-----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
Originator-Key-Asymmetric:
 MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen
 TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB
MIC-Info: RSA-MD5,RSA,
 OzWAW8NuAG5oNaJmbuUtWyjsY/bFodRafjhpM9LsTQ8ct4D9bqUhtQBJGYv3YSbJ
 EE9abGLqc6boHqiAYZghtw==

<SEC-DOCUMENT>0000796534-02-000006.txt : 20020814
<SEC-HEADER>0000796534-02-000006.hdr.sgml : 20020814
<ACCEPTANCE-DATETIME>20020814132054
ACCESSION NUMBER:		0000796534-02-000006
CONFORMED SUBMISSION TYPE:	10-Q
PUBLIC DOCUMENT COUNT:		4
CONFORMED PERIOD OF REPORT:	20020630
FILED AS OF DATE:		20020814

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			NATIONAL BANKSHARES INC
		CENTRAL INDEX KEY:			0000796534
		STANDARD INDUSTRIAL CLASSIFICATION:	NATIONAL COMMERCIAL BANKS [6021]
		IRS NUMBER:				541375874
		STATE OF INCORPORATION:			VA
		FISCAL YEAR END:			1231

	FILING VALUES:
		FORM TYPE:		10-Q
		SEC ACT:		1934 Act
		SEC FILE NUMBER:	000-15204
		FILM NUMBER:		02733812

	BUSINESS ADDRESS:	
		STREET 1:		PO BOX 90002
		CITY:			BLACKSBURG
		STATE:			VA
		ZIP:			24062-9002
		BUSINESS PHONE:		5405522011

	MAIL ADDRESS:	
		STREET 1:		100 SOUTH MAIN STREET
		STREET 2:		PO BOX 90002
		CITY:			BLACKSBURG
		STATE:			VA
		ZIP:			24062-9002
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>form10-q.txt
<DESCRIPTION>FORM 10-Q 2ND QUARTER 2002
<TEXT>
================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549


                               ------------------

                                    FORM 10-Q

                               ------------------


                Quarterly Report Pursuant to Section 13 or 15(d)
                     Of the Securities Exchange Act of 1934

                  For the quarterly period ended June 30, 2002


                               ------------------


                         Commission file number 0-15204

                            National Bankshares, Inc.
             (Exact name of registrant as specified in its charter)


                               ------------------

     State or other jurisdiction of incorporation or organization - Virginia

        Internal Revenue Service - Employer Identification No. 54-1375874

          101 Hubbard Street, P.O. Box 90002, Blacksburg, VA 24062-9002

                                 (540) 951-6300


                               ------------------


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such requirements
for the past 90 days.

Yes     |X|    No     |_|

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

          Class                               Outstanding at August 1, 2002
- --------------------------------              -----------------------------
Common Stock, $2.50 Par Value                            3,511,377


                         (This report contains 25 pages)


                                     1
<PAGE>





                  26 NATIONAL BANKSHARES, INC. AND SUBSIDIARIES

                                    Form 10-Q

                                      Index



                                                                       Page


Part I  Financial Information


Item        1 - Financial Statements

            Consolidated Balance Sheets, June 30, 2002                  3-4
             and December 31, 2001

            Consolidated Statements of Income for the                   5-6
             Three Months Ended
             June 30, 2002 and 2001

            Consolidated Statements of Income for the                   7-8
             Six Months Ended
             June 30, 2002 and 2001

            Consolidated Statements of Changes in                        9
             Stockholders' Equity, Six Months Ended
             June 30, 2002 and 2001

            Consolidated Statements of Cash Flows,                     10-11
             Six Months Ended June 30, 2002 and 2001

Item        2 - Management's Discussion and Analysis of                16-22
             Financial Condition and Results of Operations

Item        3 - Quantitative and Qualitative Disclosures about           23
                   Market Risk

Part II Other Information

Items       1 - 3 - Legal Proceedings; Changes in                        24
             Securities and Use of Proceeds;
             Defaults Upon Senior Securities

Item        4 - Submission of Matters to a Vote of                       24
             Security Holders

Item        5 - Other Information                                        24

Item        6 - Exhibits and Reports on Form 8-K                         24

Signatures                                                               25
- ----------




                                    2
<PAGE>


                   National Bankshares, Inc. and Subsidiaries
                           Consolidated Balance Sheets
                       June 30, 2002 and December 31, 2001

                                               (Unaudited)         (Audited)
                                                 June 30,        December 31,
($000's except share and per share data)           2002              2001
                                              ================   ===============

Assets
Cash and due from banks                               $11,632            12,293
Interest-bearing deposits                               3,972            15,510
Federal funds sold                                      4,229             1,080
Securities available for sale                          97,014            88,667
Securities held to maturity (fair value
 $96,367 in 2002 and $103,234 in 2001)                 94,000           102,809
Mortgage loans held for sale                              391             1,145
Loans:
     Real estate construction loans                    22,885            19,573
     Real estate mortgage loans                        80,525            77,339
     Commercial and industrial loans                  208,046           189,764
     Loans to individuals                             105,155           113,413
                                              ----------------   ---------------

          Total loans                                 416,611           400,089
     Less unearned income and deferred fees            (1,522)           (1,775)
                                              ---------------    ---------------

          Loans, net of unearned income
           and deferred fees                          415,089           398,314
     Less: allowance for loan losses                   (4,843)           (4,272)
                                              ---------------    --------------

          Loans, net                                  410,246           394,042
                                              ---------------    ---------------

Bank premises and equipment, net                        9,907            10,132
Accrued interest receivable                             5,206             4,917
Other real estate owned, net                              301               211
Intangible assets                                      11,388            11,866
Other assets                                            1,537             1,951
                                              ---------------    ---------------

          Total assets                              $ 649,823           644,623
                                              ================   ===============

Liabilities and stockholders' equity
Noninterest-bearing demand deposits                   $76,628            71,751
Interest-bearing demand deposits                      147,039           134,230
Savings deposits                                       48,974            48,827
Time deposits                                         305,396           321,810
                                              ----------------   ---------------

          Total deposits                              578,037           576,618
                                              ----------------   ---------------

Other borrowed funds                                      321               203
Accrued interest payable                                  773             1,101
Other liabilities                                       1,214             1,440
                                              ----------------   ---------------

          Total liabilities                           580,345           579,362
                                              ----------------   ---------------


                                    3
<PAGE>



Stockholders' equity 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 3,511,377 shares in 2002 and
  3,511,377 shares in 2001                              8,778             8,778
 Retained earnings                                     58,952            55,917
 Accumulated other comprehensive gain                   1,748               566
                                              ----------------   ---------------

          Total stockholders' equity                   69,478            65,261
Commitments and contingent liabilities
                                              ----------------   ---------------

          Total liabilities and
           Stockholders' equity                     $ 649,823           644,623
                                              ================   ===============



See accompanying notes to the consolidated financial statements

                                    4
<PAGE>


                   National Bankshares, Inc. and Subsidiaries
                        Consolidated Statements of Income
                    Three Months Ended June 30, 2002 and 2001
                                   (Unaudited)

                                                   June 30,          June 30,
($000's except share and per share data)             2002              2001
===============================================  =============   ==============

Interest income
- ---------------
Interest and fees on loans                            $ 8,107          $ 8,371
Interest on interest-bearing deposits                      53              171
Interest on federal funds sold                             10              196
Interest on securities - taxable                        1,369            2,080
Interest on securities - nontaxable                     1,106              864
==============================================   -------------  ---------------

          Total interest income                        10,645           11,682
==============================================   -------------  ---------------


Interest expense
- ----------------
Interest on time deposits $100,000 or more                867            1,223
Interest on other deposits                              3,092            4,961
Interest on borrowed funds                                  1                1
==============================================   -------------  ---------------

          Total interest expense                        3,960            6,185
==============================================   -------------  ---------------

          Net interest income                           6,685            5,497
Provision for loan losses                                 546              332
==============================================   -------------  ---------------

          Net interest income after
           provision for loan losses                    6,139            5,165
==============================================   -------------  ---------------


Noninterest income
- ------------------
Service charges on deposit accounts                       569              575
Other service charges and fees                             79               73
Credit card fees                                          378              335
Trust income                                              241              287
Other income                                               94               26
Realized securities gains, net                            185              ---
                                                 -------------  ---------------
          Total noninterest income                      1,546            1,296
==============================================   -------------  ---------------

Noninterest expense
- -------------------
Salaries and employee benefits                          2,216            2,047
Occupancy and furniture and fixtures                      427              427
Data processing and ATM                                   302              348
Credit card processing                                    227              265
Intangibles and goodwill amortization                     240              199
Net costs of other real estate owned                       39               16
Other operating expenses                                  897              983
==============================================   -------------  ---------------

          Total noninterest expense                     4,348            4,285
==============================================   -------------  ---------------

Income before income tax expense                        3,337            2,176
Income tax expense                                       (790)            (495)
==============================================   -------------  ---------------

          Net income                                  $ 2,547            1,681
==============================================   =============  ===============

Net income per share, basic and diluted                $ 0.72             0.48
                                                 =============  ===============
Weighted average number of common
 shares outstanding                                 3,511,377        3,511,377

            Dividends declared per share               $ 0.46             0.43
                                                 =============  ===============


       See accompanying notes to consolidated financial statements.

                                    5
<PAGE>


                   National Bankshares, Inc. and Subsidiaries
                        Consolidated Statements of Income
                     Six Months Ended June 30, 2002 and 2001
                                   (Unaudited)
                                                    June 30,      June 30,
($000's except share and per share data)              2002          2001
============================================    =============  ==============

Interest income
- ---------------
Interest and fees on loans                            $16,166         $16,603
Interest on interest-bearing deposits                      98             375
Interest on federal funds sold                             19             540
Interest on securities - taxable                        2,772           4,067
Interest on securities - nontaxable                     2,184           1,478
============================================   ---------------  --------------

          Total interest income                        21,239          23,063
============================================   ---------------  --------------

Interest expense
- ----------------
Interest on time deposits $100,000 or more              1,787           2,423
Interest on other deposits                              6,436           9,756
Interest on borrowed funds                                  3               4
============================================   ---------------  --------------

          Total interest expense                        8,226          12,183
============================================   ---------------  --------------

          Net interest income                          13,013          10,880
============================================
Provision for loan losses                               1,192             664
============================================   ---------------  --------------

          Net interest income after
           provision for loan losses                   11,821          10,216
============================================   ---------------  --------------

Noninterest income
- ------------------
Service charges on deposit accounts                     1,104           1,085
Other service charges and fees                            134             145
Credit card fees                                          683             596
Trust income                                              480             565
Other income                                              349             126
Realized securities gains (losses), net                   165             (26)
                                               ---------------  --------------
          Total noninterest income                      2,915           2,491
============================================   ---------------  --------------

Noninterest expense
- -------------------
Salaries and employee benefits                          4,443           3,966
Occupancy and furniture and fixtures                      824             843
Data processing and ATM                                   586             709
Credit card processing                                    484             502
Intangibles and goodwill amortization                     478             436
Net costs of other real estate owned                      123              20
Other operating expenses                                1,799           1,870
============================================   ---------------  --------------

          Total noninterest expense                     8,737           8,346
============================================   ---------------  --------------

Income before income tax expense                        5,999           4,361
Income tax expense                                     (1,348)         (1,064)
============================================   ---------------- --------------

          Net income                                  $ 4,651           3,297
============================================   ===============  ==============

Net income per share, basic and diluted                $ 1.32            0.94
                                               ===============  ==============

       Weighted average number of common
         shares outstanding                         3,511,377       3,511,383

            Dividends declared per share               $ 0.46            0.43
                                               ===============  ==============


See accompanying notes to consolidated financial statements.


