National Bankshares
























































                              1998 Annual Report<PAGE>







                             Financial Highlights

                                 $ In thousands, except per share data.

                                              1998     1997      1996
                                              ----     ----      ----
        Net income                          $  6,798     6,560    6,117
        Basic net income per share              1.79      1.73     1.61
        Cash dividends declared per share       0.74      0.68     0.62
        Book value per share                   16.00     14.73    13.56

        Loans, net                          $236,578   214,552  193,598
        Total securities                     166,754   149,974  171,244
        Total assets                         445,166   402,907  388,850
        Total deposits                       382,696   344,867  334,584
        Stockholders' equity                  58,503    54,029   49,801











                                   Contents



                    To Our Stockholders                  2

                    Selected Consolidated
                     Financial Data                      4

                    Management's Discussion and
                     Analysis                            5

                    Independent Auditors' Report        13

                    Consolidated Financial
                     Statements                         14

                    Notes to Consolidated
                     Financial Statements               18

                    Board of Directors                  38

                    Corporate Information               41<PAGE>



                              National Bankshares

     "Picture of James G.          from $0.68  per share  in 1997  to $0.74
   Rakes, President & CEO of       per share in 1998.
 National Bankshares, Inc. and
      the National Bank"                Bank of Tazewell County began a new
                                   era  in  May  of  1998 when  Cameron  L.
To Our Stockholders                Forrester joined the  bank as  President
     National Bankshares, Inc.     and   Chief   Executive  Officer.     In
experienced  a year  of growth     addition  to  many   years  of   banking
and  change  in  1998.    Your     experience,  Mr.  Forrester  brings  his
company  ended  the year  with     strong community bank lending background
total   assets    of   $445.17     and his connections  in the area  to the
million, an increase of 10.49%     management team at BTC.   Bank employees
over  1997.   Total  loans and     were very positive during the leadership
total  deposits  each grew  by     transition,   and   they   are   working
more  than   10%,  with  total     throughout  the  organization  to  reach
loans   10.05%   above    1997     challenging new goals.
figures and  total deposits up
by  10.97% over last  year.  A              "Picture of Cameron L.
portion of  these increases is           Forrester, President & CEO of
attributable  to The  National             Bank of Tazewell County,
Bank's   acquisition  of   the             shaking hands with fellow
office  in Galax,  Virginia in                     employee"
April  1998.   However,  loans
and deposits grew  at all  NBB          One  goal of both  Bank of Tazewell
offices   and   at   Bank   of     County's  and  National Bankshares'  was
Tazewell County as well.           met late in 1998, when BTC completed the
     With good  economic times     conversion  from  its previous  in-house
and  mortgage  loan   interest     information processing system.  The bank
rates near historic lows, 1998     now has an updated computer network, and
was  an  exceptional year  for     BTC is  processing  its work  using  The
construction   and   secondary     National  Bank's host  computer hardware
market  mortgage lending.   At     and  software.    The Tazewell  computer
year-end,  the   banks  had  a     conversion marked the end of  a two year
total of nearly $12.83 million     long,  company  wide  project that  also
in   outstanding  construction     included  NBB's 1997  purchase of  a new
loans, up 50.73% from  the end     host  computer.    This   investment  in
of 1997.  Even more remarkable     infrastructure  permits  more  efficient
is   the    total   of   loans     operations and offers some  economies of
originated  by  our  secondary     scale.   In addition,  it supports state
market  mortgage  lenders,  an     of  the art  banking  services  for  the
increase  of nearly  117% over     customers of The  National Bank and Bank
last year.                         of Tazewell County.

      "Picture of a newly              "Picture of Two Bank of Tazewell
      constructed home"              county employees in the Computer Room"

     We   were    pleased   to          Although it was  planned for  other
achieve a record level  of net     business reasons, the Company's computer
income yet again in 1998.  The     upgrade  project  came at  a  good time.
year's    total   was    $6.80     Because   of   the   upgrade,   National
million.    As  has been  past     Bankshares now has  the latest  versions
practice,  National Bankshares     of host computer hardware  and software.
shared  this achievement  with     This  helped  us  prepare to  make  this
stockholders     through    an     mission critical system Y2K compliant.
increase  in  cash   dividends          The  banking  industry,   including

                                       2<PAGE>


National Bankshares, has  been     anticipate occupying the new building in
at the forefront in addressing     late summer or early fall.
the   challenges   posed   for
information processing systems           "Picture of the Construction
by  the upcoming  century date             Site of NBB's new Hubbard
change   ("Y2K").      Federal                 Street Building"
regulators    established   an
ambitious  compliance schedule          In  a year  like 1998,  when growth
and   have   been   conducting     and  change are the  dominant themes, it
regular examinations to insure     is  nice  to  remember  that  there  are
that banks meet the deadlines.     certain  fundamentals  that  remain  the
As we move into the  final few     same.  Among these is the commitment  of
months   of   this  multi-year     National   Bankshares   to   offer   our
process, we  perceive that our     customers the best in community banking.
greatest  remaining  challenge     We continue to recognize  the importance
is to counter what may well be     of the contributions  to our success  of
widespread      misinformation     our  Directors,  our  officers  and  our
about   the   threat  of   the     employees.  Finally, there is  no change
century date change.   We want     in  our  sincere  appreciation  for  the
to   be   certain   that   our     support  and  loyalty   of  our   valued
customers    make    financial     stockholders and customers.
preparations  for  the end  of
the century armed with factual
information and  not motivated          James G. Rakes
by unwarranted fears.  We hope          Chairman of the Board
that you will encourage anyone          President and Chief
who  has  questions about  our           Executive Officer
Y2K  preparedness  program  to
contact us directly and not to
rely  on   media  reports  and
predictions.

     "Picture of employee
    demonstrating Internet
    Banking"

     The changes at Bankshares
and  its subsidiaries  did not
stop with the end of 1998.  On
February 1 of  this year,  The
National    Bank    introduced
Internet  Banking.   This  new
product    has    been    well
received,  and  we  anticipate
that it will become  even more
popular as customers  discover
the  convenience   of  banking
when  and  where they  choose.
We   are   also  making   good
progress toward  completion of
NBB's   new   Hubbard   Street
building  in  Blacksburg  that
will  house  a branch  office,
the   Trust   and  Bank   Card
departments    and    National
Bankshares  headquarters.   If
the  weather and  construction
schedules     cooperate,    we

                                       3<PAGE>


National Bankshares, Inc. and Subsidiaries
Selected Consolidated Financial Data

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

                                  1998      1997     1996     1995     1994
                                  ----      ----     ----     ----     ----
Selected   Interest income       $ 31,828   29,797   28,647    28,094   26,062
Income     Interest expense        13,928   13,106   13,036    12,703   10,684
Statement  Net interest income     17,900   16,691   15,611    15,391   15,378
Data:      Provision for loan
            losses                    624      435      331       282      553
           Noninterest income       3,174    2,834    2,693     2,382    2,047
           Noninterest expense     11,061   10,031    9,515    10,033    9,725
           Income taxes             2,591    2,499    2,341     1,933    1,844
           Net income               6,798    6,560    6,117     5,525    5,303

Per Share  Basic net income      $   1.79     1.73     1.61      1.46     1.40
Data:      Cash dividends
            declared                 0.74     0.68     0.62      0.57     0.52
           Book value per
            share(1)                16.00    14.73    13.56     12.70    11.25

Selected   Loans, net            $236,578  214,552  193,598   163,193  156,289
Balance    Total securities       166,754  149,974  171,244   187,635  184,231
Sheet      Total assets           445,166  402,907  388,850   380,915  373,132
Data at    Total deposits         382,696  344,867  334,584   330,313  327,686
End        Stockholders'
of Year:    equity                 58,503   54,029   49,801    48,154   42,658
                                           204,540
Selected   Loans, net            $225,613  157,179  177,419   160,643  152,976
Balance    Total securities       152,432  395,932  177,403   183,994  185,365
Sheet      Total assets           420,988  339,439  388,045   378,406  369,962
Daily      Total deposits         359,970           335,938   330,261  325,167
Averages:  Stockholders'                    53,712
            equity(1)              58,282            49,459    45,726   42,402

Selected   Return on average                  1.66
Ratios:     assets                   1.61              1.58      1.46     1.43
           Return on average                 12.21
            equity(1)               11.66             12.37     12.08    12.51
           Dividend payout                   39.31
            ratio                   41.29             37.55     37.32    37.13
           Average equity to                 13.57                            
            average assets(1)       13.84             12.75     12.08    11.46

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


(Dollars)                                 (Dollars)

         Book Value Per Share Graph         Cash Dividends Per Share
                                                      Graph
        1994  1995  1996  1997  1998      1994  1995  1996  1997  1998
        ----  ----  ----  ----  ----      ----  ----  ----  ----  ----
       $11.25 12.70 13.56 14.7316.00      $0.52 0.57  0.62  0.68  0.74
          

                                       4<PAGE>
($ In thousands, except per share data.)

PERFORMANCE SUMMARY
     Net  income in  1998 for  National Bankshares,  Inc. (Bankshares)  and its
wholly-owned  subsidiaries, The National Bank  of Blacksburg (NBB)  and Bank of
Tazewell County  (BTC), (the Company), was $6,798, an increase of $238 or 3.63%
over the previous year.  This produced a return on average  assets and a return
on average equity of 1.61% and 11.66%, respectively.

(Millions)
                                Net Income Graph

              1994        1995        1996        1997        1998
              ----        ----        ----        ----        ----
              $5.3        5.5         6.1         6.6         6.8

     Net  income for the  Company for 1997  was $6,560, an  increase of $443 or
7.24% over 1996.  The return on average assets and return on average equity for
1997 were 1.66% and 12.21%, respectively.

(Ratio)
                     Average Equity to Average Assets Graph

              1994        1995        1996        1997        1998
              ----        ----        ----        ----        ----
             11.46%      12.08%      12.75%      13.57%      13.84%

     The Company's  net income for 1996  was $6,117 which produced  a return on
average assets of 1.58% and a return on average equity of 12.37%.
     Basic net income per  share increased steadily over the  three-year period
rising from $1.61 per share in 1996 to $1.73 in 1997, and $1.79 in 1998.
     The  Company continues  to enjoy  good profitability  as indicated  by the
return on  average assets  and  steadily increasing  earnings per  share.   The
increased  level of bad debt expense was primarily in response to the growth in
the loan portfolio and  the need to provide adequate reserves.   The decline in
the return on average equity in 1998 was due to a net increase in the Company's
capital resulting from continued good earnings offset  by dividends paid to the
Company's  stockholders.  The dividend payout  ratio for 1998 was 41.29%, which
compares to 39.31% in 1997 and 37.55% in 1996.

NET INTEREST INCOME
     Net interest  income for 1998 was $17,900, an increase of $1,209 or  7.24%
over 1997.  In  1997, net interest income was $16,691, up  $1,080 or 6.92% from
1996 net interest income of $15,611.
     The  net yield on earnings assets  for 1998 was 4.77%.   In 1997 and 1996,
the net yield on earning assets was 4.75% and 4.59%, respectively.
     The Company experienced a higher level  of deposit growth in 1998 relative
to the two preceding years.  This allowed loan growth to be funded by deposits.
The investment portfolio grew as well.
     In 1997  and 1996, 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.
     In  1996, a  substantial amount of  loan growth  took place  in the highly
rate-competitive commercial loan  area.  This  limited the effect  of the  loan
growth on net interest income.

