  and  State  University,
Montgomery  County Schools  and  Celanese.   Other  industries include  a  wide
variety of  manufacturing, retail and service concerns.  Most of BTC's business
originates from the communities of Tazewell and Bluefield and other communities
in  Tazewell County,  Virginia  and in  Mercer County,  West  Virginia.   BTC's
service  area has largely depended on the  coal mining industry and farming for
its economic base.  In recent years, coal companies have mechanized and reduced
the  number of persons engaged  in the production  of coal.  There  are still a
number  of support  industries for  the coal  mining business that  continue to
provide employment in the area.  Additionally, several new businesses have been
established in the area and  Bluefield, West Virginia has begun to emerge  as a
regional  medical center.  The  ultimate collectibility of  the loan portfolios
and   the  recovery  of  the  carrying  amounts  of  repossessed  property  are
susceptible to changes in the market conditions of these areas.
     At  December  31,  1999  and  1998,  approximately  $130,000  and $94,000,
respectively, of the loan portfolio was concentrated in commercial real estate.
This represents approximately 44% and 39% of the loan portfolio at December 31,
1999 and 1998,  respectively.  Included  in commercial real estate  at December
31, 1999 and 1998 was approximately $85,000 and $64,000, respectively, in loans

                                       47<PAGE>

Notes to Consolidated Financial Statements

for  college housing  and  professional office  buildings.   Loans  secured  by
residential  real estate were approximately $74,000 and $67,000 at December 31,
1999 and 1998, respectively.  This  represents approximately 25% and 28% of the
loan portfolio at December 31,  1999 and 1998, respectively.  Loans  secured by
automobiles were approximately  $33,000 and  $32,000 at December  31, 1999  and
1998, respectively.  This represents approximately 11% of the loan portfolio at
December 31, 1999 and 13% at December 31, 1998
     The Company  has established  operating  policies relating  to the  credit
process  and  collateral in  loan originations.    Loans to  purchase  real and
personal property are generally collateralized by the related property and with
loan  amounts  established  based  on  certain percentage  limitations  of  the
property's total stated  or appraised value.   Credit approval  is primarily  a
function  of collateral  and  the evaluation  of  the creditworthiness  of  the
individual  borrower  or  project  based on  available  financial  information.
Interest-bearing deposits with  banks represent deposits with  the Federal Home
Loan Bank of Atlanta.  Management considers the concentration of credit risk to
be minimal.

Note 16: Fair Value of Financial Instruments
     The  estimated  fair  values of  the  Company's  financial instruments  at
December 31, 1999 and 1998 are as follows:

                                           December 31,
                                    1999                  1998
                                    ----                  ----
                            Carrying   Estimated  Carrying   Estimated
($ In thousands)             Amount   Fair Value   Amount   Fair Value
                            --------  ----------  --------  ----------
Financial assets:
   Cash and due from banks  $ 13,311      13,311    14,421     14,421
   Interest-bearing
    deposits                   9,219       9,219     7,027      7,027
   Federal funds sold          2,800       2,800     5,090      5,090
   Securities                137,492     137,341   166,754    167,229
   Mortgage loans held for
    sale                         229         229     2,180      2,180
   Loans, net                291,562     287,504   236,578    241,064
                            --------    --------   -------   --------

     Total financial assets $454,613     450,404   432,050    437,011
                            ========    ========   =======   ========

Financial liabilities:
   Deposits                 $407,187     407,328   382,696    384,080
   Other borrowed funds       10,460      10,460       214        214
                            --------    --------   -------   --------
     Total financial
      liabilities           $417,647     417,788   382,910    384,294
                            ========    ========   =======   ========




     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

                                       48<PAGE>

National Bankshares, Inc. and Subsidiaries

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

Note 17: Business Combinations
     On December  26,  1997, NBB  entered  into an  agreement  to purchase  the
assets, including real estate  and improvements, and assume the  liabilities of
the Galax, Virginia, branch office of First American Federal Savings Bank.  The
transaction, which was  subject to  regulatory approval, closed  in the  second
quarter of 1998.  It did not have a material impact on the Company's results of
operations or liquidity.

Note 18: Other Comprehensive Income (Loss)
     Other  comprehensive  income  (loss)  net  of  income  taxes  and  net  of
reclassification adjustments between net  income and other comprehensive income
(loss)   relating  to  securities  available  for  sale  are  reported  in  the
Consolidated Statements of  Income and Comprehensive  Income.  The  information
that follows  discloses the reclassification  adjustments and the  income taxes
related  to  securities  available   for  sale  that  are  included   in  other
comprehensive income, net of income taxes.

           ($ In thousands)
                                                1999        1998
                                                ----        ----
           Net unrealized gains (losses) on
            securities available for sale:
              Net unrealized holding gains
               (losses) during the year        $(6,756)     1,282
              Less reclassification
               adjustments for gains
               included in net income              (20)       (32)
              Income tax (expense) benefit       2,304       (425)
                                               -------     ------
                Total other comprehensive
                 income (loss)                 $(4,472)       825
                                               =======     ======


Note 19: Future Accounting Considerations
   There have been no recent accounting pronouncements issued that would have  a
material  effect on the consolidated financial  position, results of operations
or liquidity of the Company or require additional disclosures.