                                    6
<PAGE>


                   National Bankshares, Inc. and Subsidiaries
           Consolidated Statements of Changes in Stockholders' Equity
                     Six Months Ended June 30, 2002 and 2001
                                   (Unaudited)

<TABLE>
<CAPTION>

                                                                 Accumulated
                                                                    Other
($000's, except for per                Common      Retained     Comprehensive    Comprehensive
 share data)                           Stock       Earnings     Income (Loss)       Income          Total
                                     =========== ============= ================ ================ ============
<S>                                  <C>         <C>           <C>              <C>              <C>

Balances, December 31, 2000             $ 8,780        51,629             (575)             ---       59,834
Net income                                  ---         3,297              ---            3,297        3,297
Dividend ($0.43 per share)                  ---        (1,510)             ---              ---       (1,510)

Other comprehensive income,
 net of tax:
   Unrealized gains
    on securities
    available for sale, net
    of income tax expense $690              ---           ---              ---            1,340          ---
   Reclass adjustment net
    of tax $9                               ---           ---              ---               17          ---
                                                                                 ---------------
Other comprehensive income                  ---           ---            1,357            1,357        1,357
                                     ----------- ------------- ---------------- ---------------- ------------
Comprehensive income                        ---           ---              ---            4,654          ---
                                     ----------- ------------- ---------------- ---------------- ------------
Stock repurchase (1)                         (2)           (6)             ---              ---           (8)
                                     ----------- ------------- ----------------- --------------- ------------
Balances, June 30, 2001                 $ 8,778        53,410              782              ---       62,970
                                     =========== ============= ================= =============== ============

Balances, December 31, 2001             $ 8,778        55,917              566                        65,261
Net income                                  ---         4,651              ---            4,651        4,651
Dividend ($0.46 per share)                  ---        (1,616)             ---              ---       (1,616)
Other comprehensive income,
 net of tax
   Unrealized gains on
    securities available for
    sale, net of income tax
    expense $661                            ---           ---              ---            1,283         ---
   Reclass adjustment net of
    income tax $52                          ---           ---              ---             (101)        ---
                                                                                ----------------
Other comprehensive income                  ---           ---            1,182            1,182        1,182
                                     ----------- ------------- ---------------- ---------------- ------------
Comprehensive income                        ---           ---              ---            5,833          ---
                                     ----------- ------------- ---------------- ---------------- ------------
Stock repurchase                            ---           ---              ---              ---          ---
                                     ----------- -------------- --------------- ---------------- ------------
Balances, June 30,2002                  $ 8,778        58,952            1,748              ---       69,478
                                     =========== ============= ================ ================ ============
</TABLE>

(1)     Represents the repurchase of 500 shares at $16.25 per share.


See accompanying notes to consolidated financial statements.


                                    7
<PAGE>


                   National Bankshares, Inc. and Subsidiaries
                      Consolidated Statements of Cash Flows
                     Six Months Ended June 30, 2002 and 2001
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                                               June 30,             June 30,
($000's)                                                                         2002                 2001
                                                                           ================    =================
<S>                                                                        <C>                 <C>

Cash flows from operating activities
Net income                                                                         $ 4,651                3,297

Adjustments to reconcile net income to net cash provided by operating
 activities:
     Provision for loan losses                                                       1,192                  664
     Depreciation of bank premises and equipment                                       499                  558
     Amortization of intangibles                                                       478                  435
     Amortization of premiums and accretion of
      discount, net                                                                    196                  142
     Gains on sales of bank premises and equipment                                     ---                   (1)
     (Gains)losses on sales and calls of securities
      available for sale, net                                                         (153)                  26
     Gains on calls of securities held to                                              (12)                 ---
maturity
     Losses and write-downs on other real estate owned                                  94                    4
      (Increase) decrease in:
       Mortgage loans held for sale                                                    754                 (254)
       Accrued interest receivable                                                    (289)                (408)
       Other assets                                                                   (195)                (227)
     Increase (decrease) in:
       Accrued interest payable                                                       (328)                  22
       Other liabilities                                                              (226)                (218)
                                                                           -----------------   -----------------

          Net cash provided by operating
           activities                                                                6,661                4,040
                                                                           ----------------    -----------------

Cash flows from investing activities
Net (increase) decrease in federal funds sold                                       (3,149)              17,973
Net decrease in interest-bearing
 deposits                                                                           11,538                3,621

Proceeds from calls, maturities and principal payments of
  securities available for sale                                                      7,087               24,518
Proceeds from sales of securities available for
  sale                                                                                 404                  ---
Proceeds from calls, maturities and principal payments of securities
held to maturity                                                                     8,715                8,937
Purchases of securities available for sale                                         (13,984)             (13,096)
Purchases of securities held to maturity                                               ---              (65,534)
Purchases of loan participations                                                    (3,200)              (3,114)
Collections of loan participations                                                   2,225                2,474
Purchase of loans from acquisition                                                     ---               (9,255)
Net increase in loans to customers                                                 (16,717)             (15,716)
Proceeds from disposal of other real estate owned                                       35                  210
Recoveries on loans charged off                                                         77                   57
Purchase of bank premises and equipment                                               (274)                (668)
Proceeds from disposal of bank premises and equipment                                  ---                   16
                                                                           ----------------      ----------------

 Net cash used in investing
           activities                                                               (7,243)             (49,577)
                                                                           -----------------     ----------------



                                    8
<PAGE>



Cash flows from financing activities
Deposits purchased net of premium paid                                                 ---               29,885
Net increase (decrease) in time deposits                                           (16,414)               1,152
Net increase in other deposits                                                      17,833               17,206
Net decrease in other borrowed funds                                                   118                   92
Dividends paid on common stock                                                      (1,616)              (1,510)
Repurchase of common stock                                                             ---                   (8)
                                                                           ----------------    ------------------
          Net cash provided by (used in) financing
           activities                                                                  (79)              46,817
                                                                           ----------------    -----------------
Net increase (decrease) in cash and due from banks                                    (661)               1,280
Cash and due from banks at beginning of period                                      12,293               11,130
                                                                           ----------------    ------------------
Cash and due from banks at end of period                                           $11,632               12,410
                                                                           ================    ==================


Supplemental disclosure of cash flow information

Cash paid for interest                                                             $ 8,554               12,161
                                                                           ================   ==================
Cash paid for income taxes                                                         $ 1,439                1,263
                                                                           ================   ==================
Loans charged to the allowance for loan losses                                       $ 698                  620
                                                                           ================   ==================
Loans transferred to other real estate owned                                         $ 219                   73
                                                                           ================   ==================
Unrealized gains on securities available for sale                                $   1,791                2,056
                                                                           ================   ==================
</TABLE>


See accompanying notes to consolidated financial statements.


                                    9
<PAGE>


                   National Bankshares, Inc. and Subsidiaries

                   Notes to Consolidated Financial Statements

                                  June 30, 2002
                                   (Unaudited)


Note (1)

        The consolidated financial statements of National Bankshares, Inc.
(Bankshares) and its wholly-owned subsidiaries, The National Bank of Blacksburg
(NBB), Bank of Tazewell County (BTC) and National Bankshares Financial Services
Inc. (NBFS), (the Company), conform to accounting principles generally accepted
in the United States of America and to general practices within the banking
industry. The accompanying interim period consolidated financial statements are
unaudited; however, in the opinion of management, all adjustments consisting of
normal recurring adjustments which are necessary for a fair presentation of the
consolidated financial statements have been included. The results of operations
for the six months ended June 30, 2002 are not necessarily indicative of results
of operations for the full year or any other interim period. The interim period
consolidated financial statements and financial information included herein
should be read in conjunction with the notes to consolidated financial
statements included in the Company's 2001 Annual Report to Stockholders and
additional information supplied in the 2001 Form 10-K.



                                   10
<PAGE>


Note (2)     Allowance for Loan Losses, Nonperforming Assets and Impaired Loans
<TABLE>
<CAPTION>
                                                              For the periods ended
                                                            June 30,             December 31,
                                                      2002           2001            2001
                                                  ============== ============== ================
($000's, except for % data)
<S>                                               <C>            <C>            <C>

Balance at beginning of period                          $ 4,272          3,886            3,886
Provision for loan losses                                 1,192            664            1,408
Loans charged off                                          (698)          (620)          (1,128)
Recoveries                                                   77             57              106
                                                  -------------- -------------- ----------------
Balance at the end of period                            $ 4,843          3,987            4,272
                                                  ============== ============== ================
Ratio of allowance for loan losses to the end
of period loans net of unearned income and
deferred fees                                              1.17%          1.04%            1.07%
                                                  =============== ============== ================
Ratio of net charge-offs (recoveries) to
average loans, net of unearned income and
deferred fees(1)                                            .31%           .31%             .27%
                                                  =============== ============== ================
Ratio of allowance for loan losses to
nonperforming loans(2)                                    36.44%      2,345.29%        1,206.78%
                                                  =============== ============== ================
</TABLE>

(1)     Net charge-offs are on an annualized basis.
(2)     The Company defines nonperforming loans as total nonaccrual and
        restructured loans. Loans 90 days past due and still accruing are
        excluded.
<TABLE>
<CAPTION>

                                                             June 30,            December 31,
                                                         2002         2001           2001
                                                     ============= ============ ================
($000's, except for % data)
<S>                                                  <C>           <C>          <C>

Nonperforming Assets
 Nonaccrual loans                                            $579          170              354
 Restructured loans                                           ---          ---              ---
                                                     ------------- ------------ ----------------
     Total nonperforming loans                                579          170              354
Foreclosed property                                           301          399              211
                                                     ------------- ------------ ----------------
     Total nonperforming assets                              $880          569              565
                                                     ============= ============ ================
Ratio of nonperforming assets to loans, net of
unearned income and deferred fees, plus other real
estate owned                                                  .21%         .15%             .14%
                                                     ============= ============ ================
</TABLE>


                                   11
<PAGE>


<TABLE>
<CAPTION>


                                                             June 30,            December 31,
                                                         2002         2001           2001
                                                     ============= ============ ================
Accruing Loans Past Due 90 Days or More
<S>                                                  <C>           <C>          <C>
 Past due 90 days or more and
  still accruing                                             $876        1,400              980
                                                     ============= ============ ================
 Ratio of loans past due 90 days or
  more to loans, net of unearned
  income and deferred fees                                    .21%         .36%             .25%
                                                     ============= ============ ================
Impaired Loans

 Total impaired loans                                        $682          721              340
                                                     ============= ============ ================
 Impaired loans with a
  valuation allowance                                        $231          ---               65
 Valuation allowance                                         (110)         ---              (39)
                                                     ------------- ------------ -----------------
 Impaired loans net of allowance                             $121          ---               26
                                                     ============= ============ ================
 Impaired loans with no
  valuation allowance                                        $451          721              275
                                                     ============= ============ ================
 Average recorded investment
  in impaired loans                                          $486          591              671
                                                     ============= ============ ================
 Income recognized on impaired
  loans                                                       $ 6           29               57
                                                     ============= ============ ================
 Amount of income recognized
  on a cash basis                                             ---          ---              ---
                                                     ============= ============ ================
</TABLE>