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

                                       5<PAGE>

Management's Discussion and Analysis

fair  market values  to  adverse movement  in  interest rates.   Interest  rate
sensitivity analyses indicate repricing  opportunities, and interest rate shock
simulations  indicate  potential  economic loss  due  to  future  interest rate
changes.  Management realizes certain risks are inherent and minimizes these by
adjusting asset/liability management responses to changing economic conditions.
     The Company reduces the volatility of its net  interest income by managing
the relationship  of interest-rate sensitive assets  to interest-rate sensitive
liabilities.  The Company would be impacted by rising interest rate changes, as
it is liability sensitive for the time period up to one year.  Beyond one year,
the cumulative interest rate  position is asset sensitive, indicating  that the
effect of rising rates would dissipate in the one to five year time period.
     The impact of rate fluctuations is dependent, however, upon the magnitude,
the  length of the rising or  falling rate trend, and the  period of time rates
remain stable at  a given level.  Based  on the information and  assumptions in
effect at December 31,  1998, management believes that  an immediate 200  basis
point  rate shock,  up or  down, over  a twelve-month  period could  affect the
Company's annualized net interest income or net economic value if not countered
by management's pricing strategies.

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

                                 Loan Loss Data
     ($ In thousands)                      1998        1997       1996
                                           ----        ----       ----
     Provision for loan losses           $     624        435        331  
     Net charge-offs to average
      net loans                               0.17%      0.28%      0.21% 
     Allowance for loan losses to
      loans, net of unearned
      income and deferred fees                1.12%      1.12%      1.31% 
     Allowance for loan losses to
      nonperforming loans                 9,567.86%  2,802.30%    418.02% 
     Allowance for loan losses to
      nonperforming assets                  408.38%    479.92%    236.24% 
     Nonperforming assets to loans,
      net of unearned income 
      and deferred fees, plus 
      other real estate owned                 0.27%      0.23%      0.55% 
     Nonaccrual loans                    $      28         87        616  
     Other real estate owned, net              628        421        474  
                                         ---------  ---------    -------  
      Total nonperforming assets         $     656        508      1,090  
                                         =========  =========    =======  
     Accruing loans past due 90 days
      or more                            $     550        672        458
                                         =========  =========    =======

                                       6<PAGE>


National Bankshares, Inc. and Subsidiaries

Nonperforming  loans include nonaccrual loans and do not include accruing loans
past due 90 days or more.  Nonperforming assets for 1998 have increased $148 or
29.13% from 1997.  The majority of the increase in nonperforming assets was due
to  an  increase  in foreclosed  properties.    Nonperforming  assets for  1997
decreased by $582 or 53.39% from the 1996 total of $1,090.
     Net charge-offs to average net loans  for 1998 were .17%, down 39.29% when
compared to  1997.  Allocations for these net charge-offs were made in previous
periods.   In 1998,  overall asset  quality  continued to  be satisfactory  and
general economic conditions favorable.   The provision for loan  loss increased
by $189 or 43.45%.  This increased  level of bad debt expense was primarily  in
response to  the growth in the  loan portfolio and  the need to provide  for an
adequate reserve. 
     Net charge-offs to average net loans for 1997 were .28%, up from 1996 when
that ratio was .21%.  While the Company did experience a slight increase in net
charge-offs,  there  was an  overall trend  of  improving asset  quality.   The
provision for loan losses, which  increased $104 in 1997 or 31.42%  over 1996's
provision of $331, was  increased to cover 1997's net charge-offs.   See note 5
of  Notes  to  Consolidated  Financial Statements  for  additional  information
relating  to nonperforming assets, past due loans, impaired loans and allowance
for loan losses.  
     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 due to
the complex circumstances that often surround troubled debts.

NONINTEREST INCOME
     Noninterest income for 1998 was $3,174, an increase of $340 or      12.00%
over 1997.  Noninterest income for 1997 was $2,834, up $141 or 5.24% from 1996.
     Service charges on deposits for 1998 totaled $1,165, an increase of $34 or
3.01% from 1997.  Service charges on deposit accounts in 1997  were down $52 or
4.40% 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
1998, these charges were $231, a decrease of $19 or 7.60% from 1997.  For 1997,
these charges totaled $250, a decrease of $19 or 7.06% from 1996.
     Trust income  for 1998 was  $774 which represents an  increase of $36   or
4.88% over 1997.  In 1997, trust income was $738, an increase of $135 or 22.39%
over 1996.  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 1998, credit card income totaled $653, an increase of $47 or 7.76%
over 1997.   Credit card income for 1997 was $606,  up $95 or 18.59% over 1996.
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.

                                       7<PAGE>


Management's Discussion and Analysis

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 securities gains were $188  in 1998, up $151 or 408.11% from 1997.  In
1997, net securities gains were  $37, down 61.86% from 1996.   Gains and losses
can  occur as  a result  of portfolio  restructuring, securities  called before
maturity and certain market adjustments.

NONINTEREST EXPENSE
     Noninterest  expense in  1998 totaled  $11,061, up  $1,030 or  10.27% from
1997.   In 1997, noninterest expense was $10,031, an  increase of $516 or 5.42%
from 1996.
     Salaries and  benefits increased $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, to  salary adjustments and from  increases in
other normal compensation related items.  
     In 1997, salaries  and benefits expense totaled  $5,398, up $120  or 2.27%
from 1996.  The increase resulted from the addition of staff in connection with
NBB's opening of a new branch office early in 1997 and from salary adjustments,
promotions  and other  normal  compensation related  items,  offset by  a  $119
decrease in net pension cost.  
     Occupancy  and furniture and fixtures  expense increased $40  or 4.18% for
1998 when compared to  1997.  This increase was due  to higher costs associated
with the Galax office acquired by NBB in the second quarter and also to regular
planned  maintenance  of  facilities.   Management  anticipates  occupancy  and
furniture  and  fixtures  expense will  continue  to  increase.   The  expected
increase  in  occupancy and  furniture and  fixtures  expense will  be somewhat
moderated by a  future reduction in expenses for leased premises. Occupancy and
furniture and  fixtures expense experienced an  increase in 1997 of  8.37% over
1996.  A portion of this increase was  the result of a new branch opened by NBB
in the Rich Creek area of Giles County.
     Data  processing and ATM expense was $771  for 1998, an increase over 1997
of $193 or 33.39%.  This increase was due  to costs associated with the upgrade
of information system hardware  and software and costs  related to an  expanded
microcomputer  network.   Data processing  and ATM  expense is  also likely  to
increase in 1999, as BTC completes  a planned upgrade of its information system
hardware and  software and an expansion of its microcomputer network.  In 1997,
data processing  and ATM expense was  $578, an increase  of $81 or  16.30% over
1996.   In the fourth  quarter of 1997 the Company  began an overall upgrade of
its data  processing systems.   This  upgrade was  principally due  to capacity
limitations  of  the  existing system  that  prevented  both  of the  Company's
affiliates from using a single system.  
     The cost of Federal Deposit  Insurance decreased in 1998 by $6  from 1997.
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 1997, the Company's affiliates paid a premium of $43, an  increase of
$39 over 1996.  
     Credit card  processing expense for 1998 was $599, an  increase of $48  or
8.71%  over  1997.   This  increase  reflects  additional  expense due  to  the
introduction of a debit  card product, higher merchant processing costs  and an
overall increase in business activity.  In 1997, credit card processing expense

                                       8<PAGE>

National Bankshares, Inc. and Subsidiaries

was  $551, an increase  of 18.24% which  was primarily the  result of increased
business activity from the introduction of the debit card product.
     Net costs of other real estate owned for 1998 were $37, an increase of $29
or  362.50% from  1997.   Other real  estate owned  net of  valuation allowance
increased in  1998 by $207.   Efforts  to market existing  properties continue,
however, the exact  timing, terms and conditions of the  sale of the properties
remain  unknown.   In  1997,  net costs  of other  real  estate owned  were $8,
increasing $3 from 1996. 
     Other operating expenses were $2,759 in 1998, up $294 or 11.93% from 1997,
which was primarily the result of miscellaneous operational upgrades at BTC and
expenditures made in conjunction with the computer system upgrade at  BTC.  The
other  operating expense  category in  1997 was  $2,465, increasing  4.85% from
1996.

INCOME TAXES
     Higher  pre-tax income in  1998 resulted in  a $92 increase  in income tax
expense  when compared to 1997.  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  1998, 1997 and 1996 were 27.60%,  27.59% and
27.68%, respectively.  
     See  note 9 of Notes  to Consolidated Financial  Statements for additional
information relating to income taxes.

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

BALANCE SHEET

(Millions)
                               Total Assets Graph

              1994        1995        1996        1997        1998
              ----        ----        ----        ----        ----

             $373.1      380.9       388.9       402.9       445.2

     Total assets at year-end  1998 were $445,166 which represents  an increase
of $42,259 or 10.49% over the previous  year.  The Company's primary methods of
achieving growth  are to seek to increase deposits at its bank subsidiaries and
to grow through corporate  acquisitions and mergers.  Until  1998, management's
strategy was  to fund loan growth  through maturities and  calls of securities.
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 1998 and 1997, total average deposits grew by $20,531
and $3,501, respectively,  which represents  growth rates of  6.05% and  1.04%,
respectively.

LOANS
     Loans,  net  of unearned  income  and deferred  fees, grew  by  $22,267 or
10.26%  in 1998.    Commercial loans  grew by  $9,130  or 9.01%  with loans  to
individuals increasing by $2,858 or 4.29%.

                                       9<PAGE>


Management's Discussion and Analysis

     In 1997,  loans, net of unearned income and deferred fees, grew by $20,817
or 10.61%.   Commercial loans, which  grew by $13,860 or  15.84%, accounted for
the largest portion of the increase.
     The Company engages in the  origination and sale of mortgage loans  in the
secondary  market.   In  1998  and 1997,  the  Company  originated $41,472  and
$19,120,  respectively,  and  sold  $39,697  and  $19,231  in  1998  and  1997,
respectively, of mortgage loans.

SECURITIES
     In  1998, bank-owned securities increased by $16,780 or 11.19% compared to
1997.  
     In 1997, total bank-owned  securities decreased by $21,270 or  12.42% from
1996.   In  1997, cash  flows resulting  from the  reduction in  the securities
portfolio were used to fund loan growth.
     The  Company's  investment  policy  stresses  safety,  with  a program  of
purchasing  high quality securities such  as U.S. Treasury  and U.S. Government
agency  issues, state, county, and  municipal bonds, corporate bonds, mortgage-
backed  securities and  other  bank qualified  investments.   The  Company  has
classified all  of its  investment securities  as  either held  to maturity  or
available for  sale, as  the Company  does not  engage  in trading  activities.
Investment  strategies are  adjusted  in  response  to  market  conditions  and
available investment vehicles.
     At  December  31,   1998  and   1997,  the  Company   had  no   investment
concentrations  in any single issues (excluding  U.S. Government) that exceeded
ten percent of capital.

DEPOSITS
     At year-end 1998, total  deposits were $382,696 which represent  a $37,829
or 10.97%  increase over  1997.   At  December 31,  1997,  total deposits  were
$344,867, an increase of 3.07% over 1996.
     Average noninterest-bearing deposits  of $49,552 grew by  $5,359 or 12.13%
in  1998, $2,196  or  5.23% in  1997  and $3,164  or 8.15%  in  1996.   Average
interest-bearing deposits were $310,418 in 1998, an increase of 
$15,172  over 1997.   In  1997, average  interest-bearing deposits  of $295,246
increased $1,305 from the 1996 total.