                                       49<PAGE>

Selected Quarterly Data (Unaudited)
     The  following  is  a  summary  of  the  unaudited  quarterly  results  of
operations for the years ended December 31, 1999 and 1998:

                                                   1999
       ($ In thousands, except      First     Second    Third     Fourth
       per share data)             Quarter   Quarter   Quarter   Quarter
                                   -------   -------   -------   -------
       Income Statement Data:
       Interest income             $ 8,089     8,170     8,416    8,928
       Interest expense              3,436     3,392     3,506    3,869
                                   -------    ------    ------   ------
       Net interest income           4,653     4,778     4,910    5,059
       Provision for loan losses       232       237       371      560
       Noninterest income              766       856       956      934
       Noninterest expense           2,926     2,946     3,025    2,971
       Income taxes                    582       651       666      657
                                   -------    ------    ------   ------

         Net income                $ 1,679     1,800     1,804    1,805
                                   =======    ======    ======   ======

       Per Share Data:
       Basic net income per share  $  0.44      0.50      0.51     0.51
       Cash dividends per share        ---      0.39       ---     0.41
       Book value per share        $ 16.21     14.80     15.16    14.99

       Selected Ratios:
       Return on average assets       1.54%     1.61%     1.60%    1.53%
       Return on average equity      11.12%    12.55%    13.64%   13.50%
       Average equity to average
        assets                       13.82%    12.81%    11.70%   11.37%


























                                       50<PAGE>


                                                   1998
       ($ In thousands, except      First     Second    Third     Fourth
       per share data)             Quarter   Quarter   Quarter   Quarter
                                   -------   -------   -------   -------

       Income Statement Data:
       Interest income             $ 7,571     7,923     8,150    8,184
       Interest expense              3,296     3,458     3,590    3,584
                                   -------    ------    ------   ------
       Net interest income           4,275     4,465     4,560    4,600
       Provision for loan losses        21        73       225      305
       Noninterest income              666       826       754      928
       Noninterest expense           2,696     2,850     2,780    2,735
       Income taxes                    616       666       638      671
                                   -------    ------    ------   ------

         Net income                $ 1,608     1,702     1,671    1,817
                                   =======    ======    ======   ======

       Per Share Data:
       Basic net income per share  $  0.42      0.45      0.44     0.48
       Cash dividends per share        ---      0.36       ---     0.38
       Book value per share        $ 15.18     15.26     15.88    16.00

       Selected Ratios:
       Return on average assets       1.63%     1.63%     1.56%    1.65%
       Return on average equity      11.49%    11.92%    11.37%   11.80%
       Average equity to average
        assets                       14.16%    13.71%    13.74%   14.02%






























                                       51<PAGE>

                              National Bankshares


                               Mission Statement

     National Bankshares, Inc. strives to be an exceptional community bank
     holding company dedicated to  providing shareholder value by offering
     financial   services  to   customers  through   subsidiary  financial
     instituions and  affiliated  companies  in  an  efficient,  friendly,
     personalized and  cost-effective manner.    We recognize  that to  do
     this, our  financial institutions  must retain  the  ability to  make
     decisions locally  and must  actively participate in  the communities
     they  serve.   We  are committed  to  offering competitive  and  fair
     employment opportunities and to  maintaining the highest standards in
     all aspects of our business.

































                       The National Bank Advisory Boards

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

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

Galax Advisory  Board   Charles L.  Cox, Willie T. Greene,  Sr., Jerry R. Mink,
Judy C. Wherry, James A. Williams, Jr.

                                       52<PAGE>

                              National Bankshares
                               Board of Directors



Picture of                         Picture of
"William T. Peery, Charles L.      "Cameron L. Forrester, James A.
 Boatwright and James G. Rakes"     Deskins, Sr. and L. Allen Bowman"


William T. Peery                   Cameron L. Forrester
Cargo Oil Co., Inc. President      Bank of Tazewell County, President
Charles L. Boatwright              and Chief Executive Officer
Vice Chairman of the Board,        James A. Deskins, Sr.
Physician                          Deskins Super Market, Inc., Retired
James G. Rakes                     President
Chairman of the Board, National    L. Allen Bowman
Bankshares, Inc., President and    Litton Poly-Scientific, Retired
Chief Executive Officer, The       President
National Bank, President and
Chief Executive Officer


Picture of                         Alonzo A. Crouse
"Alonzo A. Crouse, Paul A.         Bank of Tazewell County, Executive
 Duncan and Jeffrey R. Stewart"    Vice President, Secretary and
                                   Cashier
                                   Paul A. Duncan
                                   Holiday Motor Corp., President
                                   Jeffrey R. Stewart
                                   Educational Consultant





























                                       53<PAGE>

NBB
The National Bank                                            Board of Directors






                                   Picture of
                            "NBB Board of Directors"




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





BTC
Bank of Tazewell County                                      Board of Directors





                                   Picture of
                            "BTC Board of Directors"


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











                                       54<PAGE>

                             Corporate Information

National Bankshares, Inc. Officers

   James G. Rakes, Chairman                  F. Brad Denardo
   President and Chief Executive Officer     Corporate Officer

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

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

Annual Meeting
The  Annual Meeting of Stockholders will be  held on Tuesday, April 11, 2000 at
3:00 p.m.  at the Best Western  Red Lion Inn, 900  Plantation Road, Blacksburg,
Virginia.

Corporate Stock
National Bankshares, Inc. common stock trades on the Nasdaq Stock Market  under
the symbol "NKSH".

Financial Information
Investors and analysts seeking financial information about National Bankshares,
Inc. should contact:
   James G. Rakes, Chairman             or   J. Robert Buchanan
   President and Chief Executive Officer     Treasurer
   (540)951-6300 or (800)552-4123            (540)951-6300 or (800)552-4123

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

Stockholder Services and Stock Transfer Agent
Stockholders seeking information about National Bankshares, Inc. stock accounts
should contact:
   Marilyn B. Buhyoff
   Secretary and Counsel
   (540)951-6300 or (800)552-4123

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

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

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

Corporate Office
   National Bankshares, Inc.
   101 Hubbard Street
   Blacksburg, VA 24060
   P.O. Box 90002
   Blacksburg, VA 24062-9002





                                       55<PAGE>