                                   12
<PAGE>


Note (3) Securities

        The amortized costs, gross unrealized gains, gross unrealized losses and
fair values for securities available for the sale by major security type as of
June 30, 2002 are as follows:

<TABLE>
<CAPTION>
                                                                     June 30, 2002

                                                               Gross             Gross
                                           Amortized         Unrealized        Unrealized           Fair
($ in thousands)                             Costs             Gains             Losses            Values
                                        ----------------- ----------------- ----------------- ------------------
<S>                                     <C>               <C>               <C>               <C>
Available for sale:

  U.S. Treasury                                  $ 5,247               210               ---              5,457
  U.S. Government
   agencies and
   corporations                                    2,400                45               ---              2,445
  State and political
   subdivisions                                   58,358             1,410                48             59,720
  Mortgage-backed
   securities                                     11,801               404                 2             12,203
  Corporate debt
   securities                                     13,227               224                15             13,436
  Federal Reserve Bank stock                         208               ---               ---                208
  Federal Home Loan
   Bank stock                                      1,656               ---               ---              1,656
  Other securities                                 1,469               420               ---              1,889
                                        ----------------- ----------------- ----------------- ------------------
     Total securities
      available for sale                         $94,366             2,713                65             97,014
                                        ================= ================= ================= ==================
</TABLE>

        The amortized costs, gross unrealized gains, gross unrealized losses and
fair values for securities held to maturity by major security type as of June
30, 2002 are as follows:

<TABLE>
<CAPTION>
                                                                     June 30, 2002

                                                               Gross             Gross
                                           Amortized         Unrealized        Unrealized           Fair
($ in thousands)                             Costs             Gains             Losses            Values
                                        ----------------- ----------------- ----------------- ------------------
<S>                                     <C>               <C>               <C>               <C>
Held to Maturity:

  U.S. Government
   agencies and
   corporations                                  $13,020               137               ---             13,157
  State and political
   subdivisions                                   46,900             1,085                34             47,951
  Mortgage-backed
   securities                                     11,260               234                13             11,481
  Corporate securities                            22,820             1,040                82             23,778
                                        ----------------- ----------------- ----------------- ------------------
     Total securities
      held to maturity                           $94,000             2,496               129             96,367
                                        ================= ================= ================= ==================

</TABLE>


                                   13
<PAGE>


                   National Bankshares, Inc. and Subsidiaries
                      (In 000's, except for per share data)


Item 2. Management's Discussion and Analysis of Financial Condition and
        Results of Operations

        The purpose of this discussion is to provide information about the
financial condition and results of operations of National Bankshares, Inc. and
its wholly-owned subsidiaries (the Company), which are not otherwise apparent
from the consolidated financial statements and other information included in
this report. Reference should be made to the financial statements and other
information included in this report as well as the 2001 Annual Report and Form
10-K for an understanding of the following discussion and analysis.

        This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. The Company's actual results could
differ materially from those set forth in the forward-looking statements.

Critical Accounting Policies

General

        The Company's financial statements are prepared in accordance with
accounting principles generally accepted in the United States (GAAP). The
financial information contained within our statements is, to a significant
extent, financial information that is based on measures of the financial effects
of transactions and events that have already occurred. A variety of factors
could affect the ultimate value that is obtained either when earning income,
recognizing an expense, recovering an asset or relieving a liability. We use
historical loss factors as one factor in determining the inherent loss that may
be present in our loan portfolio. Actual losses could differ significantly from
the historical factors that we use. In addition, GAAP itself may change from one
previously acceptable method to another method. Although the economics of our
transactions would be the same, the timing of events that would impact our
transactions could change.

Allowance for Loan Losses

        The allowance for loan losses is an estimate of the losses that may be
sustained in our loan portfolio. The allowance is based on two basic principles
of accounting: (i) SFAS 5, Accounting for Contingencies, which requires that
losses be accrued when they are probable of occurring and estimatable and (ii)
SFAS 114, Accounting by Creditors for Impairment of a Loan, which requires that
losses be accrued based on the differences between the value of collateral,
present value of future cash flows or values that are observable in the
secondary market and the loan balance.

        Our allowance for loan losses has three basic components: the formula
allowance, the specific allowance and the unallocated allowance. Each of these
components is determined based upon estimates that can and do change when the
actual events occur. The formula allowance uses a historical loss view as an
indicator of future losses and, as a result, could differ from the loss incurred
in the future. However, since this history is updated with the most recent loss
information, the errors that might otherwise occur are mitigated. The specific
allowance uses various techniques to arrive at an estimate of loss. Historical
loss information, expected cash flows and fair market value of collateral are
used to estimate these losses. The use of these values in inherently subjective
and our actual losses could be greater or less than the estimates. The
unallocated allowance captures losses that are attributable to various economic
events, industry or geographic sectors whose impact on the portfolio have
occurred but have yet to be recognized in either the formula or specific
allowance.



                                   14
<PAGE>

Core deposit intangibles

        In July, 2001, the Financial Accounting Standards Board issued two
statements - Statement 141, Business Combinations, and Statement 142, Goodwill
and Other Intangible Assets, which could potentially impact the accounting for
goodwill and other intangible assets. Statement 141 eliminated the pooling
method of accounting for business combinations and required that intangible
assets that meet certain criteria be reported separately from goodwill.
Statement 142 eliminated the amortization of goodwill and other intangibles that
are determined to have an indefinite life. The Statement requires, at a minimum,
annual impairment tests for goodwill and other intangible assets that are
determined to have an indefinite life.

        Subsequent to the effective date of SFAS 142 an apparent conflict with
SFAS 72 was raised as an issue, which allows certain intangibles arising from
Bank and Thrift acquisitions to be amortized over their estimated useful lives.

        In late June of 2002, the Financial Accounting Standards Board announced
that existing core deposit intangibles would continue to be amortized under SFAS
No.72, subject to periodic impairment testing. Intangibles arising from future
transactions would be subject to the provisions of SFAS No.142.




Analysis of Financial Condition and Results of Operations for the Six Months
Ended June 30,2002
- --------------------------------------------------------------------------------

        Net income for the six months ended June 30, 2002 was $4,651, which
represents an increase of $1,354 or 41.1% when compared to the same period in
2001. The annualized return on average assets for the six months ended June 30
2002 was 1.46% and 1.06% for June 30, 2001. The annualized return on average
equity was 13.86% for the period ended June 30, 2002 and 10.77% for June 30,
2001.

        Earnings per share for the period ended June 30, 2002 was $1.32 and
$0.94 in 2001 for the same period.



Net Interest Income

        Net interest income at the end of the second quarter of 2002 was
$13,013, an increase of $2,133 or 19.6%. Interest income decreased $1,824 or
7.9%, when the periods ended June 30, 2002 and 2001 are compared. Interest
expense decreased $3,957, or 32.5%, when the two periods are compared. The yield
on earning assets was 7.44%, decreasing 71 basis points from June 30, 2001. The
cost to fund earning assets for the period ended June 30, 2002 was 2.73% or a
142 basis point decrease from the same period in 2001. This resulted in a
increase in the net interest margin. As seen by this data, substantially lower
funding costs due to the low rate environment accounted for most of the
improvement.

        Management believes that the current rate environment is unsustainable
over a long period of time without having an adverse effect on the general
economy. Accordingly, rate increases are expected by the end of 2002 or the
first part of 2003. While the Company's yield on earning assets would improve in
a higher rate scenerio, it would likely be offset by a greater increase in
funding costs in the near term. The ultimate impact on the Company's net
interest margin will be dependent on several factors. The timing of rate
increases and the extent of such will be a primary factor. However, the effect
of the rate increase could be mitigated by asset and liability management
practices.


                                   15
<PAGE>


Additional uncontrollable events that may effect the general economy
and rate levels include the ongoing terrorist threat, interruption of the
nation's oil supplies, and other potential side effects from problems in the
Middle East. Recent accounting scandals and their effect on the stock markets
may also have an adverse effect on the general economy. While management can
plan for various scenerios or rate environments it cannot predict the ultimate
outcome in the potentially volatile environment currently being experienced.



Provision and Allowance for Loan Losses


        The ratio of the allowance for loan losses to loans net of unearned
income was 1.17% at June 30 2002. This compares to 1.04% at June 30, 2001. The
provision for the first six months of 2002 was $1,192, up $528 over the same
period the prior year.
        While management continues to believe that overall credit quality
remains sound, net charge-offs are expected to be at slightly higher levels in
2002, due in part to an increasing loss exposure in the consumer loan portfolio.
With much of the growth in commercial loans the Company's exposure to losses
resulting from defaults in a small number of large size credits has also
increased. The ratio of the allowance for loan losses to loans at December 31,
2001 was 1.07%. The combined effect of loan growth and additional provisions in
2002 resulted in a nominal 10 basis point increase in this ratio.

Noninterest Income

        Noninterest income is an important source of the Company's income. This
category is comprised of service charges on deposit accounts, other service
charges and fees, credit card fees, trust income and other income. Net
securities gains and losses are also included in this category. Noninterest
income for the period ended June 30, 2002 was $2,915, an increase of $424 or
17.0%.

        Credit card fees increased $87 and 14.6%. This increase was primarily
due to volume.

        Trust income decreased by 15.0% when compared to the first six months of
2001. Trust income is dependent on market conditions as well as the types of
accounts being handled at any given point in time. The level of estate business,
for example, cannot be predicted with any degree of precision. Market
conditions, which control values of assets managed and in turn trust fees, have
been less favorable. With the current market volatility, management believes
that market conditions, though unpredictable, will tend to have an adverse
affect on trust fees.

        Realized securities gains/(losses) were $165 for the period ended June
30, 2002. In the second quarter of 2002 the Company sold one third of its
investment in a local bank holding company, which produced a gain of
approximately $157. Also included in realized net gains and losses are the
result of called securities and write-downs in investments in limited liability
companies (LLC). The LLC investments allow the company to derive income from
title insurance, life & casualty insurance and investment products. The
write-downs represent an adjustment of the Company's equity investment in these
companies.

        Subsequent to June 30, 2002, an additional one third of its interest in
the previously mentioned local bank holding company was sold. A gain of
approximately $177 was realized and will be reflected in the Company's third
quarter operating results.

        Other income contained some nonrecurring or infrequent items as well as
two new forms of revenues, which accounted for a portion of the $223 increase
over 2001. Contributing to this increase were nontaxable proceeds from a life
insurance policy, which was approximately $36 and a recovery of legal fees of
$14 incurred in a prior year. In addition, there was a nonrecurring adjustment
to fees for approximately $48. Other income also included commissions from the
sale of securities and insurance products in the amount of $135, which compares
to $4 at June 30, 2001.


                                   16
<PAGE>



Noninterest Expense

        Noninterest expense for the period ended June 30 2002 was $8,737, an
increase of $391 or 4.7%.