DERIVATIVES AND MARKET RISK EXPOSURES
     The Company is  not a party to derivative financial  instruments with off-
balance sheet risks such as futures,  forwards, swaps and options.  The Company
is  a  party to  financial  instruments with  off-balance  sheet risks  such as
commitments  to  extend  credit,  standby  letters   of  credit,  and  recourse
obligations in the normal course of business to meet the financing needs of its
customers.   See  note 13  of Notes  to Consolidated  Financial Statements  for
additional information relating to financial instruments with off-balance sheet
risk.  Management does not plan  any future involvement in high risk derivative
products.     The  Company  has  investments   in  mortgage-backed  securities,
principally GNMA's, with a  fair value of approximately $17,728  which includes
$2,816  of  structured notes.   In  addition,  the Company  has  investments in
nonmortgage-backed structured notes with a  fair value of approximately $5,327.
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

                                       10<PAGE>

National Bankshares, Inc. and Subsidiaries

Financial Statements for information relating to nonperforming assets, past due
loans, impaired loans  and allowance for loan losses.  See  note 14 of Notes to
Consolidated Financial Statements for information relating to concentrations of
credit risk.  The Company has an asset/liability program to manage its interest
rate risk.   This program provides  management with information related  to the
rate sensitivity of certain assets  and liabilities and the effect of  changing
rates on profitability  and capital accounts.   While this planning  process is
designed to protect the  Company over the long  term, it does not  provide near
term  protection from interest rate  shocks, as interest  rate sensitive assets
and liabilities do  not, by their nature, move up or down in tandem in response
to 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 15 of Notes
to  Consolidated Financial Statements for information relating to fair value of
financial instruments.

LIQUIDITY
     Liquidity is the ability to provide sufficient cash flow to meet financial
commitments  and to  fund  additional loan  demand  or withdrawal  of  existing
deposits.  Sources of  liquidity include deposits, loan principal  and interest
repayments,  sales,   calls  and   maturities  of  securities   and  short-term
borrowings.  The Company maintained an adequate liquidity level during 1998 and
1997.   Management is not aware of any  trends, commitments or events that will
result  in, or  are reasonably  likely  to result  in, a  material increase  or
decrease in liquidity.
     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.
     Net cash from operating  activities of $7,573 in 1997 decreased  $395 from
1996  due primarily to the increase in net income offset by the change in other
liabilities.  Net cash  flows provided by operating activities,  securities and
financing activities for 1997 of $7,573, $21,966 and $7,562, respectively, were
used  to fund  the  net  increases  in  federal  funds  sold,  interest-bearing
deposits,  loans  made to  customers and  purchases  of loan  participations of
$2,390, $9,637, $17,400 and $6,189, respectively.

CAPITAL RESOURCES

(Millions)
                           Stockholders' Equity Graph

         1994          1995           1996          1997          1998
         ----          ----           ----          ----          ----

         $42.7         48.2           49.8          54.0          58.5

     Total stockholders' equity increased  $4,474 from 1997 to 1998  and $4,228
from 1996 to 1997.   Net income, less cash dividends on  common stock of $2,807
in  1998  and $2,579  in  1997,  accounted primarily  for  the  increase.   Net
unrealized gains (losses)  on securities  available for sale,  net of  deferred
income taxes, were $1,019 at December 31,  1998, $194 at December 31, 1997  and
$(248)  at December  31,  1996.   These  unrealized net  gains  and losses  are
recorded as a  separate component of stockholders' equity  and will continue to

                                       11<PAGE>


Management's Discussion and Analysis

be subject to change in future years due to fluctuations in fair values, sales,
purchases, maturities and calls of securities classified as available for sale.
     The Company has operated from a consistently strong capital position.  The
ratio of total stockholders' equity to total assets was 13.14% at year end 1998
compared to 13.41%  at year end 1997  and 12.81% at year  end 1996.  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
and  Bank of  Tazewell  County's  capital  adequacy  ratios  exceed  regulatory
requirements  and  provide added  flexibility  to  take advantage  of  business
opportunities as  they arise.  See  note 10 of Notes  to Consolidated Financial
Statements for additional information.

RECENT ACCOUNTING PRONOUNCEMENTS
     See notes  1 and  18  of Notes  to Consolidated  Financial Statements  for
information relating to recent accounting pronouncements.

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

FUTURE MANAGEMENT CONSIDERATIONS
     Year 2000
     The Company recognizes the risks and challenges presented by the impact of
the  century  date  change  on  information  processing   and  other  microchip
controlled  systems.   The  Year  2000  ("Y2K")  involves  several  issues  for
financial institutions.   The Company's own internal information processing and
microchip controlled  systems, as well as  those of its major  service vendors,
must  be Y2K compliant.  Banks face  credit, earnings and liquidity risk should
commercial  loan  customers or  large  depositors  suffer significant  business
disruptions as  a  result of  the  impact of  computer  failures in  their  own
operations or in those of their suppliers or customers.   Banks could encounter
temporary  funding shortages if customers withdraw unusually large sums of cash
because they  are unduly concerned  about the  effects of Y2K.   And,  although
management  believes the level of counterpart  trading risk is low, there could

                                       12<PAGE>


National Bankshares, Inc. and Subsidiaries

be  a temporary or permanent effect  on the investment portfolio resulting from
the negative impact of Y2K on the underlying entities.
     Both  of the  Company's  bank subsidiaries  have  established Y2K  project
management  teams that have developed  Y2K plans with  assessment, testing, and
remediation  phases.  The internal  audit department is  conducting Y2K audits,
and both  banks  are subject  to  the  guidelines promulgated  by  the  Federal
Financial Institutions  Examination Counsel  (FFIEC) and to  regular Year  2000
compliance examinations by their respective federal regulators.
     The assessment phase  outlined in both NBB's and BTC's  Y2K plans has been
completed.  The banks have identified all internal mission critical information
technology and  microchip controlled  systems.   Outside  vendors that  provide
mission critical service to the institutions have also been identified.
     Because  of their  importance  to daily  business operations,  substantial
attention  has  been  focused on  the  banks'  customer information  processing
hardware  and  software.   In  1997,  in the  normal  course  of business,  NBB
purchased a new  Unisys host computer and peripherals and  installed the latest
version of  its  Information Technology,  Inc.  (ITI) software.   In  the  last
quarter  of  1998,  BTC  converted   from  its  previous  in-house  information
processing system.   BTC is  now processed using  NBB's hardware and  software.
The NBB  system has  been tested,  including century  date  rollover and  other
critical dates, and validation of the ITI application is complete.
     Each  bank  has identified  as  mission  critical independent  information
technology  systems in their Trust Departments.  NBB has successfully completed
proxy testing of its external service provider, and BTC has successfully tested
its  internal  system.   Microchip controlled  bank  security systems  are also
mission critical.  Testing of these systems at both banks determined that minor
renovations were necessary at three offices.
     The Federal Reserve Bank of Richmond has provided comprehensive procedures
and instructions for interface testing.  During the first quarter  of 1999, NBB
and BTC will  test all  utilized services, including  wire transfer,  automated
clearing house and savings bonds.
     Both NBB and  BTC deal with outside vendors that  provide mission critical
support for bank  card processing and ATM servicing.   The banks are monitoring
these  vendors' progress to assure their  Y2K readiness.  The vendors regularly
provide status reports and testing criteria.  However, because both banks  have
decided to convert to a new ATM servicer in the first half of 1999,  testing of
that application  will be delayed until the NBB conversion is complete in March
1999.
     Each  bank has developed  and implemented programs to  assess the level of
Y2K risk among large loan customers.  NBB's Credit Review department performs a
precredit analysis of all new large loans made by both banks.  An assessment of
the potential effects of the Year 2000 on the credit-worthiness of borrowers is
a  part of this  analysis.  BTC is  asking new commercial  borrowers to sign an
agreement  to insure  compliance  with minimum  standards  with regard  to  Y2K
issues.  That  bank is also  following up with  these borrowers to insure  that
promised deadlines are met.   Both NBB and BTC have also  completed assessments
of Year 2000 preparedness among existing large commercial loan customers.
     The banks have ongoing initiatives designed to educate customers about Y2K
issues and  to allay any unwarranted concerns about the safety and soundness of
the  institutions.  Leaflets  discussing the topic were  sent to all customers,
and the banks have  posted information on their Web  sites.  NBB held  a public
forum  directed at small businesses and has established a toll free information
hotline.  Employee training and awareness campaigns have been completed.
     Contingency  plans  have been  drafted  by  NBB  and  BTC to  1)  identify
alternatives  if mission critical applications do not meet the banks' readiness
plan,  and 2) develop a  course of action to assure  business continuity in the

                                       13<PAGE>


Management's Discussion and Analysis

event  there are  system  failures on  critical dates.   Both  institutions are
providing their Boards of Directors with regular reports on Y2K initiatives and
preparedness.
     At  this time, National Bankshares, Inc. believes  that in the most likely
worst-case scenarios,  Y2K will  not have  a material  effect on  the Company's
operations,  liquidity  or financial  condition.    Although contingency  plans
address multiple alternative  scenarios, the Company believes it  is impossible
for  any business  to  address the  potentially  unlimited number  of  possible
circumstances relating  to Y2K  issues.   Even though  it  is highly  unlikely,
National Bankshares  recognizes  that if  its  Y2K assessment,  remediation  or
contingency plans prove to be inadequate, this could have a  material impact on
its  operations and  therefore  result in  a  material  adverse effect  on  the
Company's results of operations and financial condition.
     The Company's  recently completed  upgrade of internal  processing systems
does enhance Y2K preparedness.  However, the major goals of the upgrade were to
provide  a shared information processing  system for affiliates  and to provide
additional processing capacity and the ability to use the most advanced version
of software  available.   The costs  of the upgrade  were substantial,  but the
total of costs  of the upgrade  directly related to  the Y2K component was  not
material.

COMMON STOCK INFORMATION AND DIVIDENDS
     National  Bankshares, Inc.'s common stock is  traded on a limited basis in
the over-the-counter  market and  is not  listed on any  exchange or  quoted on
NASDAQ.   Some trades in the  Company's stock are reported on  the OTC Bulletin
Board  under the trading symbol NKSH.   Local brokerage firms are familiar with
and active in trading in  the common stock of National Bankshares, Inc.   As of
December  31, 1998, there were  1,154 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 1998  and 1997.
Prices do  not necessarily  reflect the prices  which would have  prevailed had
there been  an active trading  market, nor  do they reflect  unreported trades,
which may have been at lower or higher prices.

                           Common Stock Market Prices

                                                           Dividends
                               1998           1997         Per Share
                             --------       --------       ---------
                           High     Low    High    Low    1998   1997
                           ----     ---    ----    ---    ----   ----
        First Quarter     $27.75   24.75   26.25   25.00    ---     ---
        Second Quarter     28.00   26.50   25.87   23.50    .36     .33
        Third Quarter      27.50   23.25   25.75   23.81    ---     ---
        Fourth Quarter     24.25   21.25   26.50   23.50    .38     .35


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





                                       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, 1998 and  1997, 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, 1998.   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,  1998 and 1997,  and the
results of  their operations and their cash flows for  each of the years in the
three-year period ended December 31, 1998 in conformity with generally accepted
accounting principles.

As discussed in note 1(R) 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.


                                                  KPMG LLP




Roanoke, Virginia
February 5, 1999













                                       15<PAGE>

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

<CAPTION>
$ In thousands, except share and per share data.
 December 31, 1998 and 1997                                        1998       1997
                                                                   ----       ----
<S>                                                                <C>        <C>
Assets        Cash and due from banks (notes 2 and 15)            $ 14,421   12,435  
              Interest-bearing deposits (note 15)                    7,027    9,728  
              Federal funds sold (note 15)                           5,090    4,300  
              Securities available for sale (notes 3 and 15)       136,078   65,582  
              Securities held to maturity (fair value $31,151                        
               in 1998 and $85,005 in 1997) (notes 3 and 15)        30,676   84,392  
              Mortgage loans held for sale (notes 13, 14 and 15)     2,180      405  
              Loans (notes 4, 5, 14 and 15):
                   Real estate construction loans                   12,827    8,510  
                   Real estate mortgage loans                       48,724   42,969  
                   Commercial and industrial loans                 110,509  101,379  
                   Loans to individuals                             69,493   66,635  
                                                                  --------  -------  

                        Total loans                                241,553  219,493  

                   Less unearned income and deferred fees           (2,296)  (2,503) 
                                                                  --------  -------  

                        Loans, net of unearned income and
                         deferred fees                             239,257  216,990  

                   Less allowance for loan losses (note 5)          (2,679)  (2,438) 
                                                                  --------  -------  

                        Loans, net                                 236,578  214,552  
                                                                  --------  -------  

              Bank premises and equipment, net (note 6)              6,657    5,739  
              Accrued interest receivable                            3,777    3,445  
              Other real estate owned, net (note 5)                    628      421  
              Other assets (note 9)                                  2,054    1,908  
                                                                  --------  -------  

                        Total assets                              $445,166  402,907  
                                                                  ========  =======  

Liabilities   Noninterest-bearing demand deposits                 $ 55,479   45,093  
and           Interest-bearing demand deposits                      84,319   77,863  
Stockholders' Savings deposits                                      46,387   46,773  
Equity        Time deposits (note 7)                               196,511  175,138  
                                                                  --------  -------  

                        Total deposits (note 15)                   382,696  344,867  
                                                                  --------  -------  




                                          16<PAGE>



              Other borrowed funds (note 15)                           214      485  
              Accrued interest payable                                 647      722  
              Other liabilities (note 8)                               926      966  
                                                                  --------  -------  

                        Total liabilities                          384,483  347,040  
                                                                  --------  -------  

              Common stock subject to ESOP put option (note 8)       2,180    1,838  
                                                                  --------  -------  

              Stockholders' equity (notes 9, 10 and 16):
                   Preferred stock of no par value. Authorized
                    5,000,000 shares; none issued and
                    outstanding                                        ---      ---  
                   Common stock of $2.50 par value. Authorized
                    5,000,000 shares; issued and outstanding
                    3,792,833 shares                                 9,482    9,482  
                   Retained earnings                                50,182   46,191  
                   Accumulated other comprehensive income            1,019      194  
                   Common stock subject to ESOP put option
                    (77,301 shares at $28.20 per share in 1998
                    and 72,783 shares at $25.25 per share in
                    1997) (note 8)                                  (2,180)  (1,838) 
                                                                  --------  -------  

                        Total stockholders' equity                  58,503   54,029  

              Commitments and contingent liabilities (notes 6, 8
               and 13)
                                                                                     
                        Total liabilities and stockholders'       --------  -------  
                         equity
                                                                  $445,166  402,907  
                                                                  ========  =======  



















See accompanying notes to consolidated financial statements.
</TABLE>
                                          17<PAGE>
<TABLE>
National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Income and Comprehensive Income

<CAPTION>
$ In thousands, except per share data. Years ended
December 31, 1998, 1997 and 1996                         1998       1997      1996
                                                         ----       ----      ----
<S>                                                      <C>        <C>       <C>
Interest      Interest and fees on loans                $ 21,691   19,553      17,232 
Income        Interest on federal funds sold                 345      451         476 
              Interest on interest-bearing deposits          696      230          91 
              Interest on securities - taxable             7,201    7,776       8,877 
              Interest on securities - nontaxable          1,895    1,787       1,971 
                                                        --------  -------     ------- 
              
                   Total interest income                  31,828   29,797      28,647 
                                                        --------  -------     ------- 

Interest      Interest on time deposits of $100,000                                   
Expense        or more                                     2,457    2,335       2,070 
              Interest on other deposits                  11,460   10,754      10,939 
              Interest on borrowed funds                      11       17          27 
                                                        --------  -------     ------- 

                   Total interest expense                 13,928   13,106      13,036 
                                                        --------  -------     ------- 

                   Net interest income                    17,900   16,691      15,611 

              Provision for loan losses (note 5)             624      435         331 
                                                        --------  -------     ------- 

                   Net interest income after                                          
                    provision for loan losses             17,276   16,256      15,280 
                                                        --------  -------     ------- 

Noninterest   Service charges on deposit accounts          1,165    1,131       1,183 
Income        Other service charges and fees                 231      250         269 
              Credit card fees                               653      606         511 
              Trust income                                   774      738         603 
              Other income                                   163       72          30 
              Realized securities gains, net (note 3)        188       37          97 
                                                        --------  -------     ------- 

                   Total noninterest income                3,174    2,834       2,693 
                                                        --------  -------     ------- 

Noninterest   Salaries and employee benefits (note 8)      5,824    5,398       5,278 
Expense       Occupancy and furniture and fixtures           998      958         884 
              Data processing and ATM                        771      578         497 
              FDIC assessment                                 37       43           4 
              Credit card processing                         599      551         466 
              Goodwill amortization                           36       30          30 
              Net costs of other real estate owned            37        8           5 
              Other operating expenses                     2,759    2,465       2,351 
                                                        --------  -------     ------- 

                   Total noninterest expense              11,061   10,031       9,515 
                                                        --------  -------     ------- 


                                          18<PAGE>


              Income before income tax expense             9,389    9,059       8,458 
              Income tax expense (note 9)                  2,591    2,499       2,341 
                                                        --------  -------     ------- 

                   Net income                              6,798    6,560       6,117 
                                                        --------  -------     ------- 

              Other comprehensive income (loss), net
               of income taxes:
                Net unrealized gains (losses) on
                 securities available for sale (notes
                 1 and 17):
                  Arising during the year                    356      442        (530)
                  Cumulative accounting change               469      ---         --- 
                                                        --------  -------     ------- 

                   Total                                     825      442        (530)
                                                        --------  -------     ------- 

                   Comprehensive income                 $  7,623    7,002       5,587 
                                                        ========  =======     ======= 

                   Basic net income per share (note 1)  $   1.79     1.73        1.61 
                                                        ========  =======     ======= 































See accompanying notes to consolidated financial statements.

</TABLE>

                                          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,     Common   Retained   Comprehensive    Put
1998, 1997 and 1996                 Stock    Earnings      Income      Option    Total
                                    ------   --------   -------------  -------   -----
<S>                                 <C>      <C>        <C>            <C>       <C>
Balances, December 31, 1995        $ 9,482     38,390         282         ---    48,154 
Net income                             ---      6,117         ---         ---     6,117 
Cash dividends ($.62 per share)        ---     (1,787)        ---         ---    (1,787)
Cash dividends of BTC declared
 prior to merger                       ---       (510)        ---         ---      (510)
Change in net unrealized gains
 (losses) on securities available
 for sale, net of income tax
 benefit of $273                       ---        ---        (530)        ---      (530)
Change in common stock subject to
 ESOP put option                       ---        ---         ---      (1,643)   (1,643)
                                   -------     ------      ------      ------    ------ 
                                                                       
Balances, December 31, 1996          9,482     42,210        (248)     (1,643)   49,801 
Net income                             ---      6,560         ---         ---     6,560 
Cash dividends ($.68 per share)        ---     (2,579)        ---         ---    (2,579)
Change in net unrealized gains
 (losses) on securities available
 for sale, net of income tax                                    
 expense of $228                       ---        ---         442         ---       442 
Change in common stock subject to
 ESOP put option                       ---        ---         ---        (195)     (195)
                                   -------     ------      ------      ------    ------ 

Balances at December 31, 1997        9,482     46,191         194      (1,838)   54,029 
Net income                             ---      6,798         ---         ---     6,798 
Cash dividends ($.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                                ---        ---         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 
                                   =======     ======      ======      ======    ====== 




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, 1998, 1997 and 1996        1998        1997       1996
                                                                    ----        ----       ----
<S>                                                                 <C>         <C>        <C>
Cash Flows   Net income                                            $  6,798      6,560       6,117
from         Adjustments to reconcile net income to net cash
Operating     provided by operating activities: 
Activities        Provision for loan losses                             624        435         331 
(Note 12)         Recovery of bond losses                               ---        (10)        (89)
                  Provision for deferred income taxes                  (135)       300          (4)
                  Depreciation of bank premises and equipment           811        586         517 
                  Amortization of intangibles                           144        121         121 
                  Amortization of premiums and accretion of
                   discounts, net                                        87         11          52 
                  Gains on sales and calls of
                   securities available for sale, net                  (145)        (5)         (3)
                  Other                                                (135)       (18)         (7)
                  (Increase) decrease in:
                       Mortgage loans held for sale                  (1,775)       111         364 
                       Accrued interest receivable                     (332)        65         111 
                       Other assets                                    (580)       (76)         40 
                  Increase (decrease) in:
                       Accrued interest payable                         (75)        22         (44)
                       Other liabilities                                (40)      (529)        462 
                                                                   --------    -------     ------- 
                                                                                                   
                            Net cash provided by operating
                             activities                               5,247      7,573       7,968 
                                                                   --------    -------     ------- 

Cash Flows   Net (increase) decrease in federal funds sold             (790)    (2,390)      5,815 
from         Net decrease (increase) in interest-bearing
Investing     deposits                                                2,701     (9,637)        (91)
Activities   Proceeds from repayments of mortgage-backed
(Note 12)     securities available for sale                           1,065        396         180 
             Proceeds from sales of other securities available                          
              for sale                                                2,999        ---       1,000 
             Proceeds from calls and maturities of other
              securities available for sale                          35,180      9,443      21,758 
             Proceeds from calls and maturities of
              securities held to maturity                            34,187     35,673      35,569 
             Purchases of mortgage-backed securities available
              for sale                                              (14,175)       ---         --- 
             Purchases of other securities available for sale       (73,685)   (12,201)    (10,397)
             Purchases of securities held to maturity                (1,000)   (11,345)    (32,477)

                                                      21<PAGE>
             Purchases of loan participations                        (4,635)    (6,189)     (1,704)
             Collections of loan participations                       4,074      1,934       2,448 
             Loans purchased including premium                       (4,051)       ---         --- 
             Net increase in loans made to customers                (18,675)   (17,400)    (31,633)
             Proceeds from disposal of other real estate owned          194        216         325 
             Recoveries on loans charged off                            255        107         125 
             Bank premises and equipment expenditures                (1,770)    (1,304)       (882)
             Proceeds from sale of bank premises and equipment          114          8         --- 
                                                                   --------    -------     ------- 

                            Net cash used in investing
                             activities                             (38,012)   (12,689)     (9,964)
                                                                   --------    -------     ------- 
Cash Flows
from         Deposits acquired, net of premium                        7,016        ---         --- 
Financing    Net increase in time deposits                           14,357      6,618       1,672 
Activities   Net increase in other deposits                          16,456      3,665       2,599 
(Note 12)    Net increase (decrease) in other borrowed funds           (271)      (142)        466 
             Cash dividends paid                                     (2,807)    (2,579)     (2,807)
                                                                   --------    -------     ------- 

                            Net cash provided by
                             financing activities                    34,751      7,562       1,930 
                                                                   --------    -------     ------- 