        Salaries and employee benefits increased by $477 or 12.0% when the
periods ended June 30, 2002 and 2001 are compared. This increase was due in part
to the acquisition of a branch in late March 2001. Due to the timing of the
purchase the full impact of the additional expense was not experienced in 2001.
Also, included in the 2002 expense is the full effect of salaries and employee
benefits associated with the Company's financial services affiliate. Routine
merit salary and promotional salary increases also contributed to the increase
in this category.


        Data processing costs decreased $123 or 17.4%. This decline was
primarily due to a reduction achieved in maintenance costs and the absence of
conversion costs associated with the 2001 branch acquisition that has been
discussed.

        Credit card processing decreased $18 or 3.6% due to volume. Included in
credit card expense for 2002 were two nonrecurring items. The first was a rebate
of processing charges of approximately $42. The second was a rebate for $10
received as a signing bonus for a new processor. These increases were offset in
part by higher expenses related to volume.

        Intangibles expense for the second quarter of 2002 was $478 compared to
$436 during the same period last year. This increase was related to the branch
acquisition that occurred in the latter part of March 2001. Since the
transaction occurred late in the first quarter of 2001 intangibles expense was
prorated.


        Balance Sheet

        Total assets at June 30, 2002 were $649,823, an increase of $5,200 or
0.8% from period end assets at December 31, 2001.




Securities

        Securities available for sale increased by 9.4%, while securities held
to maturity decreased 8.6%. (Refer to the table previously presented for
portfolio composition.)


Loans

        Loans net of unearned income grew by $16,775 or 4.2% from December 31,
2001. Since December 31, 2001, construction loans increased by $3,312 or 16.9%
with real estate mortgage loans increasing $3,186 or 4.1%. The largest increase,
however was experienced in the commercial loan category which grew by $18,282 or
9.6% due to demand. The only category to show a decrease was loans to
individuals, which declined by $8,258 or 7.3%. Given the general economic
conditions, it is not known to what extent loans to individuals will ultimately
decline or when growth in this area will resume. Loans to individuals generally
produce higher yields than other loan categories. A prolonged and substantial
run-off of these loans could have a measurable impact on the Company's net
interest margin.

                                   17
<PAGE>


Deposits

        Total deposits decreased $1,419 or 0.3% when June 30 2002 and December
31, 2001 are compared.

        Noninterest-bearing demand deposits increased $4,877 or 6.8%, when June
30, 2002 and December 31, 2001 are compared. During the same period
interest-bearing demand deposits increased by 9.5%, while savings deposits were
up 0.3%. Management believes that the increase in interest-bearing demand
deposits is in part due to the customers' expectation of higher interest rates
in the near to intermediate term. Hence, the Company's customers are not
committing their funds for longer terms. The largest decrease in deposits took
place in time deposits, which declined by $16,414 or 5.1%, as management has
allowed higher cost time deposits to run-off.




Daily Averages

        Daily averages for the major categories are as follows:

(000's)                                   June 30,2002       December 31,2001
                                       ------------------- ---------------------
Loans, net                                   $406,812              380,970
Securities available for sale                  87,937              109,682
Securities held to maturity                    98,876               79,127
Total assets                                  642,400              635,692
Total deposits                                572,071              569,139
Stockholders' equity                           67,651               63,460


Liquidity

        Liquidity is the ability to provide sufficient cash levels to meet
financial commitments and to fund loan demand and deposit withdrawals.

        Cash from operating activities was $6,661. The primary sources were net
income and net sales of real estate loans held for sale.

        Cash used in investing activities was $7,243. As can be seen from the
cash flow statement the principal use of cash was for lending activities.

        Financing activities during the period was a user of cash, mainly due to
a decline in in the area of time deposits previously noted.

        Management is not aware of any commitments that will result in, or are
likely to result in, a material and adverse decline in liquidity.

Branching Activity

        The Company's NBB affiliate announced in the second quarter its plans to
establish a new branch in Christiansburg, Virginia. The new branch will be
located in the downtown area and is expected to be opened in the first quarter
of 2003.


                                   18
<PAGE>


        Analysis of the Financial Condition and Results of Operations for the
Three Months Ended June 30, 2002
- --------------------------------------------------------------------------------

        Net income for the three months ended June 30, 2001 was $2,547, a
increase of $866 or 51.5% over the same period in 2001. The annualized return on
average assets for the second quarter of 2002 was 1.58% and 1.04% for the second
quarter of 2001. The annualized return on average equity for the second quarter
of 2002 was 14.93%. This compares to 10.83% for the same period in 2000.
        Basic earnings per share for the three months ended June 30,2002 was
$0.72, an increase of $0.24 from the second quarter of 2001.

Net interest income

        Net interest income for the quarter ended June 30, 2002 was $6,685 or a
21.6% increase from the same quarter in 2001. As previously discussed the
Company continues to benefit from the low interest rate environment.

Provision for loan losses

        The provision for loan losses for the second quarter of 2002 was $546.
This compares to $332 for the same period the prior year. The increase in the
provision was necessitated in part by loan growth and a higher level of
charge-offs. As previously mentioned, an increasing concern for loss exposure,
in the consumer loan portfolio exists. The shift in the loan portfolio mix as
discussed previously also contributed to the need for an increased provision.


Noninterest income

        Noninterest income for the second quarter of 2002 was $1,546, an
increase of $250 over the period ending June 30, 2001. Previously mentioned
securities gains accounted for the majority of this increase.

      Service charges on deposits remained relativity unchanged decreasing $6 or
1.0% when the quarter-ended June 30, 2002 is compared to the same period in
2001.

      Credit card income also showed slight improvement due to volume.

      Trust income decreased by 16.0% when the two periods are compared. As
previously discussed various factors contribute to the level of trust income.
Market values of assets managed are dependent on market valuations, which as of
late have been generally down.

Noninterest expense

      Noninterest expense for the quarter ended June 30, 2002 was $4,348. This
represents an increase of $63 or 1.5% when compared to the quarter ended June
30, 2001. This category contains two nonrecurring items related to credit card
expense. Please refer to the year-to- date discussion for details.


                                   19
<PAGE>



Balance Sheet

        Total average assets for the quarter ended June 30, 2002 were $646,533,
which represents an increase of $358 or 0.1% over total assets at June 30, 2001.
A comparison of selected quarterly averages follows.


($000)                              June 30, 2002      June 30, 2001
                                    -------------      -------------

Federal funds sold                      $   2,448             16,934
Federal Home Loan Bank deposits            12,397             16,476
Securities available for sale              89,285            115,613
Securities held to maturity                97,023             85,938
Loans net of unearned income and fees     406,119            371,907
Noninterest-bearing deposits               74,917             66,527
Interest-bearing deposits                 500,833            515,149
Borrowed money                                 97                246



                                   20
<PAGE>



Item 3. Quantitative and Qualitative Disclosures about Market Risk

Derivatives

        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. Management does not plan any future involvement in high risk
derivative products. The Company has limited amounts of collateralized mortgage
obligations, structured notes and other similar instruments that are included in
securities available for sale and securities held to maturity.

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 to
adverse movement in interest rates. Interest rate shock analyses provides
management with an indication of potential economic loss due to future rate
changes. There have not been any changes, which would significantly alter the
results disclosed as of December 31, 2001.



                                   21
<PAGE>


                   National Bankshares, Inc. and Subsidiaries
                                     Part II
                                Other Information

Items 1-3.  Legal Proceedings; Changes in Securities and Use of Proceeds;
            Defaults upon Senior Securities

            None for the three months ended June 30, 2002.

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

            Three class 3 Directors of the Company were elected by a
            vote of the security holders for a term of three years
            each.

             (a) This matter was submitted to a vote at the Company's
                 Annual Meeting of Stockholders held on April 9, 2002.

             (b) The name of each director elected at the meeting follows:
                 James A. Deskins, Sr.
                 William T. Peery
                 James M. Shuler

                 The name of each director whose term of office continued after
                 the meeting is listed:
                 L. Allen Bowman
                 Alonso A. Crouse
                 Paul A. Duncan
                 Cameron L. Forrester
                 James G. Rakes
                 Jeffrey R. Stewart

             (c) The number votes cast for or against each nominee is
                 provided below. There were no abstaining votes and
                 broker non-votes.

                 Election of directors

                 Director                   Votes For          Votes Against
                 --------                   ---------          -------------
                 James A. Deskins, Sr.      2,657,077             15,480
                 William T. Peery           2,659,268             13,289
                 James M. Shuler            2,664,050              8,507


Item 5.     Other Information

                  None

Item 6.     Exhibits and Reports on Form 8-K

            The Company had no filings on Form 8-K for the quarter ended June
            2002. See the index to exhibits for items incorporated by reference
            to this filing.


                                   22
<PAGE>



                                   Signatures



Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



                            National Bankshares, Inc.
                                  (Registrant)





Date:      08/14/2002                  /s/ James G. Rakes
          --------------               -------------------------------------
                                       James G. Rakes, Chairman
                                       President and Chief Executive Officer



Date:     08/14/2002                   /s/ J. Robert Buchanan
          ------------                 -------------------------------------
                                       J. Robert Buchanan, Treasurer
                                       (principal financial officer)




                                   23
<PAGE>


                                Index to Exhibits

                                                                Page No. in
Exhibit No.                    Description                   Sequential System
- -----------                    -----------                   -----------------
   3(i)       Articles of Incorporation, as amended, of      (incorporated
              National Bankshares, Inc.                      herein by
                                                             reference to
                                                             Exhibit 3(a) of
                                                             the Annual Report
                                                             on Form 10K for
                                                             fiscal year ended
                                                             December 31, 1993)

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

   4(i)       Article Fourth of the Articles of              (incorporated
              Incorporation of National Bankshares, Inc.     herein by
              included in Exhibit No. 3(a))                  reference to
                                                             Exhibit
                                                             4(b) of the
                                                             Annual
                                                             Report on
                                                             Form 10K
                                                             for fiscal
                                                             year ended
                                                             December
                                                             31, 1993)

 10(ii)(B)    Computer software license agreement dated      (incorporated
              June 18, 1990, by and between Information      herein by
              Technology, Inc. and The National Bank of      reference to
              Blacksburg                                     Exhibit 10(e) of
                                                             the Annual Report
                                                             on Form 10K for
                                                             fiscal year ended
                                                             December 31, 1992)

*10(iii)(A)   Employment Agreement dated January 1, 2002,
              by and between National Bankshares, Inc. and
              James G. Rakes

*10(iii)(A)   Capital Accumulation Plan (included in
              Exhibit No. 10(iii)(A)



                                   24
<PAGE>


*10(iii)(A)   National Bankshares, Inc. 1999 Stock Option    (incorporated
              Plan                                           herein by reference
                                                             to Exhibit  4.3 of
                                                             the   Form   S-8,
                                                             filed  as
                                                             Registration   No.
                                                             333-79979 with the
                                                             Commission  on June
                                                             4, 1999)

   99(a)      Certification of Chief Executive Officer
              Pursuant to 18 U.S.C. Section 1350

   99(b)      Certification of Chief Financial Officer
              Pursuant to 18 U.S.C. Section 1350



                                   25 <PAGE>





























</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>3
<FILENAME>ex-10.txt
<DESCRIPTION>EMPLOYMENT AGREEMENT
<TEXT>


                       *10 (iii) (A) EMPLOYMENT AGREEMENT

        THIS EMPLOYMENT AGREEMENT, dated as of this 1st day of January, 2002
(the "Effective Date"), by and between National Bankshares, Inc., a Virginia
corporation (the "Company"), and James G. Rakes (the "Executive").

        WHEREAS, the Company considers the availability of the Executive's
services to be important to the management and conduct of the Company's business
and desires to secure the continued availability of the Executive's services;
and

        WHEREAS, the Executive is willing to continue to make his services
available to the Company on the terms and subject to the conditions set forth
herein.

        In consideration of the mutual covenants and agreements set forth
herein, the parties agree as follows:

Part I:  General Employment Terms

        This Part provides general terms and conditions of the Executive's
employment. If a Change in Control (as defined in Section 10) occurs, the terms
and conditions of Part II shall also apply and supercede any conflicting
provisions in this Part I.

        1. Employment and Duties. The Executive is hereby employed by the
Company as its President and Chief Executive Officer. The Executive accepts such
employment and agrees to perform the managerial duties and responsibilities of
President and Chief Executive Officer. The Executive agrees to devote his time
and attention on a full-time basis to the discharge of such duties and
responsibilities of an executive nature as may be assigned him by the Board of
Directors of the Company (the "Board"). The Executive may accept any elective or
appointed positions or offices with any duly recognized associations or
organizations whose activities or purposes are closely related to the financial
services business which would generate good will for the Company and its
Affiliated Companies. The term "Affiliated Companies" includes any company
controlled by, controlling or under common control with the Company.

        2. Term. The term of this Agreement shall commence at the Effective Date
and shall continue through December 31, 2004 (the "Original Period"), unless
terminated or extended as hereinafter provided (collectively with any renewal or
extended periods provided for herein, the "Term"). This Agreement shall be
renewed for successive one-year periods following the then-current period unless
either party notifies the other in writing at least ninety (90) days prior to
the end of the then-current period that the Agreement shall not be extended
beyond its current period. Notwithstanding the foregoing, provisions of this
Agreement which provide for rights and/or obligations which extend beyond the
Term shall be and remain in full force and effect as shall be necessary to
effectuate them fully.

          3.   Compensation and Benefits.  This Agreement specifically
provides for the following types of compensation: Base Salary; Annual Bonus;
Stock-Based Awards and a Capital Accumulation Plan.  In addition, this Agreement
provides for Welfare, Executive and Retirement Benefits.

               (a) Base Salary. For the period beginning on the Effective Date
and ending on December 31, 2002 the Company shall pay the Executive an annual
base salary of not less than $225,500 (as adjusted from time to time as
hereinafter provided, "Base Salary"). The Base Salary shall be paid to the
Executive in accordance with established payroll practices of the Company. The
Company agrees to review the Executive's Base Salary in December of each year
during the Term of this Agreement and to consider in good faith implementing
increases in the Base Salary for the next following Company Fiscal Year as it
may deem appropriate (each period from January 1 to December 31 during the Term
is a "Company Fiscal Year"); provided, however, the Base Salary shall not be
less than $225,500 at any time.


                                    1
<PAGE>


               (b) Annual Bonus. During the Term of this Agreement, the
Executive will be eligible to receive an annual bonus ("Annual Bonus") based on
the overall performance of the Company for the Company Fiscal Year in question.
The Board or a committee of the Board with the authority to act (a "Board
Committee") shall meet in December of each year, determine whether the Company's
overall performance during the Company Fiscal Year merits, in their reasonable
good faith judgment, an Annual Bonus to the Executive and if so, the amount of
such Annual Bonus. Any Annual Bonus so awarded shall be paid to the Executive
prior to the end of the January immediately following the Company Fiscal Year
for which it is awarded.

               (c) Stock-Based Awards. In November of each year during the Term,
the Board or a Board Committee will determine whether, in their reasonable good
faith judgment, to make a stock-based award ("Stock-Based Award") to the
Executive, and if so, the nature and extent of the Stock-Based Award. The
Stock-Based Award, which may consist of stock options or restricted stock
grants, or any combination thereof, will include such vesting and other terms
and conditions as determined in the sole discretion of the Board or the Board
Committee. Any Stock-Based Award so granted shall be made to the Executive by
December 31 immediately following the November in which the Stock-Based Award
determination is made.

               (d) (1) Capital Accumulation Plan. During the Term of this
Agreement, the Executive will participate in the Company's Capital Accumulation
Plan ("CAP"). The Company shall make annual contributions to the CAP when and as
required hereunder. No contributions shall be made for any Company Fiscal Year
subsequent to the Company Fiscal Year in which the Executive's employment
hereunder terminates, except that in the event the Executive's employment
hereunder is terminated by the Executive for Good Reason (as hereinafter
defined) or by the Company Without Cause (as hereinafter defined), the Company
shall make a final contribution to CAP based on the amount of the contribution
that would have been earned by the Executive had the Executive completed the
full Company Fiscal Year in question multiplied by a fraction, the numerator of
which is the number of days in such Company Fiscal Year prior to (but including
the day of) the termination of the Executive and the denominator of which is
365. The CAP is intended to award the Executive based on the Company's annual
performance relative to a selected group of peer banking companies with respect
to two key measurements.

        (i)  For purposes of the CAP, the two target areas
        ("Target Areas") are:
        o       Return on Equity ("ROE")
        o       Return on Assets ("ROA")

        (ii) For purposes of the CAP, the initial group of peer banking
        companies ("Peer Group") shall include:

        o       First National Bank of Christiansburg (symbol: FNBP)
        o       Union Bankshares Corp. (symbol:  UBSH)
        o       Resource Bankshares (symbol:  RBKV)
        o       American National Bankshares (symbol:  AMNB)
        o       Old Point Financial Corp. (symbol:  OPDF)
        o       First Community Bankshares (symbol:  FCBC)
        o       First Century Bankshares (symbol:  FCBS)


                                    2
<PAGE>

                     In the event that the number of the banking companies in
                     the Peer Group publicly reporting their results in the
                     Target Areas falls below five (5), the parties shall make a
                     good faith effort to mutually agree on such number of
                     additional banking companies which they deem comparable as
                     shall be necessary to increase the Peer Group to at least
                     five (5) members. In the event the parties are unable to
                     agree, the Company's outside public accounting firm shall
                     name at least two (2) potential banking companies to be
                     added to the Peer Group for each member of the Peer Group
                     necessary to bring the number of Peer Group banking
                     companies up to five (5). From such list, first the Company
                     and then the Executive shall alternatively select new Peer
                     Group banking companies until the number reaches at least
                     five. The selection process for each succeeding occasion
                     when membership in the Peer Group is drawn from a list
                     provided by the Company's outside public accounting firm
                     shall be begun by the party which was not the last to make
                     the selection for the immediately preceding occasion. When
                     Peer Group banking companies are changed in accordance
                     herewith they shall be added by an amendment hereto.

        (iii)  The term "Maximum Company Allocation" means the
total amount allocated by the
Company to the CAP for a Company Fiscal Year, which shall not be less than
$60,000. The Company shall determine the annual Maximum Company Allocation to
the CAP by January 1 of each Company Fiscal Year.

        (iv)   The term "Maximum Target Allocation" means one-half (or as near
to one-half as possible) of the Maximum Company Allocation, which shall be
allocated to each of the Target Areas. For example, if the annual Maximum
Company Allocation is $60,000, the Maximum Target Allocation is $30,000,
allocated to each of the ROE and ROA Target Areas.

        (2) After the conclusion of the Company Fiscal Year and as soon
as the performance with respect to ROE and ROA of the Peer Group is publicly
available and an average for the Peer Group in each of the ROE and ROA Target
Areas can be computed, the Company shall make a contribution to the CAP based on
the Company's performance in each of the Target Areas in relation to the average
of the Peer Group for such Target Areas, as follows:

        (i)    The Maximum Target Allocation for each Target Area shall be
divided into four
levels. Level 4 shall be the Maximum Target Allocation; Level 3 shall be 75% of
the Maximum Target Allocation; Level 2 shall be 50% of the Maximum Target
Allocation, and Level 1 shall be 25% of the Maximum Target Allocation. For
example, if the Maximum Target Allocation is $30,000, Level 4 is $30,000; Level
3 is $22,500; Level 2 is $15,000, and Level 1 is $7,500.

        (ii)   The  Company  will make:  (a) a Level 4  contribution  for a
Target Area if the Company performed at least 150% of the Peer Group average for
that Target Area; (b) a Level 3 contribution for a Target Area if the Company
achieves at least 125% up to (but not including) 150% of the Peer Group average
for that Target Area; (c) a Level 2 contribution for the Target Area if the
Company achieves at least 100% up to (but not including) 125% of the Peer Group
average for that Target Area; (d) a Level 1 contribution if the Company achieves
at least 85% up to (but not including) 100% of the Peer Group average for that
Target Area. No contribution for a Target Area is made if the Company does not
achieve 85% or more of the Peer Group average for that Target Area.

        (3) All contributions shall be made by the later of (a) 15 days
after the date when the Company has determined its ROE and ROA for the Company
Fiscal Year and the ROE and ROA for the Peer Group are publicly available or (b)
June 1 of the year next following the relevant Company Fiscal Year in which
case, Peer Group averages shall be computed based on the relevant Peer Group
information that is then publicly available. Such contribution date made in the
year following the year in which the Executive is terminated is the CAP
Termination Date.


                                    3
<PAGE>


        (4) This is an example of the way the CAP is intended by this
Agreement to work: by January 1 of Company Fiscal Year 2002, the Board
determines its Maximum Company Allocation for FY2002. For example, the Board
sets the Maximum Company Allocation at the minimum $60,000. The Maximum Company
Allocation is allocated to the two Maximum Target Allocations in amounts as
nearly equal as possible. For example, $30,000 is allocated as the ROE Maximum
Target Allocation and $30,000 as Maximum ROA Target Allocation. Based on these
allocations, four levels of relative performance for each Target Area are set as
follows:
<TABLE>
<CAPTION>


                        Level 1           Level 2           Level 3          Level 4
   Target Area            85%       to      100%      to      125%      to 150% and above
- ------------------- ----------------- ----------------- ---------------- -----------------
<S>                 <C>               <C>               <C>              <C>
       ROE               $7,500           $15,000           $22,500          $30,000
- ------------------- ----------------- ----------------- ---------------- -----------------
- ------------------- ----------------- ----------------- ---------------- -----------------
       ROA               $7,500           $15,000           $22,500          $30,000
- ------------------- ----------------- ----------------- ---------------- -----------------
</TABLE>

        After the conclusion of Company Fiscal Year 2002 and promptly after
numbers become available for the Peer Group (but in any event by June 1, 2003)
an amount will be contributed from each Maximum Target Allocation based on the
comparative performance of the Company, as a percentage, to the average
performance of the Peer Group with respect to each Target Area. Thus, if in
FY2002, the Company made 160% of the average Peer Group ROE (resulting in a
$30,000 contribution) and 84% of the average Peer Group ROA (resulting in no
contribution), the CAP contribution for 2002 would be $30,000.