             Net increase (decrease) in cash and due from banks       1,986      2,446         (66)
             Cash and due from banks at beginning of year            12,435      9,989      10,055 
                                                                   --------    -------     ------- 
             Cash and due from banks at end of year                $ 14,421     12,435       9,989 
                                                                   ========    =======     ======= 















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

Notes to Consolidated Financial Statements

$ In thousands, except share and per share data.  
December 31, 1998, 1997 and 1996

Note 1: Summary of Significant Accounting Policies
     The  accounting  and  reporting  policies of  National  Bankshares,  Inc.
(Bankshares)  and   its  wholly-owned  subsidiaries,  The   National  Bank  of
Blacksburg  (NBB)  and Bank  of Tazewell  County  (BTC), conform  to generally
accepted  accounting  principles  and  general practices  within  the  banking
industry (see note 16 for merger with BTC).  
     The following is a summary of the more significant accounting policies.
     (A)  Consolidation
          The  consolidated  financial  statements  include  the  accounts  of
     National  Bankshares,   Inc.  and  its  wholly-owned   subsidiaries  (the
     Company). All  significant intercompany  balances  and transactions  have
     been eliminated.
     (B)  Cash and Cash Equivalents
          For purposes  of reporting  cash  flows, cash  and cash  equivalents
     include cash on hand and due from banks.
     (C)  Securities
          Securities  available  for sale  are  reported at  fair  value, with
     unrealized gains and losses excluded from net income and reported, net of
     income  taxes,   in  a   separate  component  of   stockholders'  equity.
     Securities held to maturity are stated at cost, adjusted for amortization
     of  premiums and accretion of discounts on a basis which approximates the
     level yield method.  The Company  does not engage in securities  trading.
     Gains  and  losses  on securities  are  accounted  for  on the  completed
     transaction basis by the specific identification method.
          A decline in  the fair value  of any available  for sale or  held to
     maturity  security  below cost  that is  deemed  other than  temporary is
     charged to income resulting in the  establishment of a new cost basis for
     the security.
     (D)  Loans
          Loans  are  stated  at  the  amount  of  funds  disbursed  plus  the
     applicable  amount, if  any, of  unearned income  and deferred  fees less
     payments  received.   Income  on  installment  loans, including  impaired
     installment  loans that  have not  been placed  in nonaccrual  status, is
     recognized on methods which approximate the level yield method.  Interest
     on all other  loans, including impaired  other loans  that have not  been
     placed  in nonaccrual status, is accrued based on the balance outstanding
     times the applicable interest rate.
          Interest is  recognized on the cash  basis for all  loans carried in
     nonaccrual  status.  Loans generally are placed in nonaccrual status when
     the collection  of principal or  interest is  90 days or  more past  due,
     unless  the obligation  is  both  well-secured  and  in  the  process  of
     collection.
          Impaired  loans are  presented in  the financial  statements at  the
     present value  of expected future cash flows or  at the fair value of the
     loan's  collateral if  the  loan is  deemed  "collateral dependent."    A
     valuation allowance is  required to the  extent that  the measure of  the
     impaired  loans is less than  the recorded investment.   This requirement
     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.

                                      23<PAGE>

Notes to Consolidated Financial Statements

          Mortgage  loans held for  sale are carried  at the lower  of cost or
     fair value on an individual loan basis.
     (E)  Allowance for Loan Losses
          The allowance for loan losses is a valuation allowance consisting of
     the cumulative effect of the provision for  loan losses, plus any amounts
     recovered on loans previously charged off, minus loans charged  off.  The
     provision for loan  losses charged to expense is  the amount necessary in
     management's judgement to  maintain the  allowance for loan  losses at  a
     level it  believes adequate  to absorb  losses in  the collection of  its
     loans.
     (F)  Bank Premises and Equipment
          Bank premises and equipment  are stated at cost, net  of accumulated
     depreciation.   Depreciation  is charged  to  expense over  the estimated
     useful lives of the assets on the straight-line basis.  Depreciable lives
     include  40 years for premises,  3-10 years for  furniture and equipment,
     and 5  years for computer software.  Costs of maintenance and repairs are
     charged to expense as incurred and improvements are capitalized.
     (G)  Other Real Estate Owned
          Other real estate, acquired  through foreclosure or deed in  lieu of
     foreclosure, is carried at  the lower of the  recorded investment or  its
     fair value,  less estimated costs to  sell (net realizable value).   When
     the property  is  acquired, any  excess  of  the loan  balance  over  net
     realizable value is charged to the allowance for loan losses.   Increases
     or  decreases in the net realizable value of such properties are credited
     or charged to  income by adjusting the valuation allowance for other real
     estate  owned.    Net  costs  of  maintaining  or  operating   foreclosed
     properties are expensed as incurred.  
     (H)  Intangible Assets
          Included in other assets are deposit intangibles of $706 and $575 at
     December 31, 1998 and 1997,  respectively, and goodwill of $420  and $337
     at December 31,  1998 and  1997, 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)  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 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.
     (J)  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

                                      24<PAGE>

National Bankshares, Inc. and Subsidiaries

     Company contributes to  the pension plans amounts  deductible for federal
     income tax purposes.
     (K)  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.
     (L)  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.
     (M)  Net Income Per Share
          Basic net income per share is based upon the weighted average number
     of common shares outstanding (3,792,833 shares in 1998, 1997 and 1996).
          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.   It replaces the
     presentation of  primary EPS with a  presentation of basic EPS.   It also
     requires dual  presentation of basic and  diluted EPS on the  face of the
     income statement for  all entities  with complex  capital structures  and
     requires a reconciliation of  the numerator and denominator of  the basic
     EPS  computation  to the  numerator and  denominator  of the  diluted EPS
     computation.
          Basic  EPS excludes  dilution  and is  computed  by dividing  income
     available to common stockholders by the weighted-average number of common
     shares  outstanding for the period.   Diluted EPS  reflects the potential
     dilution  that  could occur  if securities  or  other contracts  to issue
     common stock were exercised or converted into common stock or resulted in
     the  issuance of  common stock that  then shared  in the  earnings of the
     entity.
          Statement 128  was adopted by the Company at December 31, 1997.  The
     Statement  requires  restatement  of  prior  years  EPS  data  previously
     presented.  Adoption of this Statement did not have any effect on current
     or prior  years' EPS data presented  due to the Company's  simple capital
     structure.
     (N)  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.
     (O)  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.

                                      25<PAGE>

Notes to Consolidated Financial Statements

          (2)  Securities
                    The  fair values  of securities  are determined  by quoted
               market  prices or  dealer quotes.   The  fair value  of certain
               state and municipal securities is not readily available through
               market  sources other  than  dealer quotations,  so fair  value
               estimates  are  based  on   quoted  market  prices  of  similar
               instruments,  adjusted  for  differences  between   the  quoted
               instruments and the instruments being valued.
          (3)  Loans
                    Fair  values are  estimated for  portfolios of  loans with
               similar  financial characteristics.   Loans  are segregated  by
               type such  as mortgage loans  held for  sale, commercial,  real
               estate  - commercial, real estate - construction, real estate -
               mortgage,  credit card  and other  consumer loans.    Each loan
               category is  further segmented  into fixed and  adjustable rate
               interest terms and by performing and nonperforming categories.
                    The  fair  value  of  performing loans  is  calculated  by
               discounting scheduled cash flows through the estimated maturity
               using estimated  market discount rates that  reflect the credit
               and  interest  rate  risk inherent  in  the  loan,  as well  as
               estimates  for prepayments.  The estimate  of maturity is based
               on the Company's historical experience with repayments for each
               loan classification,  modified, as required, by  an estimate of
               the effect of current economic and lending conditions.
                    Fair value for significant nonperforming loans is based on
               estimated  cash  flows  which   are  discounted  using  a  rate
               commensurate with  the risk associated with  the estimated cash
               flows.    Assumptions regarding  credit  risk,  cash flows  and
               discount  rates are  judgmentally  determined  using  available
               market information and specific borrower information.
          (4)  Deposits
                    The  fair  value of  demand  and savings  deposits  is the
               amount payable on  demand.   The fair value  of fixed  maturity
               time deposits  and certificates  of deposit is  estimated using
               the rates currently offered for deposits with similar remaining
               maturities.
          (5)  Other Borrowed Funds
                    Other borrowed  funds  represents treasury  tax  and  loan
               deposits.  The carrying amount is a reasonable estimate of fair
               value because the deposits are generally repaid within 1 to 120
               days from the transaction date.
          (6)  Commitments to Extend Credit and Standby Letters of Credit
                    The  only  amounts  recorded  for  commitments  to  extend
               credit,  standby  letters  of credit  and  financial guarantees
               written are  the deferred fees arising  from these unrecognized
               financial  instruments.   These  deferred fees  are not  deemed
               significant at December  31, 1998  and 1997, and  as such,  the
               related fair values have not been estimated.
     (P)  Transfers and  Servicing of Financial Assets  and Extinguishments of
          Liabilities
          The Company adopted the provisions of Statement No. 125, "Accounting
     for  Transfers and Servicing  of Financial Assets  and Extinguishments of
     Liabilities," on January 1, 1997.  This Statement provides accounting and
     reporting standards for transfers  and servicing of financial assets  and
     extinguishments  of  liabilities based  on  consistent  application of  a
     financial-components  approach  that  focuses  on control.    Under  that
     approach,  after a transfer of financial assets, an entity recognizes the

                                      26<PAGE>

National Bankshares, Inc. and Subsidiaries

     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.
     (Q)  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 is
     included as a  separate disclosure within the  Consolidated Statements of
     Changes  in  Stockholders'   Equity  in  the  accompanying   consolidated
     financial statements.  Comprehensive income for the years ended  December
     31, 1997 and 1996 is presented for comparative purposes.  The adoption of
     Statement  130  did not  have any  effect  on the  Company's consolidated
     financial position, results of operation or liquidity.
     (R)  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
     (losses)  on  securities   available  for  sale,   comprehensive  income,
     accumulated  other  comprehensive  income  and  stockholders'  equity  of

                                      27<PAGE>

Notes to Consolidated Financial Statements

     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.
     (S)  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.
     (T)  Reclassifications
          Certain   reclassifications  have   been   made   to  prior   years'
     consolidated financial  statements to  place them  on a  basis comparable
     with the 1998 consolidated financial statements.

Note 2: Restrictions on Cash
     To  comply with Federal Reserve  regulations, the Company  is required to
maintain  certain  average  reserve  balances.    The  daily  average  reserve
requirements were $4,813  and $3,699 for the weeks including December 31, 1998
and 1997, 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, 1998 and 1997 are as follows:

                                                 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 
      Other securities                     709       ---       ---         709 
                                      --------    ------     -----     ------- 

          Total securities
           available for sale         $134,534     1,916      (372)    136,078 
                                      ========    ======     =====     ======= 


                                                 



                                      28<PAGE>

National Bankshares, Inc. and Subsidiaries

                                                 December 31, 1997

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

     Available for sale:
      U.S. Treasury                   $  6,742         131      (11)     6,862 
      U.S. Government agencies
       and corporations                 36,252         141     (117)    36,276 
      States and political
       subdivisions                      9,540         101       (2)     9,639 
      Mortgage-backed securities         4,172          34      (87)     4,119 
      Corporate debt securities          7,780          61      (17)     7,824 
      Federal Home Loan Bank
       stock                               537         ---      ---        537 
      Other securities                     265          60      ---        325 
                                      --------       -----    -----     ------ 

          Total securities
           available for sale         $ 65,288         528     (234)    65,582 
                                      ========       =====    =====     ====== 


     The  amortized  costs  and  fair  values of  single  maturity  securities
available for sale at  December 31, 1998,  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, 1998.