               (5) The CAP benefits (contributions plus income or loss) which
have been accrued will be payable to the Executive by the Company on the
earliest to occur of the following: (i) January 1, 2009; (ii) a Determination of
Long Term Incapacity (as defined in Section 4(c)(2)); (iii) the Executive's
Retirement (as defined in Section 4(h)); or (iv) Termination by the Executive
for Good Reason or by the Company Without Cause (as defined in Sections 4(f)(1)
and 4(e) respectively); provided, however, that nothing herein shall be deemed
to relieve the Company or any successor in interest from its obligation to make
CAP contributions as required hereunder before the CAP Termination Date as
hereafter provided.

               (6) The Company shall make the CAP contributions as and when
required hereby to the Trust Department of the National Bank of Blacksburg to be
held in an account for the Company designated as the Company's CAP account which
shall be invested by such Trust Department in a prudent manner consistent with
and comparable to investments for other Trust customers. The CAP shall be
unfunded for tax purposes and for purposes of Title 1 of the Employment
Retirement Income Security Act of 1974 ("ERISA"). Therefore, the parties agree
that the obligation of the Company hereunder with respect to the CAP shall be an
unsecured promise by the Company to pay the CAP fund balance held by the Trust
Department, which balance represents contributions, together with the related
earnings or loss, in accordance with the provisions of this Agreement. The CAP
fund balance shall not be deemed to be held in trust and the Company shall
remain the owner of the CAP fund balance, which will remain subject to the
claims of the Company's unsecured creditors in the event of bankruptcy or
insolvency until it is actually paid to the Executive.

               (7) The Executive's rights to CAP payments are accrued and vested
when their contribution is made or required to be made hereunder by the Company
but such rights are not transferable and are not subject to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, attachment or
garnishment.


                                    4
<PAGE>


               (8) When CAP benefits become payable to Executive, the Company
shall pay the CAP balance in installments over five years unless the Executive
elects in writing to receive the benefits in a lump sum or in installments over
three (3) years and the Board consents. The Executive's election must be filed
with an officer of the Company (other than the Executive) no earlier than sixty
(60) days before the first payment elected is due or the end of the calendar
year immediately preceding the calendar year in which payment is to begin,
whichever is earlier. If the Executive dies (whether before receiving or after
commencement of payments) the beneficiary designated by the Executive may make
such election. The Executive may name, change, or revoke the naming of a
beneficiary to receive the amounts due under the CAP by filing a written
beneficiary designation with an executive officer of the Company (other than the
Executive). In all cases, the written beneficiary designation, if any, bearing
the latest date shall be deemed to revoke all prior designations and shall
govern. If no designation is made or the named beneficiary predeceases the
Executive and no contingent or successor beneficiary is named, then the
beneficiary shall be the Executive's estate.

               (e) Other Compensation Benefits. Unless substantially duplicative
of rights provided the Executive under this Agreement, the Executive may
participate in any other annual incentive plan, executive deferred compensation
plan, savings or savings opportunities made generally available in the ordinary
course of business to other peer executives of the Company and its Affiliated
Companies. The Board shall make a good faith determination as to whether the
additional plans are substantially duplicative. The Executive shall also be
entitled to standard Board and Board Committee fees for the Executive's
attendance at Board and Board Committee meetings as a member.

               (f) Welfare Benefits. The Executive shall be eligible to
participate in any plans, programs or benefits made generally available in the
ordinary course of business to other peer executives of the Company and its
Affiliated Companies, including, without limitation, group medical, dental,
death, disability and life insurance, and sick leave and any other welfare
benefit plans as defined in Section 3(1) of ERISA ("Welfare Plans" and the
benefits provided thereunder "Welfare Benefits").

               (g) Executive Benefits. The Executive shall be entitled to four
weeks vacation annually without loss of pay; the Company will pay the
Executive's country club dues in a reasonable amount; the Company will provide
the Executive with an appropriate automobile or automobile allowance in a
reasonable amount; and the Executive shall also receive annual reimbursement for
certain personal benefits approved by the Board in a reasonable amount and in
furtherance of a proper corporate purpose. These personal benefits shall
include, but not be limited to, the reasonable cost of an annual executive
physical, financial planning and tax preparation, professional and community
organizational memberships and activities, and seats at sporting events. In
addition, the Company shall reimburse the Executive promptly, upon presentation
of adequate substantiation, including receipts, for the reasonable travel,
entertainment, lodging and other business expenses incurred by the Executive,
including, without limitation, those expenses incurred by the Executive and his
spouse in attending trade and professional association conventions, meetings and
other related functions (all of the foregoing in this section, "Executive
Benefits").

               (h) Retirement Benefits. The Executive shall be entitled to
participate in National Bankshares Retirement Income Plan (or any successor or
substitute plan or plans of the Company ("Retirement Plan") and receive all of
the benefits thereof ("Retirement Benefits").

4.     Termination of Employment.  This Agreement provides that the
Executive's employment hereunder may be terminated in the following ways:  death
of the Executive; Long Term Incapacity of the Executive; With Cause by the
Company; Without Cause by the Company; by the Executive for Good Reason; by the
Executive for Other than Good Reason; and Retirement.


                                    5
<PAGE>


               (a)    Definitions.
                      -----------

      (1)    Accrued Obligations. "Accrued Obligations" are the sum of: (i) the
Executive's Base Salary through the Date of Termination at the rate in effect
immediately prior to the time a Notice of Termination is given; (ii) the amount,
if any, of any incentive or bonus compensation theretofore earned which has not
yet been paid including, but not limited to, any Annual Bonus and Stock-Based
Awards; (iii) in addition to the Annual Bonus most recently paid or payable,
including by reason of deferral, the product of the total amount of such Annual
Bonus and a fraction, the numerator of which is the number of days in the
current year through the Date of Termination and the denominator of which is
365; (iv) any other benefits or awards (including both the cash and stock
components) which pursuant to the terms of any plans, policies or programs have
been earned or become payable, but which have not yet been paid to the Executive
(but not including amounts that previously had been deferred at the Executive's
request, which amounts will be paid in accordance with the Executive's existing
directions); and (5) the amount of all accrued CAP benefits. Unless otherwise
specified hereunder, Accrued Obligations shall be paid in a lump sum in cash (or
in the case of a Stock-Based Award/Change in Control Stock-Based Award (as
hereinafter defined) in the mode of the Award) within 30 days of the Date of
Termination.

               (2) Executive Continuance Benefit. Executive Continuance Benefit
is a continuation of all Welfare and Executive Benefits which the Executive or
his dependents were receiving immediately prior to the Date of Termination for a
certain amount of time as described herein, provided that the continued receipt
of the Executive or dependents is possible under the general terms and
provisions of such plans and programs as then in effect. The Company will pay
all or a portion of the cost of the Executive Continuance Benefit for the
Executive and his dependents on the same basis as applicable immediately prior
to the Date of Termination or, if more favorable, to the Executive or his
dependants, on the same basis as paid with respect to peer executives of the
Company and its Affiliated Companies under comparable plans and programs, from
time to time after the Date of Termination. If participation in any one or more
of the plans or programs included in the Executive Continuance Benefit is not
possible under the terms thereof or any provision of law would create an adverse
tax effect for the Executive or the Company due to such participation, the
Company, at its sole discretion, may choose to either (i) provide substantially
identical benefits directly or through an insurance arrangement or (ii) pay the
Executive a lump sum equal to the estimated cost of maintaining such plans for
the Executive for the remaining period of the Executive Continuance Benefit.
Payments may be made, if the Executive is not living, to the Executive's estate
or to one or more beneficiaries designated in writing by the Executive to the
Company. The Executive Continuance Benefit will cease if and when the Executive
has obtained coverage under one or more benefit plans of a subsequent employer
that provides for equal or greater benefits to the Executive and his dependents
with respect to the specific type of benefit. The Executive or his dependents
will become eligible for COBRA continuation coverage as of the date the
Executive Continuance Benefit ceases for all health and dental benefits.

        3.     Notice of Termination.  "Notice of Termination" shall mean a
notice which shall indicate the specific termination provision in this Agreement
relied upon.

        4. Date of Termination. "Date of Termination" means (i) if the
Executive's employment is terminated by the Company With Cause, or by the
Executive for Good Reason, the date of receipt of the Notice of Termination or
any later date specified therein, as the case may be, (ii) if the Executive's
employment is terminated by the Company Without Cause or by Executive for Good
Reason, the date specified in the Notice of Termination (which shall not be less
than 30 nor more than 60 days from the date such Notice of Termination is
given), and (iii) if the Executive's employment is terminated for Long Term
Incapacity, 30 days after Notice of Termination is given, provided that the
Executive shall not have returned to the full-time performance of his duties
during such 30-day period.


                                    6
<PAGE>


               (b) Death. The Executive's employment under this Agreement shall
terminate automatically upon the Executive's death. The Executive's survivors,
designees or estate shall receive any Accrued Obligations within ten (10) days
after his death plus Base Salary and the Executive Continuance Benefit for three
months following his death.
               (c)(1) Incapacity. Upon a Determination of Long Term Incapacity
(as hereinafter defined) the Company may terminate the Executive's employment
under this Agreement upon thirty (30) days' written notice provided that, within
thirty (30) days after receipt of such notice, the Executive shall not have
returned to full-time performance of his assigned duties.

               (2) "Determination Long Term Incapacity" shall mean a good faith
determination by the Board that as a result of mental or physical illness or
injury the Executive has failed to perform his assigned duties with the Company
on a full-time basis for a period exceeding twelve (12) consecutive months after
a Determination of Temporary Incapacity. "Determination of Temporary Incapacity"
shall mean a determination by a physician selected by the Company that the
Executive is unable to perform his assigned duties with the Company on a
full-time basis as a result of mental or physical illness or injury.

               (3) Interim Compensation. During the period between a
Determination of Temporary Incapacity and a Determination of Long Term
Incapacity the Executive shall receive full Base Salary for the first six (6)
months of any such period and 60% of Base Salary for any subsequent period prior
to a Determination of Long Term Incapacity. The Company will pay for the cost of
all physician's fees and testing not reimbursed by insurance. The amounts
payable to the Executive under this Section shall be reduced by any benefits
paid to the Executive pursuant to any disability insurance the premiums for
which were paid by the Company ("Company Disability Insurance").

               (4) Company Obligations. If the Executive's employment is
terminated by reason of a Determination of Long Term Incapacity, the Executive
will receive Base Salary for twenty-four (24) months following the Date of
Termination (less any amounts paid to the Executive under Company Disability
Insurance); the Executive Continuance Benefit for twenty-four (24) months
following the Date of Termination; and any Accrued Obligations shall be paid
within ten (10) days after the Determination of Long Term Incapacity.
Notwithstanding the foregoing, if a Change of Control occurs within 24 months
after a Termination on account of Long Term Incapacity then the twenty-four (24)
period for Base Salary and the Executive Continuance Benefit shall commence
again and the Executive will receive all benefits as if the Executive had been
subject to a Termination Without Cause on the date of the Change in Control.

        (d)(1) Termination by Company With Cause. The Company may terminate the
Executive's employment during the term of this Agreement, With or Without Cause.
For purposes of this Agreement, "Cause" or "With Cause" shall mean:

                      (i)    continual or  deliberate  neglect by the  Executive
in the  performance  of his material duties and responsibilities as established
from time to time by the Board, or the Executive's willful failure to follow
reasonable instructions or policies of the Company after being advised in
writing of such failure and being given a reasonable opportunity and period (as
reasonably determined by the Company) to remedy such failure;

                      (ii)   conviction of, indictment for (or its procedural
equivalent), entering of a guilty plea or plea of no contest with respect to a
felony, a crime of moral turpitude or any other crime with respect to which
imprisonment is a possible punishment, or the commission of an act of
embezzlement or fraud against the Company or any subsidiary or affiliate
thereof;

                      (iii)  any breach by the Executive of a material term of
this Agreement, or violation in any material respect of any code or standard of
behavior generally applicable to officers of the Company, after being advised in
writing of such breach or violation and being given a reasonable opportunity and
period (as determined by the Company) to remedy such breach or violation;

                      (iv)   dishonesty  of the Executive  with respect to the
Company or any  subsidiary or affiliate  thereof,  or breach of a  fiduciary
duty owed to the  Company  or any  subsidiary  or  affiliate thereof; or


                                    7
<PAGE>


                      (v)    the willful engaging by the Executive in conduct
that is reasonably likely to result, in the good faith judgment of the Company,
in material injury to the Company, monetarily or otherwise.

        (2) Company Obligations. If the Company terminates Executive's
employment With Cause, this Agreement shall terminate without any further
obligation of the Company to the Executive other than to pay to the Executive
any Accrued Obligations within ten (10) days. The Executive will still be
required to comply with the non-competition and confidentiality covenants set
forth in Section 5.

        (e) Termination by Company Without Cause. The Company may terminate the
Executive's employment during the term of this Agreement Without Cause. For
purposes hereof, Termination Without Cause shall be any termination of the
Executive's employment which does not occur by virtue of the death or Retirement
of the Executive or pursuant to a Determination of Long Term Incapacity, by the
Company With Cause, or by the Executive for Good Reason or for Other than Good
Reason. If, during the Term of this Agreement, the Company terminates the
Executive's employment Without Cause, the Company will pay to the Executive in a
lump sum within ten (10) days after the Date of Termination an amount equal to
any Accrued Obligations and provide, (i) the Executive Continuance Benefits for
twenty-four (24) months and (ii) an annual Base Salary over a period of
twenty-four (24) months from the Date of Termination at the highest annual Base
Salary in effect at any time during the Term.

        (f)(1) Termination by Executive for Good Reason. The Executive may
terminate his employment for Good Reason or for Other than Good Reason. For
purposes of this Agreement, "Good Reason" shall mean the following:

                      (i)    the continued assignment to the Executive of duties
inconsistent with the Executive's position, authority, duties or
responsibilities as contemplated by Section 1 hereof or, in the event of a
Change in Control (as hereinafter defined), in Section 7(a);

                      (ii)   any action taken by the Company which results in a
substantial reduction in the status of the Executive, including a diminution in
his position, authority, duties or responsibilities, excluding for this purpose
an isolated, insubstantial and/or inadvertent action not taken in had faith and
which is remedied by the Company promptly after receipt of notice thereof given
by the Executive;

                      (iii)  the relocation of the Executive to any other
primary place of employment which might require him to move his residence or,
in any event, any reassignment to a place of employment located more than 50
miles from the Executive's initially assigned place of employment, without the
Executive's express written consent to such relocation; provided, however, this
subsection (iii) shall not apply in connection with the relocation of the
Executive if the Company decides to relocate its headquarters; provided,
further, however that the provisions of Section 7(a) shall supercede all of the
foregoing on and after a Change in Control; or

                      (iv)   any failure by the Company, or any successor entity
following a Change in Control, to comply with the provisions of Part II hereof
or to honor any other term or provision of this Agreement, other than an
isolated, insubstantial or inadvertent failure not occurring in bad faith and
which is remedied by the Company promptly after receipt of notice thereof given
by the Executive.

                      (v)    anything in this Agreement to the contrary
notwithstanding, a termination by the Executive for any reason during the thirty
(30) day period immediately following the first anniversary of a Change in
Control of the Company shall be deemed to be a termination for Good Reason for
all purposes of this Agreement.


                                    8
<PAGE>


                      Any good faith (meaning honesty-in-fact) determination of
Good Reason, based on one or more of the foregoing, made by the Executive shall
be conclusive. Any termination by the Executive which is not for Good Reason or
Retirement shall be deemed a termination for Other than Good Reason.

         (2)   Company's Obligations. If the Executive terminates his employment
for Good Reason, the Company's obligations to the Executive will be the same as
provided in Section 4(e) for a Termination Without Cause.

        (g) Termination by Executive for other than Good Reason. If the
Executive terminates employment for other than Good Reason, the Company's
obligations to the Executive shall be the same as provided in Section 4(d) for a
Termination With Cause.

        (h) Retirement. If the Executive's employment is terminated by reason of
his retirement ("Retirement") on or after the Executive's normal retirement date
under the terms of the Retirement Plan, this Agreement shall terminate without
further obligation to the Executive or his legal representative except that the
Executive shall be entitled to receive any Accrued Obligations within ten (10)
days after his retirement and all benefits payable under the Retirement Plan.

        (i) Notice of Termination. Any termination during the Term of this
Agreement by the Company or by the Executive for Good Reason or Other than Good
Reason shall be communicated and effectuated by written Notice of Termination to
the other party hereto.

        (j) Mitigation. The Executive shall not be required to mitigate the
amount of any payment the Company becomes obligated to make to the Executive in
connection with this Agreement, by seeking other employment or otherwise. Except
as specifically provided with respect to the Executive Continuance Benefit, the
amount of any payment provided for in Section 4 shall not be reduced, offset or
subject to recovery by the Company by reason of any compensation earned by the
Executive as the result of employment by another employer after the Date of
Termination, or otherwise.

        5(a) Confidentiality and Noncompete. The Executive recognizes that as an
employee of the Company he will have access to and may participate in the
origination of non-public, proprietary and confidential information and that he
owes a fiduciary duty to the Company. Confidential information may include, but
is not limited to, trade secrets, customer lists and information, internal
corporate planning, strategic plans, methods of marketing and operation, and
other data or information of or concerning the Company or its customers that is
not generally known to the public or in the banking industry. The Executive
agrees that he will never make a disclosure of confidential information to a
third party or use confidential information other than for the exclusive benefit
of the Company and its affiliates.

               (b) Non-Competition. In addition, in exchange for the payments on
termination as provided herein, other provisions of this Agreement and other
valuable consideration hereby acknowledged, the Executive agrees that, except as
otherwise provided herein, he will not engage in Competition for a period of
twenty-four (24) months after the Executive's employment with the Company ceases
for any reason, including the expiration or nonrenewal of this Agreement or than
termination by the Executive for Good Reason or by the Company Without Cause, in
which event this Section 5(b) shall not apply. For purposes hereof:

        (i)      "Competition" means the Executive's  engaging without the
        written consent of the Board or a person authorized
        thereby, in an activity as an officer, a director, an
        employee, a partner, a more than one percent shareholder or
        other owner, an agent, a consultant, or in any other
        individual or representative capacity within 50 miles of
        the Company's headquarters or any branch office of the


                                    9
<PAGE>


        Company or any of its subsidiaries (unless the Executive's
        duties, responsibilities and activities, including
        supervisory activities, for or on behalf of such activity,
        are not related in any way to such competitive activity) if
        it involves:

                      (A)    engaging in or entering into the business of any
banking, lending, investment or insurance or any other business activity in
which the Company or any of its affiliates is actively engaged at the time the
Executive's employment ceases, or

                      (B)    soliciting or contacting, either directly or
indirectly, any of the customers or clients of the Company or any of its
affiliates for the purpose of competing with the products or services provided
by the Company or any of its affiliates, or

                      (C)    employing or soliciting for employment any
employees of the Company or any of its affiliates for the purpose of competing
with the Company or any of its affiliates.

                      (ii)   For purposes of this Agreement, "customers" or
"clients" of the Company or any of its affiliates means individuals or entities
to whom the Company or any of its affiliates has provided banking, lending,
investment, insurance or other similar financial services at any time from the
Effective Date through the date the Executive's employment with the Company
ceases.

        (c). Remedies. The Executive acknowledges that the restrictions set
forth in Section 5 of this Agreement are just, reasonable, and necessary to
protect the legitimate business interests of the Company. The Executive further
acknowledges that if he breaches or threatens to breach any provision of Section
5, the Company's remedies at law will be inadequate, and the Company will be
irreparably harmed. Accordingly, the Company shall he entitled to an injunction,
both preliminary and permanent, restraining the Executive from such breach or
threatened breach, such injunctive relief not to preclude the Company from
pursuing all available legal and equitable remedies. In addition to all other
available remedies, if the Executive violates the provisions of Section 5, the
Executive shall pay all costs and fees, including reasonable legal fees,
incurred by the Company in enforcing the provisions of that paragraph. If, on
the other hand, it is finally determined by a court of competent jurisdiction
that a breach or threatened breach did not occur under Section 5 of this
Agreement, the Company shall reimburse the Executive for reasonable legal fees
incurred to defend that claim.

Part II:  Change in Control

        This Part applies only on and after a Change in Control (as hereinafter
defined) of the Company.

        6. Employment After a Change in Control. If a Change in Control (as
hereinafter defined) of the Company occurs during the Term of this Agreement and
the Executive is employed by the Company on the date the Change in Control
occurs (the "Change in Control Date"), the then-current Term will be
automatically extended to the third anniversary of the Change in Control Date
and shall be renewed for successive one year periods following the then current
period unless either party notifies the other in writing at least ninety days
prior to the end of the then-current period that the Agreement shall not be
extended beyond its then current period (the "Change in Control Period"). If a
Change in Control occurs on account of a series of transactions, the Change in
Control Date is the date of the last of such transactions. In the event of a
Change in Control of the Company, Sections 6 through 10 in this Part II shall
become effective and govern the terms and conditions of the Executive's
employment in addition to the provisions in Part I and Part III except that this
Part II shall supercede and control any contrary or inconsistent term or
provision in the remainder of this Agreement.


                                   10
<PAGE>


        7.     Terms of Employment.
               -------------------

               (a) Position and Duties. During the Change in Control Period, (i)
the Executive's position, authority, duties and responsibilities will at all
times be at least commensurate in all material respects with the most
significant of those held, exercised and assigned at any time during the 120 day
period immediately preceding the Change in Control Date, and (ii) the
Executive's services will be performed at the location where the Executive was
employed immediately preceding the Change in Control Date.

               (b) Continuity of Compensation and Benefits. During the Change in
Control Period, the Executive will continue to receive the Base Salary and shall
continue to be entitled to receive and participate in all other compensation and
benefits provided in Section 3; provided, however, that to the extent
compensation or benefits are, at any time after the Change in Control Date,
generally applicable to other peer executives of the Company and its Affiliated
Companies, the terms and conditions of any of which are more favorable to the
Executive than those provided by Section 3, the Executive shall be entitled to
receive and participate in such more favorable compensation and benefits, as the
case may be.

               (ii) Minimum Stock-Based Award. For each Company Fiscal Year,
after a Change in Control (prorated for partial Company Fiscal Years), the
Executive will be provided with an annual Stock-Based Award with a value equal
to at least 30% of his then-current Base Salary ("Change in Control Stock Based
Award").