                                               December 31, 1998

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

      Due in one year or less                 $  7,397     7,459 
      Due after one year through five years     32,385    33,140 
      Due after five years through ten years    40,017    40,606 
      Due after ten years                       53,277    53,414 
      No maturity                                1,458     1,459 
                                              --------   ------- 

                                              $134,534   136,078 
                                              ========   ======= 


     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, 1998 and 1997 are as follows:








                                      29<PAGE>

Notes to Consolidated Financial Statements

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



                                                 December 31, 1997

                                                   Gross      Gross
                                      Amortized Unrealized Unrealized   Fair
        ($ In thousands)                Costs      Gains     Losses    Values
                                      --------- ---------- ----------  ------
        Held to maturity:
         U.S. Treasury                 $ 7,527         27     (41)       7,513 
         U.S. Government agencies
          and corporations              36,853        167    (362)      36,658 
         States and political
          subdivisions                  32,949        696     (32)      33,613 
         Mortgage-backed securities        630         28     ---          658 
         Corporate debt securities       6,433        131      (1)       6,563 
                                       -------      -----    ----      ------- 

             Total securities held
              to maturity              $84,392      1,049    (436)      85,005 
                                       =======      =====    ====      ======= 


     The amortized costs and fair values of single maturity securities held to
maturity at  December  31, 1998,  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, 1998.









                                      30<PAGE>

National Bankshares, Inc. and Subsidiaries

                                                    December 31, 1998

                                                   Amortized    Fair
           ($ In thousands)                          Costs     Values
                                                   ---------   ------
           Due in one year or less                  $ 4,024      4,046 
           Due after one year through five years     21,119     21,485 
           Due after five years through ten years     3,949      3,997 
           Due after ten years                        1,584      1,623 
                                                    -------    ------- 

                                                    $30,676     31,151 
                                                    =======    ======= 

     There  were no sales of securities held  to maturity during 1998, 1997 or
1996.  
     The  carrying  value of  securities pledged  to  secure public  and trust
deposits, and for other purposes as required or permitted by  law, was $21,629
at December 31, 1998 and $21,257 at December 31, 1997.  
     The Federal  Home Loan Bank stock  is carried at cost  and collateralizes
lines of  credit available from the Federal  Home Loan Bank.   At December 31,
1998,  amounts available under these  unused lines of  credit approximated $35
million.

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,
1998 and 1997, there were direct  loans to executive officers and directors of
$1,782 and  $1,351, respectively.  In addition, there were loans of $1,844 and
$3,566 at December  31, 1998  and 1997, 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)                            1998 
                                                   ------------
          Aggregate balance, beginning of year       $ 4,917      
          Additions                                    4,359      
          Collections                                 (5,650)     
                                                     -------      
          Aggregate balance, end of year                          
                                                     $ 3,626      
                                                     =======      


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






                                      31<PAGE>

Notes to Consolidated Financial Statements

     Nonperforming assets consist of the following:

                                                        December 31,

          ($ In thousands)                       1998       1997       1996
                                                 ----       ----       ----
          Nonaccrual loans                      $    28        87        616  

          Other real estate owned, net              628       421        474  
                                                -------    ------     ------  

               Total nonperforming assets       $   656       508      1,090  
                                                =======    ======     ======  
          Accruing loans past due 90 days or
           more                                 $   550       672        458  
                                                =======    ======     ======  

     There  were no material commitments to lend additional funds to customers
whose loans were classified as nonperforming at December 31, 1998.
     The following  table shows the  interest that  would have been  earned on
nonaccrual  loans if they  had been current in  accordance with their original
terms and  the recorded  interest that  was earned and  included in  income on
these loans:

                                                  Years ended December 31,

          ($ In thousands)                       1998       1997       1996
                                                 ----       ----       ----
          Scheduled interest:
           Nonaccrual loans                    $      4         8         68  
                                               ========    ======     ======  
          Recorded interest:
           Nonaccrual loans                    $    ---         1         24  
                                               ========    ======     ======  

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

                                                   Years ended December 31,

          ($ In thousands)                         1998      1997      1996
                                                   ----      ----      ----

          Balances, beginning of year             $    68       96       91   
          Provision for other real estate owned        25      ---        5   
          Write-offs                                  ---      (28)     ---   
                                                  -------    -----     ----   

          Balances, end of year                   $    93       68       96   
                                                  =======    =====     ====   

     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.  At December 31, 1997, the recorded
investment in loans which have been identified as impaired loans totaled $177.
Of  this amount,  $124 related to  loans with  no valuation  allowance and $53
related to loans with a corresponding valuation allowance of $53.

                                      32<PAGE>

National Bankshares, Inc. and Subsidiaries

     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.   For the year ended December 31, 1996, the average recorded investment
in  impaired loans  was  approximately $800,  and  the total  interest  income
recognized on  impaired loans was  $33 of which  $23 was recognized on  a cash
basis.
     Changes in the allowance for loan losses are as follows:

                                                  Years ended December 31,

          ($ In thousands)                       1998       1997       1996
                                                 ----       ----       ----
          Balances, beginning of year           $ 2,438     2,575      2,625  
          Provision for loan losses                 624       435        331  
          Recoveries                                255       107        125  
          Loans charged off                        (638)     (679)      (506) 
                                                -------    ------     ------  

          Balances, end of year                 $ 2,679     2,438      2,575  
                                                =======    ======     ======  

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

                                                          December 31,

        ($ In thousands)                               1998          1997
                                                       ----          ----
        Premises                                      $  6,321        6,148   
        Furniture and equipment                          5,343        4,458   
        Construction-in-progress                           632           33   
                                                      --------      -------   
        Less accumulated depreciation                   12,296       10,639   
                                                        (5,639)      (4,900)  
             Total bank premises and equipment        --------      -------   

                                                      $  6,657        5,739   
                                                      ========      =======   

     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, 1998 are as
follows:  $64 in 1999, $13 in the years 2000, 2001 and 2002, and $10 in 2003.
     As  of December 31,  1998, the Company  had an outstanding  commitment of
approximately $1,600 related to the construction of new company headquarters.

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  $46,257 at December 31,
1998  and $42,547 at December  31, 1997.  At  December 31, 1998, the scheduled
maturities of time deposits are as follows: $144,057 in 1999, $33,821 in 2000,
$6,742 in 2001, $3,963 in 2002 and $7,928 in 2003.

                                      33<PAGE>

Notes to Consolidated Financial Statements

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,  1998, 1997  and
1996, NBB contributed $91, $87 and $83, 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.  There  was no
contribution to the plan in  1998.  Contribution expense amounted to  $219 and
$200 for the years ended December 31, 1997 and 1996,  respectively.  Dividends
on ESOP shares are charged to retained earnings.  As of December 31, 1998, the
number of  allocated shares  held by  the ESOP  was 72,296  and the  number of
unallocated  shares was  5,005.  All  shares held  by the ESOP  are treated as
outstanding in computing the Company's net basic income per share.  Bankshares
or the  ESOP has the  right of first refusal  for any shares  distributed to a
participant  in the  event the participant  elects to  sell the  shares.  Upon
reaching age 55 with ten years of plan participation, a vested participant has
the right to diversify 50% of his or her allocated  ESOP shares and Bankshares
or the ESOP, with the agreement of the Trustee, would be obligated to purchase
those  shares.   The ESOP  contains a  put option  which allows  a withdrawing
participant  to  require Bankshares  or the  ESOP,  if the  plan administrator
agrees, to purchase his  or her allocated shares if the shares are not readily
tradeable on an established market at the time of its distribution.  Since the
shares are not readily tradeable, at December 31, 1998, 77,301 shares of stock
held  by the ESOP, at their  estimated fair value, which is  based on the most
recent available  independent valuation, is recorded  outside of stockholders'
equity.  Bankshares does not anticipate any material cash requirements in each
of  the next five years  relating to the  purchase of shares held  by the ESOP
participants.
     The Company  also sponsors  two separate noncontributory  defined benefit
pension  plans which  cover substantially  all of  its employees.  The pension
plans' benefit  formulas generally  base payments  to  retired employees  upon
their length of  service and  a percentage of  qualifying compensation  during
their  final years of employment.  The  NBB pension plan's assets are invested
principally in  U.S. Government agency  obligations (34%), mutual  funds (31%)
and  equity  securities  (35%).   BTC's  pension  plan's  assets are  invested
principally  in  BTC certificates  of  deposit (23%),  U.S.  Government agency
obligations (34%),  U.S. Treasury securities  (11%), corporate debt  (20%) and
equity securities (12%).















                                      34<PAGE>

National Bankshares, Inc. and Subsidiaries


                                                            Pension Benefits
                                                            ----------------
                                                              December 31,
          ($ In thousands)                                   1998      1997
                                                             ----      ----

          Change in benefit obligation
          Benefit obligation at beginning of year          $  4,967     5,161 
          Service cost                                          331       281 
          Interest cost                                         367       367 
          Actuarial gain                                        491      (559)
          Benefits paid                                        (161)     (283)
                                                           --------   ------- 

               Benefit obligation at end of year              5,995     4,967 
                                                           --------   ------- 
          Change in plan assets
          Fair value of plan assets at beginning of year      4,337     3,950 
          Actual return on plan assets                          430       327 
          Employer contribution                                 365       343 
          Benefits paid                                        (161)     (283)
                                                           --------   ------- 

               Fair value of plan assets at end of year       4,971     4,337 
                                                           --------   ------- 
          Funded status                                      (1,024)     (630)
          Unrecognized net actuarial loss                       917       459 
          Unrecognized prior service cost                       216       231 
          Unrecognized transition asset                        (183)     (205)
                                                           --------   ------- 

               Net accrued pension cost (includes accrued
                pension cost of $363 in 1998 and $352 in
                1997, included in other liabilities, and
                prepaid pension cost of $289 in 1998 and
                $207 in 1997 included in other assets)     $    (74)     (145)
                                                           ========   ======= 



                                              Pension Benefits
                                              ----------------
                                       NBB                       BTC

         ($ In thousands)       1998   1997    1996      1998   1997    1996
                                ----   ----    ----      ----   ----    ----
         Weighted average
          assumptions as of
          December 31
         Weighted average
          discount rate         7.00%  7.50%   7.75%     7.00%   7.50%   7.00%
         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%


                                      35<PAGE>

Notes to Consolidated Financial Statements


                                                   Pension Benefits
                                                   ----------------
                                               Years Ended December 31,
         ($ In thousands)                   1998         1997         1996
                                            ----         ----         ----

         Components of net periodic
          benefit cost
         Service cost                     $ 331           281          327    
         Interest cost                      367           367          353    
         Expected return on plan assets    (400)         (364)        (323)   
         Amortization of prior service
          cost                               15            15           15    
         Recognized net actuarial loss        3             8           54    
         Amortization of transition
          asset                             (22)          (23)         (23)   
                                          -----         -----        -----    

              Net periodic benefit cost   $ 294           284          403    
                                          =====         =====        =====    



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


                                                   Years ended December 31,

          ($ In thousands)                         1998      1997      1996
                                                   ----      ----      ----
          Income                                  $ 2,591    2,499      2,341 
          Stockholders' equity, for net
           unrealized gains (losses) on
           securities available for sale
           recognized for financial reporting                                 
           purposes                                   425      228      (273) 
                                                  -------   ------    ------- 

               Total income taxes                 $ 3,016    2,727      2,068 
                                                  =======   ======    ======= 


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













                                      36<PAGE>

National Bankshares, Inc. and Subsidiaries



                                                   Years ended December 31,

          ($ In thousands)                         1998      1997      1996
                                                   ----      ----      ----
          Current                                 $ 2,726    2,199     2,345  
          Deferred                                   (135)     300        (4) 
                                                  -------   ------   -------  

               Total income tax expense           $ 2,591    2,499     2,341  
                                                  =======   ======   =======  


     Taxes resulting from securities transactions amounted to a tax expense of
$64 for the year ended December 31, 1998, $13 for the  year ended December 31,
1997 and $33 for the year ended December 31, 1996.
     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)                         1998      1997      1996
                                                   ----      ----      ----

          Expected income tax expense (34%)       $ 3,192    3,080     2,876  
          Tax-exempt interest income                 (742)    (700)     (756) 
          Nondeductible interest expense               97       90        99  
          Other, net                                   44       29       122  
                                                  -------   ------    ------  

               Reported income tax expense        $ 2,591    2,499     2,341  
                                                  =======   ======    ======  

     The  tax effects of temporary  differences that give  rise to significant
portions  of the deferred tax assets  and deferred tax liabilities at December
31, 1998 and 1997 are presented below:












                                                   





                                      37<PAGE>

Notes to Consolidated Financial Statements


                                                              December 31,

          ($ In thousands)                                    1998     1997
                                                              ----     ----
          Deferred tax assets:
            Loans, principally due to allowance for loan
             losses and unearned fee income                 $   545       344 
            Other real estate owned, principally due to
             valuation allowance                                 32        23 
            Deferred compensation and other liabilities,
             due to accrual for financial reporting
             purpose                                             96       114 
            Deposit intangibles and goodwill                     51        42 
            Community development corporation related tax
             credit                                              22        26 
                                                            -------   ------- 

               Total gross deferred tax assets                  746       549 
               Less valuation allowance                         ---       --- 
                                                            -------   ------- 

               Net deferred tax assets                          746       549
                                                            -------   -------

          Deferred tax liabilities:
            Bank premises and equipment, principally due
             to differences in depreciation                    (102)      (16)
            Securities, due to differences in discount
             accretion                                          (52)      (77)
            Other assets                                        (63)      (62)
            Net unrealized gains on securities available
             for sale                                          (525)     (100)
                                                            -------   ------- 

               Total gross deferred liabilities                (742)     (255)
                                                            -------   ------- 

               Net deferred tax asset included in other
                assets                                      $     4       294 
                                                            =======   ======= 


     The  Company has  determined  that a  valuation allowance  for  the gross
deferred  tax assets is not necessary at December 31, 1998 and 1997 due to the
fact  that the  realization of  the entire  gross deferred  tax assets  can be
supported by  the amount of  taxes paid during the  carryback period available
under current tax laws.

Note 10: Restrictions on Payments of Dividends and Capital Requirements
     Bankshares'  principal source of funds for dividend payments is dividends
received from  its subsidiary banks.   For the years ended  December 31, 1998,
1997 and 1996,  dividends received from subsidiary  banks were $5,341,  $2,712
and $1,901,  respectively.  Included  in the 1998  dividends was $2,534  which
represented a transfer of capital to Bankshares.
     Substantially  all of  Bankshares'  retained earnings  are  undistributed
earnings  of  its  banking  subsidiaries,  which  are  restricted  by  various


                                      38<PAGE>

National Bankshares, Inc. and Subsidiaries

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,
1998,  retained net  income  which was  free of  such restriction  amounted to
approximately $5,461.
     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, 1998, 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.

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

($ 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%

                                      39<PAGE>

Notes to Consolidated Financial Statements


                                                              To Be Well
                                                              Capitalized
                                                             Under Prompt
                                             For Capital      Corrective
                                              Adequacy          Action
                              Actual          Purposes        Provisions
                          --------------    -------------   --------------
($ In thousands)          Amount   Ratio   Amount   Ratio   Amount   Ratio
                          ------   -----   ------   -----   ------   -----

December 31, 1997 
 Total capital (to risk
  weighted assets)
 Bankshares consolidated  $57,198   23.3%   19,652    8.0%    N/A     N/A  
 NBB                       28,825   17.4%   13,232    8.0%   16,540   10.0%
 BTC                       28,313   34.7%    6,527    8.0%    8,159   10.0%

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

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


     As  of  December  31,  1998,  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.

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















                                      40<PAGE>

National Bankshares, Inc. and Subsidiaries

                           Condensed Balance Sheets

                                                    December 31,
($ In thousands, except share and 
 per share data.)                                 1998        1997
                                                  ----        ----
Assets        Cash due from subsidiaries         $     28         69  
              Securities available for sale         2,521        ---  
              Investment in subsidiaries, at
               equity                              58,139     55,807  
              Refundable income taxes due
               from subsidiaries                       30         22  
              Other assets                             30        ---  
                                                 --------    -------  

                   Total assets                  $ 60,748     55,898  
                                                 ========    =======  

Liabilities   Other liabilities                  $     65         31  
and                                              --------    -------  
Stockholders' Common stock subject to ESOP
Equity         put option (note 8)                  2,180      1,838  
                                                 --------    -------  
              Stockholders' equity (notes 9,
               10 and 16):
                 Preferred stock of no par
                  value.  Authorized
                  5,000,000 shares; none
                  issued and outstanding              ---        ---  
                 Common stock of $2.50 par
                  value.  Authorized
                  5,000,000 shares; issued
                  and outstanding 3,792,833
                  shares                            9,482      9,482  
                 Retained earnings                 50,182     46,191  
                 Accumulated other
                  comprehensive income              1,019        194  
                 Common stock subject to ESOP
                  put option (77,301 shares at
                  $28.20 per share in 1998 and
                  72,783 shares at $25.25 per
                  share in 1997) (note 8)          (2,180)    (1,838) 
                                                 --------    -------  

                   Total stockholders' equity      58,503     54,029  


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

                   Total liabilities and
                    stockholders' equity         $ 60,748     55,898  
                                                 ========    =======  




                                      41<PAGE>

Notes to Consolidated Financial Statements

            Condensed Statements of Income and Comprehensive Income

                                          Years ended December 31,

($ In thousands)                         1998       1997       1996
                                         ----       ----       ----
Income   Dividends from subsidiaries
          (note 10)                     $5,341      2,712      1,901  
         Interest on securities -
          taxable                           29        ---        ---  
         Interest on securities -
          nontaxable                        24        ---        ---  
                                        ------     ------     ------  

                                         5,394      2,712      1,901  

Expenses Other expenses                    173        125        232  
                                        ------     ------     ------  
                                                                      
         Income before income tax
          benefit and equity in
          undistributed net income
          of subsidiaries                5,221      2,587      1,669  

         Applicable income tax
          benefit                           47         42         41  
                                        ------     ------     ------  

         Income before equity in
          undistributed net income
          of subsidiaries                5,268      2,629      1,710  

         Equity in undistributed net
          income of subsidiaries         1,530      3,931      4,407  
                                        ------     ------     ------  
                                                           
            Net income                   6,798      6,560      6,117  
                                        ------     ------     ------  

         Other comprehensive income
          (loss), net of income
          taxes:

            Net unrealized gains
             (losses) on securities
             available for sale
             (notes 1 and 17):
             Arising during the year       356        442       (530) 
             Cumulative accounting
              change                       469        ---        ---  
                                        ------     ------     ------  

            Total                          825        442       (530) 
                                        ------     ------     ------  

            Comprehensive income        $7,623      7,002      5,587  
                                        ======     ======     ======  

                                      42<PAGE>

National Bankshares, Inc. and Subsidiaries


                      Condensed Statements of Cash Flows

                                          Years ended December 31,

($ In thousands)                          1998       1997       1996
                                          ----       ----       ----
Cash Flows  Net income                  $  6,798     6,560      6,117  
from        Adjustments to reconcile
Operating    net income to net cash
Activities   provided by operating
             activities:
              Equity in undistributed
               net income of                                
               subsidiaries               (1,530)   (3,931)    (4,407) 
              Amortization of premiums
               and accretion of
               discounts, net                  4       ---        ---  
              (Increase) decrease in
               refundable income taxes
               due from subsidiaries          (8)        3         88  
              Increase in other assets       (30)      ---        ---  
              Increase (decrease) in
               other liabilities              22        (4)        (5) 
                                         -------    ------    -------  

                 Net cash provided
                  by operating
                  activities               5,256     2,628      1,793  
                                         -------    ------    -------  

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

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

Cash Flows  Cash dividends paid           (2,807)   (2,579)    (1,787) 
from                                     -------    ------    -------  
Financing
Activities       Net cash used in
                  financing activities    (2,807)   (2,579)    (1,787) 
                                         -------    ------    -------  

            Net increase (decrease) in
             cash                            (41)       49          6  
            Cash due from subsidiary
             at beginning of year             69        20         14  
                                         -------    ------    -------  

            Cash due from subsidiary
             at end of year              $    28        69         20  
                                         =======    ======    =======  


                                      43<PAGE>

Notes to Consolidated Financial Statements

Note 12: Supplemental Cash Flow Information
     The  Company paid $14,003, $13,084  and $13,080 for  interest and $2,631,
$2,719 and $1,839  for income taxes, net  of refunds, in 1998,  1997 and 1996,
respectively.  Noncash investing  activities consisted of $638, $679  and $506
of loans charged against the allowance for loan losses in 1998, 1997 and 1996,
respectively.  Noncash  investing activities  also included $382  in 1998  and
$159 in 1997 of  loans transferred to other real  estate owned.  In  addition,
for the  years ended  December  31, 1998,  1997  and 1996,  noncash  investing
activities  included changes  in net  unrealized gains (losses)  on securities
available  for sale  of  $1,250, $670  and  ($803), respectively,  changes  in
deferred tax  assets  included in  other assets  of ($425),  ($228) and  $273,
respectively,  and changes  in  net unrealized  gains  (losses) on  securities
available  for sale included in stockholders' equity of $825, $442 and ($530),
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 the Financial Accounting Standards  No. 133 "Accounting
for Derivative Instruments and  Hedging Activities," which was adopted  by the
Company on October 1, 1998.

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


                                                    December 31,

      ($ In thousands)                           1998          1997
                                                 ----          ----
      Financial instruments whose contract
       amounts represent credit risk:
         Commitments to extend credit           $53,498        37,700   
                                                =======        ======   

         Standby letters of credit              $ 3,320         1,949   
                                                =======        ======   

         Mortgage loans sold with potential
          recourse                              $39,697        19,231   
                                                =======        ======   

     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

                                      44<PAGE>

National Bankshares, Inc. and Subsidiaries

and  may require payment of a fee.  Since many of the commitments are expected
to  expire without  being  drawn upon,  the  total commitment  amounts  do not
necessarily represent  future cash requirements.   The Company  evaluates each
customer's creditworthiness on a case-by-case basis.  The amount of collateral
obtained, if required  by the Company  upon extension of  credit, is based  on
management's  credit evaluation of the  customer.  Collateral  held varies but
may include accounts receivable, inventory, property, plant  and equipment and
income-producing  commercial properties.   Extensions  of credit  arising from
these  commitments are  predominantly variable  rate in nature;  the principal
exception being  construction loans which are  at fixed rates, but  have terms
generally less than one year.
     Standby  letters of  credit  are conditional  commitments  issued by  the
Company  to guarantee the  performance of a  customer to  a third party.   The
credit  risk involved in issuing letters of  credit is essentially the same as
that involved in extending loans to customers.  Collateral held varies but may
include  accounts receivable,  inventory,  property, plant  and equipment  and
income-producing commercial properties.
     The  Company  originates  mortgage loans  for  sale  to  secondary market
investors subject to contractually  specified and limited recourse provisions.
In  1998,  the  Company originated  $41,472  and  sold  $39,697 to  investors,
compared to $19,120 originated and $19,231  sold in 1997.  Every contract with
each investor contains certain recourse language.  In general, the Company may
be required  to repurchase a previously  sold mortgage loan if  there is major
noncompliance  with  defined  loan  origination  or  documentation  standards,
including  fraud, negligence or  material misstatement in  the loan documents.
Repurchase  may also be required if necessary governmental loan guarantees are
canceled or never issued, or if an investor is forced to buy back a loan after
it has  been resold as a  part of a loan  pool.  In addition,  the Company may
have  an obligation to repurchase a loan  if the mortgagor has defaulted early
in  the loan  term.   This potential  default  period is  approximately twelve
months after sale of a loan to the investor.  