        8.     Termination of Employment and Obligations of the Company.
               --------------------------------------------------------

        (a) Termination Without Cause or for Good Reason. The Executive will be
entitled to the following benefits if, on or after a Change in Control, the
Company or any Affiliated Company terminates his employment Without Cause or the
Executive terminates his employment with the Company or any Affiliated Company
for Good Reason:

(i)    Accrued Obligations.  The Accrued Obligations will be paid to the
Executive in a lump sum cash payment (or in the case of Stock-Based or Change in
Control Stock-Based Awards, in the form of the Award) within ten (10) days after
the Date of Termination.

                      (ii)   Salary Continuance Benefit.  The Salary Continuance
Benefit is an amount equal to 2.99 times the Executive's average annual
compensation includable in the Executive's annual gross income for federal
income tax purposes for the five (5) most recent taxable years ending before the
date on which the Change in Control occurs. The Salary Continuance Benefit will
be paid to the Executive in a lump sum cash payment not later than the 45th day
following the Date of Termination;

                      (iii)  Executive Continuance Benefit.  The Executive will
receive the Executive Continuance Benefit for thirty-six (36) months following
the Date of Termination

                      (iv)   Additional Retirement Benefit. In addition to any
retirement benefits to which the Executive is entitled under the Retirement Plan
in which the Executive participates on the Date of Termination, as such term is
defined in Section 4(h), Executive shall be paid in one sum in cash at normal
retirement age (or earlier retirement age) as defined in the Retirement Plan an
amount, as an additional retirement benefit, equal to the actuarial equivalent
of the additional amount that the Executive would have earned under such
Retirement Plan had it accumulated four (4) additional years of continuance
service under such Retirement Plan both for purposes of determining eligibility
for a benefit and for purposes of calculating the amount of such benefit. For
purposes of this paragraph, "actuarial equivalent" shall be determined using the
same methods and assumptions utilized under the Retirement Plan, or any
successor plan, immediately prior to the Change in Control of the Company.


                                   11
<PAGE>


               (b) Possible Reduction in Payment and Benefits. Following any
Change in Control, to the extent that any amount of pay or benefits provided
under to the Executive under this Agreement would cause the Executive to be
subject to excise tax under sections 280G and 4999 of the Internal Revenue Code
of 1986, as amended (the "Code"), and after taking into consideration all other
amounts payable to the Executive under other Company plans, programs, policies,
and arrangements, then the amount of pay and benefits provided under this
Agreement shall be reduced to the extent necessary to avoid imposition of any
such excise taxes. The Executive may select the payments and benefits to be
limited or reduced, including an election not to have the vesting of certain
benefits, including stock options, accelerate as a result of a Change in
Control.

               (c) The Executive will not be required to comply with the
non-competition covenant in Section 5(b) if his employment is terminated during
the Change in Control Period Without Cause or by him for Good Reason.

        10.    Change in Control Defined.  For purposes of this Agreement, a
"Change in Control" shall mean:


        (a) the acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) and 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act') of beneficial ownership (within the meaning of
Rule 13d-3 under the Exchange Act), of securities of the Company representing
20% or more of the combined voting power of the then outstanding securities;
provided, however, that the following acquisitions shall not constitute a Change
in Control:

                      (i)    acquisition directly from the Company (excluding an
acquisition by virtue of the exercise of a conversion privilege);

                      (ii)   any acquisition by the Company;

                      (iii)  any acquisition by any employee benefit plan (or
related trust) sponsored or maintained by the Company or any corporation
controlled by the Company; or

                      (iv)   any acquisition pursuant to a reorganization,
merger or consolidation by any corporation owned or proposed to be owned,
directly or indirectly, by shareholders of the Company if the shareholders'
ownership of securities of the corporation resulting from such transaction
constitutes a majority of the ownership of securities of the resulting entity
and at least a majority of the members of the board of directors of the
corporation resulting from such transaction were members of the Incumbent Board
as defined in this Agreement at the time of the execution of the initial
agreement providing for such reorganization, merger or consolidation; or

        (b) where individuals who, as of the inception of this Agreement,
constitute the Board (the "Incumbent Board") cease for any reason to constitute
at least a majority of such board of directors; provided, however, that any
individual becoming a director subsequent to the effective date of this
Agreement whose election, or nomination for election by the shareholders was
approved by a vote of at least a majority of the directors then comprising the
Incumbent Board shall be considered as though such individual were a member of
the Incumbent Board, but excluding, for this purpose, any such individual whose
initial assumption of office occurs as a result of either an actual or
threatened election contest (as such terms are used in Rule 14a-11 of Regulation
14A promulgated under the Exchange Act) or other actual or threatened
solicitation of proxies or consents by or on behalf of a person other than a
member of the board of directors; or

        (c)    the shareholders of the Company approve, or the Company otherwise
consummates,

                                   12
<PAGE>


                      (i)    a merger, statutory share exchange, or
consolidation of the Company with any other corporation, except as provided in
subparagraph (a)(iv) of this section, or

                      (ii)   the sale or other disposition of all or
substantially all of the assets of the Company.

Part III:  Miscellaneous

        This Part III applies regardless of whether a Change in Control has
occurred.

        11. Legal Fees and Costs. Except as otherwise provided herein, the
Company will pay or reimburse the Executive for all costs and expenses,
including without limitation court costs and reasonable attorneys' fees and
expert witness fees and expenses, incurred by the Executive (i) in contesting or
disputing any termination of the Executive's employment or (ii) in seeking to
obtain or enforce any right or benefit provided by this Agreement, in each case
provided the Executive's claim is substantially upheld by a court of competent
jurisdiction.

        12. Documents. All documents, record, tapes and other media of any kind
or description relating to the business of the Company or any of its affiliates
(the "Documents"), whether or not prepared by the Executive, shall be the sole
and exclusive property of the Company. The Documents (and any copies) shall be
returned to the Company upon the Executive's termination of employment for any
reason or at such earlier time or times as the Board or its designee may
specify.

        13. Severability. If any provision of this Agreement, or part thereof,
is determined to be unenforceable for any reason whatsoever, it shall be
severable from the remainder of this Agreement and shall not invalidate or
affect the other provisions of this Agreement, which shall remain in full force
and effect arid shall be enforceable according to their terms. No covenant shall
be dependent upon any other covenant or provision herein, each of which stands
independently.

        14. Modification. The parties expressly agree that should a court find
any provision of this Agreement, or part thereof, to be unenforceable or
unreasonable, the court may modify the provision, or part thereof, in a manner
which renders that provision reasonable, enforceable, and in conformity with the
public policy of Virginia.

        15.    Governing Law.  This agreement shall be governed by and construed
in accordance with the laws of the Commonwealth of Virginia.

        16. Notices. All written notices required by this Agreement shall be
deemed given when delivered personally or sent by registered or certified mail,
return receipt requested, to the parties at their addresses set forth on the
signature page of this Agreement. Each party may, from time to time, designate a
different address to which notices should be sent by giving notice thereof in
writing to the other party at least three days before the effective date of such
change in address.

        17.    Amendment.  This Agreement may not be varied, altered, modified
or in any way amended except by an instrument in writing executed by the parties
hereto or their legal representatives.

        18. Binding Effect. This Agreement shall be binding upon the Executive
and on the Company, its successors and assigns effective on the date first above
written subject to the approval by the Board. The Company will require any
successor to all or substantially all of the business and/or assets of the
Company to assume expressly and agree to perform this Agreement in the same
manner and to the same extent that the Company would be required to perform it
if no such succession had taken place.


                                   13
<PAGE>


        19. No Construction Against Any Party. This Agreement is the product of
informed negotiations between the Executive and the Company. If any part of this
Agreement is deemed to he unclear or ambiguous, it shall be construed as if it
were drafted jointly by all parties. The Executive and the Company agree that
neither party was in a superior bargaining position regarding the substantive
terms of this Agreement.

        20. Entire Agreement. This Agreement constitutes the complete, final and
entire agreement of the parties with respect to the matters addressed herein and
it supersedes all other prior agreements and understandings, both written and
oral, express or implied, with respect to the subject matter of this Agreement.
No promises, representations or warranties have been made by any party to or for
the benefit of the other with respect to such matters which are not expressly
set forth herein.

        IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written herein.

                            National Bankshares, Inc.


                            By:/s/ L.A. BOWMAN
                            ---------------------------------
                            Chairman of the Personnel Committee
                            Address:  c/o National Bankshares, Inc.
                                      -----------------------------
                                      P.O. Box 90002
                                      --------------------------
                                      Blacksburg, VA  24062-9002
                                      -----------------------------



                            /s/ JAMES G. RAKES
                            ---------------------------------------
                            James G. Rakes

                            Address: 3335 McEver Road
                                     -------------------------
                                     Blacksburg, VA  24060
                                     -------------------------

                                   14




















</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99
<SEQUENCE>4
<FILENAME>ex-99a.txt
<DESCRIPTION>CERTIFICATION OF CHIEF EXECUTIVE OFFICER
<TEXT>
Exhibit 99(a)

                    CERTIFICATION OF CHIEF EXECUTIVE OFFICER
                                     PURSUANT TO 18 U.S.C. SECTION 1350

        In connection with the Form 10-Q of National Bankshares, Inc. for the
quarter ended June 30, 2002, I, James G. Rakes, Chairman, President and Chief
Executive Officer of National Bankshares, Inc. hereby certify pursuant to 18
U.S.C.ss.1350, as adopted pursuant toss.906 of the Sarbanes-Oxley Act of 2002,
to the best of my knowledge and belief, that:

(1) such Form 10-Q for the quarter ended June 30, 2002, fully complies with the
    requirements of section 13(a) or 15 (d) of the Securities Exchange Act of
    1934; and

(2) the information contained in such Form 10-Q for the quarter ended June 30,
    2002, fairly presents, in all material respects, the financial condition and
    results of operations of National Bankshares, Inc.


/s/ JAMES G. RAKES
- -----------------------------
James G. Rakes
Chairman, President and Chief Executive Officer


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99
<SEQUENCE>5
<FILENAME>ex-99b.txt
<DESCRIPTION>CERTIFICATION OF CHIEF FINANCIAL OFFICER
<TEXT>
Exhibit 99 (b)

                    CERTIFICATION OF CHIEF FINANCIAL OFFICER
                                     PURSUANT TO 18 U.S.C. SECTION 1350

    In connection with the Form 10-Q of National Bankshares, Inc. for the
quarter ended June 30, 2002, I, J. Robert Buchanan, Treasurer and Chief
Financial Officer of National Bankshares, Inc. hereby certify pursuant to 18
U.S.C.ss.1350, as adopted pursuant toss.906 of the Sarbanes-Oxley Act of 2002,
to the best of my knowledge and belief, that:

(1) such Form 10-Q for the quarter ended June 30, 2002, fully complies with the
    requirements of section 13(a) or 15 (d) of the Securities Exchange Act of
    1934; and

(2) the information contained in such Form 10-Q for the quarter ended June 30,
    2002, fairly presents, in all material respects, the financial condition and
    results of operations of National Bankshares, Inc.


/s/ J. ROBERT BUCHANAN
- ------------------------------------
J. Robert Buchanan
Treasurer and Chief Financial Officer


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


</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