Note 14:  Concentrations of Credit Risk
     The Company  does  a general  banking business,  serving the  commercial,
agricultural  and  personal  banking needs  of  its  customers.   NBB's  trade
territory,  commonly  referred  to  as  the  New  River  Valley,  consists  of
Montgomery and  Giles Counties 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,  1998  and 1997,  approximately  $94,000  and  $80,000,
respectively,  of  the  loan portfolio  was  concentrated  in commercial  real
estate.   This represents approximately 39%  and 37% of the  loan portfolio at

                                      45<PAGE>

Notes to Consolidated Financial Statements

December 31, 1998 and 1997, respectively.  Included in commercial  real estate
at  December  31,  1998  and  1997  was  approximately  $64,000  and  $50,000,
respectively, in loans for college housing and professional  office buildings.
Loans  secured  by residential  real  estate  were  approximately $67,000  and
$65,000  at December  31,  1998  and  1997,  respectively.    This  represents
approximately 28% and 30% of the loan portfolio at December 31, 1998 and 1997,
respectively.   Loans secured  by automobiles  were approximately  $32,000 and
$34,000  at December  31,  1998  and  1997,  respectively.    This  represents
approximately  13% of  the loan  portfolio  at December  31, 1998  and 16%  at
December 31, 1997.
     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 15: Fair Value of Financial Instruments
     The  estimated  fair values  of  the Company's  financial  instruments at
December 31, 1998 and 1997 are as follows:

                                             December 31,

                                      1998                   1997
                                    --------               --------
                              Carrying   Estimated   Carrying   Estimated
($ In thousands)               Amount   Fair Value    Amount   Fair Value
                              --------  ----------   --------  ----------
Financial assets:
   Cash and due from banks    $ 14,421      14,421     12,435      12,435 
   Interest-bearing
    deposits                     7,027       7,027      9,728       9,728 
   Federal funds sold            5,090       5,090      4,300       4,300 
   Securities                  166,754     167,229    149,974     150,587 
   Mortgage loans held for
    sale                         2,180       2,180        405         405 
   Loans, net                  236,578     241,064    214,552     215,285 
                              --------    --------    -------     ------- 

     Total financial assets   $432,050     437,011    391,394     392,740 
                              ========    ========    =======     ======= 

Financial liabilities:
   Deposits                   $382,696     384,080    344,867     344,589 
   Other borrowed funds            214         214        485         485 
                              --------    --------    -------     ------- 
     Total financial
      liabilities             $382,910     384,294    345,352     345,074 
                              ========    ========    =======     ======= 

     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

                                      46<PAGE>

National Bankshares, Inc. and Subsidiaries

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

Note 16: Business Combinations
     On June 1, 1996, Bankshares  issued 1,888,209 shares of its  common stock
in  a one-for-one  exchange for all  the outstanding  common stock  of Bank of
Tazewell  County, Tazewell,  Virginia.   This  business  combination has  been
accounted  for as  a pooling-of-interests  and, accordingly,  the consolidated
financial  statements for  the  periods prior  to  the combination  have  been
restated to include the accounts and results of operations of Bank of Tazewell
County.  There were no adjustments of a material amount resulting from Bank of
Tazewell County's adoption of Bankshares' accounting policies.
     In  May  1996, Bankshares  declared  a stock  split of  .11129  per share
effected in the form  of a stock dividend to the holders  of Bankshares common
stock just prior to  the merger effective  date to facilitate the  one-for-one
common stock exchange ratio.  All stockholders' equity accounts, share and per
share data have been adjusted retroactively to reflect the stock split.
     The results of operations previously reported by the separate enterprises
and the  combined amounts presented  in the accompanying  financial statements
are summarized below:

                                                 Six months
                                               ended June 30,
                                               --------------
                 ($ In thousands)                   1996
                                               --------------
                 Revenues:
                  National Bankshares, Inc.         $ 9,286  
                  Bank of Tazewell County             6,166  
                                                    -------  

                   Combined                         $15,452  
                                                    =======  

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

                   Combined                         $ 2,989  
                                                    =======  



                                      47<PAGE>

Notes to Consolidated Financial Statements

     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 17: Other Comprehensive Income
     Other   comprehensive   income   net  of   income   taxes   and   net  of
reclassification adjustments between net income and other comprehensive income
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)                    1998
                                                     ----
                 Net unrealized gains on
                  securities available for sale:
                   Net unrealized holding gains
                    during the year                 $ 1,282  
                   Less reclassification
                    adjustments for gains
                    included in net income              (32) 
                   Income tax expense                  (425) 
                                                    -------  
                      Other comprehensive income,
                       net of income taxes          $   825  
                                                    =======  

Note 18: Future Accounting Considerations  
     In March 1998, the AICPA  Accounting Standards Executive Committee issued
Statement  of Position  (SOP)  98-1, "Accounting  for  the Costs  of  Computer
Software Developed or Obtained for Internal Use."  SOP 98-1  is applicable for
the costs  of computer software developed  or obtained for internal  use.  The
SOP requires  that certain  costs related  to the  development or  purchase of
internal-use software be capitalized  and amortized over the  estimated useful
life of  the  software.   The  SOP also  requires that  costs  related to  the
preliminary  project  stage  and  the  post-implementation/operation  stage as
defined in SOP 98-1 for  computer software developed or obtained  for internal
use be expensed as incurred.
     SOP  98-1 is effective for  financial statements issued  for fiscal years
beginning  after  December 15,  1998.   Earlier  application is  encouraged in
fiscal  years  for which  annual financial  statements  have not  been issued.
Initial application should be as of the beginning of the fiscal year in  which
the SOP is first adopted and applied to costs incurred for all projects during
that fiscal year, including those in progress upon initial application.  Costs
incurred prior to initial application of the  SOP, whether capitalized or not,
should not be adjusted to the amounts that would have been capitalized had the
SOP been in effect when those costs were incurred.
     The  Company  adopted SOP  98-1  on  January  1,  1999,  and  it  is  not
anticipated SOP 98-1 will have a material effect on the consolidated financial
position, results of operations or liquidity of the Company.
     There have  been no  other 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.

                                      48<PAGE>

National Bankshares, Inc. Board of Directors

                              National Bankshares


"Picture of James G.    James G. Rakes, Chairman
Rakes, Charles L.       of the Board, National
Boatwright and          Bankshares, Inc., The
William T. Peery"       National Bank, President
                        and Chief Executive
                        Officer; Charles L.
                        Boatwright, Vice Chairman
                        of the Board, Physician;
                        William T. Peery, Cargo
                        Oil Co., Inc., President;



                        L. Allen Bowman, Litton     "Picture of L. Allen
                        Poly-Scientific, Retired    Bowman, James A.
                        President; James A.         Deskins and Cameron
                        Deskins, Sr., Deskins       L. Forrester"
                        Super Market, Inc.,
                        President; Cameron L.
                        Forrester, Bank of
                        Tazewell County,
                        President and Chief
                        Executive Officer;


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






















                                      49<PAGE>

The National Bank and Bank of Tazewell County Boards of Directors


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

BTC
Bank of Tazewell County
"Picture of James A. Deskins,   James A. Deskins, Sr., Deskins Super
Sr., James G. Rakes, James S.   Market, Inc., President; James G.
Gillespie, Jr., Charles E.      Rakes, National Bankshares, Inc., The
Green, III, Alonzo A. Crouse,   National Bank, President and Chief
E. P. Greever, Cameron L.       Executive Officer; James S. Gillespie,
Forrester, William H.           Jr., Jim Sam Gillespie Farm, President;
VanDyke, William T. Peery,      Charles E. Green, III, Registered
Carl C. Gillespie and J. M.     Representative, The Equitable Life
Pope                            Assurance Society of the United States;
                                Alonzo A. Crouse, Bank of Tazewell
                                County, Executive Vice President,
                                Secretary and Cashier; E.P. Greever,
                                Retired; Cameron L. Forrester, Bank of
                                Tazewell County, President and Chief
                                Executive Officer; William H. VanDyke,
                                Candlewax Smokeless Fuel Co., Vice
                                President; William T. Peery, Chairman
                                of the Board, Cargo Oil Co., Inc.,
                                President; Carl C. Gillespie, Honorary
                                Chairman of the Board, Attorney; J. M.
                                Pope, Retired






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


                                      50<PAGE>

                                In Remembrance


   On  March  16,  1998  the  directors,  officers  and  employees  of National
Bankshares, Inc.  and of The  National Bank and  Bank of Tazewell  County were
saddened  by the  death of BTC's  President and  CEO, Raymond L.  Dodson.  Mr.
Dodson had been  the President and a director  of BTC for more than  25 years.
He worked in the banking industry for over 48 years.  Mr. Dodson was  a strong
advocate of BTC's merger with National Bankshares, Inc., and he was elected to
the holding company Board in  1996 following the merger.  The Bank of Tazewell
County  and National  Bankshares greatly  benefited from Mr.  Dodson's banking
background and skillful  leadership.   Mr. Dodson's enthusiasm  and energy  is
very much missed by those who knew and worked with him.


   Our Company experienced another  great loss with the  untimely death of  the
Chairman of  the Board, Dr. Robert  E. Christopher, Jr., on  October 18, 1998.
As a member of the Board of Directors of  NBB for more than 30 years and as  a
director  of National Bankshares from  its formation in  1986, Dr. Christopher
made an important  and lasting contribution to the growth  and success of both
organizations.  Dr. Christopher served as Chairman of both Boards of Directors
from 1992  until his death.   He will be  remembered as a quiet  and honorable
leader who was very proud of  his association with National Bankshares and The
National Bank.


   When he retired in 1995  from the Boards  of Directors of the National  Bank
and of  National Bankshares,  John  M. Barringer  had more  than  40 years  of
service  on  the  bank's Board.    He  was  a  founding director  of  National
Bankshares.  In addition, Mayor  Barringer was chairman of the NBB  Board from
1979 to  1982.   During his  long association  with the  bank and  the holding
company,  Mayor Barringer willingly shared his  professional expertise and his
understanding  of  the community.   His  death on  January  9, 1999,  left his
friends and colleagues with a  deep sense of loss.  They  will fondly remember
Mayor Barringer's personal warmth and quick wit.

























                                      51<PAGE>

Corporate Information

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

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

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

   F. Brad Denardo
   Corporate Officer

Annual Meeting
The  Annual Meeting of Stockholders will be held on Tuesday, April 13, 1999 at
3:00 p.m. at the Best  Western Red Lion Inn, 900 Plantation  Road, Blacksburg,
Virginia.

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

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

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

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

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

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



                                      52<PAGE>